Tata's airline dilemma

Even as things limp back to normal in India’s aviation sector, all eyes are currently on the Air India’s disinvestment. Although the process has only really just begun, everyone is convinced there is only one serious bidder for the national carrier, the Tata group. None of the others — and it is still unclear who all have expressed earnest interest — is being taken seriously by the government or the industry.

A Tata takeover of Air India is being seen as the best outcome for all concerned. The government, determined to sell the airline this time round, would be happy with a credible buyer with deep pockets and a reasonable understanding of the sector. For the Tatas, it would push their total market share across three airlines to almost 25 per cent, give or take a percentage point. That’s far better than the present situation where both its ventures, Vistara (at 6.3 per cent) and AirAsia India (7 per cent) are neither here nor there or as one industry source put it, “two dead ducks”. Chances of either venture turning around on its own steam in the near future appear slim.

But even from a country and passenger point of view, this could well be the most promising outcome. Once sold, the airline will no longer be a liability on government finances. More importantly, it will no longer be used by politicians, bureaucrats and employees as their personal carrier, bringing in efficiency in its running. For the country’s aviation industry as a whole, a second strong player with financial muscle would emerge as a result that would hopefully corner some of the international traffic that flows in and out of India that is currently captured by a clutch of international carriers such as Emirates, Etihad, Singapore Airlines (SIA) and so on. Even domestically, IndiGo, the market leader, will have at least one competitor with heft and this will lower the risk of the airline turning into a monopoly.

Sources close to the process confirmed that the Tatas have decided to go the whole hog, evident with the recent increase in stake in AirAsia India, thus, paving the way for the eventual exit of its Malaysian partner. The Tatas have, meanwhile, started beefing up the management of the airline, including efforts to bring in aviation talent from abroad.

As far as the purchase of Air India goes, there are indications that the Tata partner in Vistara, SIA— which was reluctant pre-pandemic on the buy — has had a change of heart in view of the hugely altered situation. Dependent almost entirely on through traffic, four city-state airlines — Emirates, Etihad, Qatar and SIA — stare at a pretty bleak future with no domestic traffic base to fall back upon. Going forward, therefore, India’s large domestic traffic has proved enough of a carrot for SIA to reconsider its stand.

As things stand, the industry largely expects the Tatas to buy the national carrier — squeezing the best possible deal out of the government — and merge Vistara with Air India and  AirAsia India with Air India Express. While this sounds logical and the best option in the present circumstances, pulling this off successfully is likely to be no cakewalk. With mergers of this kind, the one big black hole is culture, an issue that Vistara has already struggled with. The performance of the SIA appointees sent in to manage affairs in India has been disappointing from the Tata lens and a less- than-happy experience for the partners as well. 

Assuming the Tatas do produce the kind of management talent required to pull this magic rabbit out of the proverbial hat, two conflicts remain.  One, the new entity that emerges from the merger of Air India and Vistara will end up competing on many routes domestically with its sister entity — the merged AirAsia India and Air India Express. The Tatas would have to carefully balance who flies where and when to ensure that the two avoid stepping on to each other’s toes.

Two, for SIA, which is dependent on flying Indian traffic out of its own base in Singapore to destinations around the world, a new quandary will emerge. Vistara or whatever the new merged entity is labelled will be vying for the same passengers as the parent back home. Should SIA risk shrinking its own pie and let its Indian subsidiary (with a surfeit of bilateral rights) subsume some of its traffic and, if so, to what extent? It will be a delicate balance since presumably many of the routes on offer by SIA and the new entity will overlap.

All this remains, of course, in the realm of fantasy for now. Politics and political forces in India can always be counted upon to derail any effort— and there is no reason to believe this time round they would relent.