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This week, news was out that the Tata group plans to raise its stake in AirAsia India from 51 to 76 per cent and prepare the ground for an exit route to its Malaysian partner, AirAsia Berhad. The group has also invested over Rs 650 crore in the airline through optionally convertible debentures, which can be converted into equity. And it is looking for a name for the airline (expected to have the Tata tag) once the brand licensing agreement ends in March next year.
For the Tatas, this will mean a wide wingspan across the aviation market — from full-service carrier Vistara, its joint venture (Tatas own 51 per cent share) with Singapore Airlines, to the low-cost carrier (LCC) AirAsia India. Both carriers are still loss-makers with modest market shares, so is the group spreading itself too thin in a challenging business?
At least one thing going for the Tata group’s quest for a bigger stake in an LCC is that this market accounts for 84 per cent of the domestic passenger market, and it is growing. This is also an opportune time to push the joystick since some of the rivals have hit air pockets. Two of the three players in the LCC space have eroded their market shares — SpiceJet (with its fuel efficient 787 fleet still grounded for reasons beyond its control) and GoAir. Taken together, their market share has dropped from 26 per cent in the January-March quarter to 21 per cent in October. The overwhelming gainer has been IndiGo, which dominates the market with over 55 per cent.
But AirAsia’s market share has been stagnant at over 7 per cent and that is because it has one of the smallest fleets (32 aircraft) among its LCCs competitors — GoAir has 57 aircraft and Spicejet 104. The airline was nowhere near its plan to hit 40 planes by May this year, leave alone flying abroad last September, which has been stalled by a government investigation into alleged irregularities in the permit process.
In the international market again, the LCC pie is getting larger, especially on short-haul flights. For instance, in the March quarter of this year, LCCs accounted for nearly half the customers who flew internationally in any of the top ten airlines (in terms of market share) to and from India. Last year, during the same period the LCC share was just over 36 per cent.
But despite the market potential, AirAsia has struggled. Frequent strategy flip-flops, changes in top management, alleged violations of Indian laws (it is being probed by the Central Bureau of Investigations) and lack of clarity on who really is piloting the airline (the Tatas started with only 30 per cent and AirAsia Berhad’s promoter Tony Fernandes was to run the show) have all taken a toll. The company has never been even close to breakeven with its losses going up from Rs 182 crore in FY16 to Rs 670 crore in FY19. FY20 saw some improvement, with losses pared to Rs 317 crore.
But it is now pretty clear that the Tatas have decided to occupy the pilot’s seat at the airline. The process started in October-end 2018 when an old Tata hand, Sunil Bhaskaran, was appointed as MD and CEO after the top spot was vacant for months. This was followed by Fernandes quitting the board. In early 2019, the group took a more decisive step towards ownership and control by raising its stake to 51 per cent. And now discussions are on for AirAsia Berhad’s formal exit.
For the Tatas, building a budget brand in services or products is not new. As a top former executive of AirAsia India pointed out: “It’s in the Tata DNA. They built Ginger Hotels to address the affordable hotel segment even though they had super luxury hotels. They did so too in the passenger car segment — with the Nano even though they also own JLR. So it was very clear that they were keen to run a budget airlines and straddle the entire aviation space even though they have a full-service carrier.”
But how does AirAsia India fit in with the Tata’s overall aviation ambition — which, apart from the two carriers, may include bidding for state-owned Air India? Mumbai-based aviation consultancy firm Martin Consulting said based on order books and plans of the three airlines for the next few years (assuming there is no change), the Tata group will end up commanding an aviation group with a fleet of 800-900 aircraft (roughly the same as Delta Airlines) with conservative revenues of $7-8 billion-plus annually.
“The Tatas could easily become a global aviation force to reckon with, they only have to offer clearly differentiated products and cater to different segments of the market. This will also help expand the overall Indian market — both domestic and international,” said Mark Martin, founder of Martin Consulting.
But ambition in the aviation business tends to be overtaken by hard realities. The Tata group’s aviation plans will be put to its sternest test yet.
