Will the Maharaja Rule the Skies Again?

January 28, 2022 was a historic day for Indian aviation, as it marked the transfer of ownership of Air India from the Indian Government back to the Tata Group, from whom the airline was taken in 1953! As a long-suffering Indian aviation sector consumer, and as a fan and well-wisher of the Tata Group, it gives me a lot of hope that with this deal, Air India will now go back to its glory days (which, I have never experienced myself, only read about!) of its first innings under the legendary JRD’s leadership. However, the pragmatist in me knows that it is going to be very far from a walk-in-the-park for the Tatas to be able to pull that off, given various factors, including critically, the inherent inefficiencies of the asset in question.

The crux of the problem is not only that Air India is a deeply distressed asset, with close to USD 2.75 billion in debt assumed under the deal and a disproportionately heavy and unionized work force seeped in a culture of several decades of ineptitude and entitlement, but, it is also that the Tata Group’s strategy itself in the aviation space appears a tad confused. Obviously, the Tata Group is helmed by very able and experienced leadership, and I have no doubt that they didn’t just plunge significant resources into this deal without some very deep calculations and a gameplan on how things would play out. However, on the face of it, one needs to highlight the structural inefficiencies in the group’s current aviation sector approach, as these would need to be addressed effectively by the group’s leadership to make it a win-win proposition for all stakeholders.

The biggest problem, in my view, is that the Tata Group now has THREE operating airlines, each of which would effectively attempt to cannibalize the others, as they would all be each other’s competition. There is often virtually NO segmentation at work in the Indian market, and this is particularly true in the aviation sector, where Air India competes with Indigo, Vistara, Air Asia, Spicejet, GoAir etc., even though Vistara is a full-service airline like Air India itself, and the rest are budget airlines! In this sort of an overlapping market, for the Tatas to acquire and operate one more airline, with no sustainable differentiation strategy is bound to be stiffly challenging.

Therefore, the Tatas have two strategic choices ahead of them, in my view, to make this work: ?

(a)??fundamentally re-think the operational strategy and positioning of EACH airline that they own – for example, Air India will ONLY operate as an international airline and it will operate like top-class competitors like Emirates and SIA and at similar price points, while Vistara will assume the badge of a full-service (i.e., non-discounted?pricing and?service) domestic airline, and Air Asia will, in a focused manner, compete as an LCC, OR

(b)??fundamentally re-think its ownership in the other two airlines. In my view, a simple merger of all three airlines, as some experts have suggested, may not be easy at all to implement legally, nor even strategically optimal. Each of Vistara and Air Asia has a JV partner, and if either of them had the appetite to becoming shareholders in Air India, we would have seen a deal already announced. It is fair to assume that neither SIA nor Air Asia would be interested in merging their JV entities with Air India, in which case, this restructuring option has to be effectively of Tatas buying the JV partner out, or selling out from either or both of these airlines and exiting them completely. There again, Indian FDI regulations would present a challenge, as our FDI laws limit foreign airlines’ ownership in Indian airline companies to 49%, so essentially, Tata Group would have to look at Indian buyers, which may limit their valuation expectations.

Like I said, I am personally very excited by this deal. But, it is going to require a lot of hard and smart work from the Tata Group to address the above problems. May the Force be with them!!!