Air India + Vistara: What buying the govt airline means for Tata and its full-service ambitions

The much-anticipated privatisation of Air India kickstarted when the government came out with Preliminary Information Memorandum (PIM) early this week. While there were reports of IndiGo and Etihad having met officials in the Ministry of Civil Aviation to discuss privatisation of Air India, there continues to be a rumor of the Tata group trying to bag the airline.

With the PIM out, there is some clarity on what is on offer. Air India without the B747s, Air India Express and Air India’s 50 percent stake in AI-SATS — its ground handling unit. The regional subsidiary Air India Regional which operates a fleet of ATR turboprop aircraft and would see the B747s from Air India being transferred, along with the engineering arm won’t be part of this sale.

IndiGo, India’s largest carrier by fleet and domestic market share, has in the past been open about having an interest in the national carrier’s wide body international operations, if sold separately. While IndiGo has a cash balance which nearly equals the liability of Air India as stated in the PIM, it may be unlikely that IndiGo would want to look at Air India in the form it is on offer. Etihad holds a 24 percent stake in Jet Airways — which suspended operations in April last year. Jet Airways is still trading on the bourses and has invited second round of Expression of Interest (EoI). The Tata group on its part had shown interest in Jet Airways and had admitted it publicly. However, little materialised between the two and a formal bid was never made.

Air India is  competing with multiple global airlines for a stake sale, yet there is a lot more that Air India offers. The last decade saw formation of IAG (International Airlines Group) which owns British Airways and Iberia, and Air France — KLM which is the holding company of the two airlines. The two Middle Eastern airlines — Etihad and Qatar Airways — have investments in multiple airlines across the globe. And while the PIM allows airlines, consortia and non-airline groups to bid, the focus remains on Tata, which operated the airline before it was nationalized.

The Tata group has presence in full service (Vistara) and low-cost segment (AirAsia India), with the former being in partnership with Singapore Airlines and the latter being in partnership with AirAsia. Both have been in losses since inception. While airline industry takes time to breakeven and generate profits, the market in India has seen margins as thin as a boarding pass, making it a difficult market to operate into.

While both the airlines from the Tata group stable benefited from the suspension of Jet Airways, challenges which come up now due to depreciating rupee and increasing oil prices will act as a double whammy to inch towards profitability.

There is one thing that both the airlines from the Tata group know well, that they need a sizeable presence across the country — starting with metros to get a fair share of the market. This then translates into power to price and eventually could lead to higher fares, profitability and better margins.

While Vistara started with an intention to establish a hub at New Delhi, AirAsia India had its focus on leisure routes from Bengaluru. However, over a period, AirAsia India has entered the Delhi, Mumbai, Chennai, Kolkata and Hyderabad markets and started servicing them. Yet, both the airlines have a lot of catching up to do when it comes to presence at airports, flights and market share.

With Jet Airways out of the market, Vistara is the only private FSC. If the group acquires Air India, it would have a monopoly in the FSC space. More importantly, it would get a head start on the international expansion where the capacity from Indian carriers is miniscule.

Air India has a market share of 12 percent in domestic network, coupled with that of Vistara — the combine will sneak past Spicejet and become the second largest player in the country. However, the two have a lot of overlap yet the most attractive part for Vistara is the slot bank in Delhi — where Air India has a large presence and an effective and efficient hub, along with multifold increase in Mumbai — the financial capital. While IndiGo may be feeling the pressure on yields between metros, for an FSC that is the market where the traffic, yield and growth is.

Slot constraints in India aren’t restricted to Mumbai and Delhi, there is a whole bunch of airports like Ahmedabad, Goa, Pune and more where there is a considerable business traffic and shortage of slots. Air India holds substantial slots at these airports.

However, the biggest head start would be on international routes. With widebody operations of Air India spanning from USA to Australia and holding slots at some of the most congested airports in the world — including New York, Newark, Chicago, London, among others. Vistara is yet to get slots at London Heathrow, while Air India already operates to Heathrow from Mumbai and Delhi. For all one knows, Air India could be worth the multiple pair of slots at Heathrow which Vistara may have to otherwise purchase if it cannot lease.

With Air India regional out of the equation, the fleet of Vistara matches well with that of Air India, including both airlines operating the A320neo powered by CFM. Air India operates the B787-8 Dreamliner while Vistara has the -9 variants on order. Air India operates the B777s in its fleet which are slightly older and can be replaced by the B787-9 for the same mission. While the configurations remain distinct, the integration won’t be a one-day affair and cash can be pumped in to re-configure the aircraft in due course of time based on market demand and deployment needs.

Like any acquisition, challenges galore but if there is anybody who has the scale, ethos and history in India, it is the Tata group. With Air India, it gets a global footprint in full service market along with branding, sales and distribution network which remains unmatched by any Indian carrier.