Merging Vistara with Air India was the best way forward, says Singapore Airlines

Tata Group’s plan to consolidate its airline business, which took off with the planned merger of Air India Express and Air Asia India, has taken the final shape with the merger announcement of AI and Vistara. 46 days after Singapore Airlines announced it is in talks with the Tata Group to merge Vistara with Air India, the deal has been sealed.

As part of the transaction, Singapore airlines will hold 25.1 percent stake in an enlarged Air India in return of its 49 percent stake in Vistara and cash payment of $250 million.

According to SIA’s disclosure on Singapore Exchange, SIA’s 49% stake in Vistara will exchange into approximately 19.4 percent of the enlarged AI, and shares for 5.7 percent equity will be allotted in exchange of the cash infusion worth $250 million.

The merger is expected to complete by March 2024, subject to regulatory approvals.

SIA and Tata have also agreed to participate in additional capital injections, if required.

“Based on SIA’s 25.1 percent stake post-completion, SIA’s share of any additional capital injection could be up to $615 million payable only after the completion of the merger,” said the statement by Singapore airlines.

Commenting on the merger, N Chandrasekaran, Chairman of Tata Sons said the merger of Vistara and Air India is an important milestone in the group’s journey to make Air India a truly world-class airline.

"We are transforming Air India, with the aim of providing great customer experience, every time, for every customer. As part of the transformation, Air India is focusing on growing both its network and fleet, revamping its customer proposition, enhancing safety, reliability, and on-time performance. We are excited with the opportunity of creating a strong Air India which would offer both full-service and low-cost service across domestic and international routes.  We would like to thank Singapore Airlines for their continued partnership,” he said.

For Singapore Airlines, this merger was the best possible road to stay put in the Indian aviation market.

“SIA is of the view that the risks in proceeding with the Proposed Merger and investing in the enlarged AI is not more than the risks that would be faced by the SIA Group in remaining invested in Vistara only, especially considering the competitive headwinds facing Vistara and a possible exit from the Indian aviation market,” it said in the disclosure on SGX.

Explaining the rationale behind this merger, SIA said Vistara is currently and has been a loss-making entity, and it will need to significantly expand and increase its market share in the Indian aviation market to scale up to become cost effective and profitable. However, Vistara faces intense competition against larger incumbent Indian airline companies which have been longer established in the Indian aviation market and have stronger footholds in terms of securing air traffic rights and slots in many of 11 the Indian domestic and international flight networks.

SIA further said there is no assurance that Vistara would be able to secure new and suitable air traffic rights and slots required for growth. Vistara’s ability to grow and scale could therefore be hampered. It is anticipated that the path to expand Vistara organically would be met with multiple challenges in the industry and could potentially involve the incurrence of even higher costs and sustaining more years of losses before it can grow to a critical size and reach a profitable position.

Speaking about SIA’s future growth after this deal, Goh Choon Phong, Chief Executive Officer, Singapore Airlines said SIA has an opportunity to deepen its relationship with Tata and participate directly in an exciting new growth phase in India’s aviation market.

“We will work together to support Air India’s transformation program, unlock its significant potential, and restore it to its position as a leading airline on the global stage,” he said.

According to DGCA’s Air Traffic Data for October, the combined Air India holds nearly 26 percent share in domestic market against IndiGo’s 57.7 percent. The four airlines including Air India, Vistara, Air Asia India,  and Air India Express together carried 3.4 crore passengers in October versus 5.3 crore passengers carried by IndiGo. Their combined fleet in service stands at 200 aircraft compared to IndiGo’s 245 planes in air. In terms of On-Time Performance (OTP) in October, Air India was on top at 90.8 percent, followed by Vistara and AirAsia India, both at 89.1 percent.

After the consolidation of Air India’s airline business, experts wonder if the Indian aviation space is likely to see a duopoly between the new Air India and IndiGo.