Tata-SIA partnership can be a game changer in overcrowded aviation sector
By Jitender Bhargava
Six decades after the Indian government divested the Tatas of their majority holding inAir India by nationalising the airline, the announcement by Tata Sons earlier this week for establishing a full-service carrier, in partnership with Singapore Airlines, with a combined investment of $100 million, has not only surprised the aviation industry but evoked tremendous interest.
The warm response to the announcement, which has the potential to be a major game changer, was only to be expected considering that it was the Tata Airlines that had heralded the birth of civil aviation in India in 1932. That previous attempts to enter the airline business had been effectively foiled by certain vested interests, prompting Ratan Tata to emphatically state that the Tata groupwas no longer interested in forming an airline, also add to the surprise element. Emotional factors apart, the announcement is bound to raise numerous questions in the coming weeks, particularly with regard to its positive and negative impacts on the Indian civil aviation industry.
While it is a foregone conclusion that the airline to be created by the two monolith business organisations -- one running a hugely successful international airline and the other having business interests across the industry spectrum -- will be a formidable one, a question that strikes one is whether the timing for entering the aviation sector is opportune.
Open Sky
Most Indian carriers are today saddled with huge debts and mounting losses, not because all of them are inefficient or the industry is vulnerable to economic ups and downs but because the Indian market is price-sensitive. An increase in fares instantly impacts growth, and that operational costs are high because of steep ATF and airport costs doesn't help.
The domestic market is divided between low-cost airlines -- IndiGo, SpiceJet, Jet Konnect and GoAir - which hold over 60 per cent market share, with the legacy carriers Air India andJet AirwaysBSE 1.57 % accounting for the rest. The Tatas have stated in unequivocal terms that the new airline will be a full-service carrier. The reality, though, is that its operations will be restricted to the domestic market because current regulations do not permit an airline to fly internationally till it has met two primary conditions: five years of domestic operations, and a fleet of 20 aircraft. One is therefore tempted to ask whether the formidable airline that will be set up is for serving only a part of the under-40 per cent segment of the domestic market?
As the new entity will have deeper pockets than the promoters of existing airlines, the new Tata airline will have to wean away passengers from Air India and Jet Airways to build market share by offering attractive low fares when it enters the fray; a quality product by itself will not fill up flights. There are lessons that can be learnt from Kingfisher: even though it was a full-service carrier, providing a top-of-the-line product, it could never find enough passengers willing to pay a premium for the value-added services it provided. Its collapse was, of course, due to various other reasons.
Tata-SIA can be a game changer, but allowing the Tatas to buy back the airline they divested from 60 years ago is an option in a crowded marketJet Airways (India) Ltd.
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The warm response to the announcement, which has the potential to be a major game changer, was only to be expected considering that it was the Tata Airlines that had heralded the birth of civil aviation in India in 1932. That previous attempts to enter the airline business had been effectively foiled by certain vested interests, prompting Ratan Tata to emphatically state that the Tata groupwas no longer interested in forming an airline, also add to the surprise element. Emotional factors apart, the announcement is bound to raise numerous questions in the coming weeks, particularly with regard to its positive and negative impacts on the Indian civil aviation industry.
While it is a foregone conclusion that the airline to be created by the two monolith business organisations -- one running a hugely successful international airline and the other having business interests across the industry spectrum -- will be a formidable one, a question that strikes one is whether the timing for entering the aviation sector is opportune.
Open Sky
Most Indian carriers are today saddled with huge debts and mounting losses, not because all of them are inefficient or the industry is vulnerable to economic ups and downs but because the Indian market is price-sensitive. An increase in fares instantly impacts growth, and that operational costs are high because of steep ATF and airport costs doesn't help.
The domestic market is divided between low-cost airlines -- IndiGo, SpiceJet, Jet Konnect and GoAir - which hold over 60 per cent market share, with the legacy carriers Air India andJet AirwaysBSE 1.57 % accounting for the rest. The Tatas have stated in unequivocal terms that the new airline will be a full-service carrier. The reality, though, is that its operations will be restricted to the domestic market because current regulations do not permit an airline to fly internationally till it has met two primary conditions: five years of domestic operations, and a fleet of 20 aircraft. One is therefore tempted to ask whether the formidable airline that will be set up is for serving only a part of the under-40 per cent segment of the domestic market?
As the new entity will have deeper pockets than the promoters of existing airlines, the new Tata airline will have to wean away passengers from Air India and Jet Airways to build market share by offering attractive low fares when it enters the fray; a quality product by itself will not fill up flights. There are lessons that can be learnt from Kingfisher: even though it was a full-service carrier, providing a top-of-the-line product, it could never find enough passengers willing to pay a premium for the value-added services it provided. Its collapse was, of course, due to various other reasons.
With the difference in fares currently charged by full-service and low-cost airlines being only negligible - and in fact some low-cost airlines charging higher fares than their full service brethren on certain sectors -- the industry will feel the impact of the new entity's additional capacity.
Which leads one to a bigger issue: why is the country functioning without a comprehensive civil aviation policy? Only if the country had a well-deliberated policy there would have been rules laying down the number of airlines that the country could effectively have; and the number of aircraft or seats that can be gainfully operated for domestic operations. In the absence of a transparent mechanism, the government is taking decisions on a case-by-case basis which hasn't helped the industry so far and is unlikely to assist in the future too. One can clearly visualise a scenario of eligibility conditions for international operations being changed in the near future -- not necessarily to facilitate the new entity - which will have existing players likely crying foul. There is thus an emergent need to formulate a national policy for transforming aviation into a vibrant sector, as it is in China.
The other question that begs an answer is whether it is desirable for the Tatas to be stakeholders in two airlines, ostensibly serving different segments of air passengers. Will there be a conflict of interest with both Air Asia India and the new airline operating on the same routes? In the pre-merger era, Indian Airlines always objected to Air India's domestic operations; and Air India did the same with regard to Indian Airlines' international flights on the grounds that it was hurting its commercial interests by charging lower fares.
India Connect
It also remains to be seen if the Tata-Singapore tie-up will lead to a grant of additional seats on the India-Singapore sector for Singapore Airlines - in a manner similar to how the Jet-Etihad FDI agreement was facilitated by doling out of 37,000 additional seats on the Abu Dhabi sector by the Indian government.
While the Tatas' entry is certainly desirable and welcome notwithstanding the questions that it raises or the impact it will have on other players, one hopes that the name assigned to the new airline represents India because unlike in Air Asia's case where the Tatas have a minority stake, in the new entity it has a majority 51 per cent stake. Airlines when operating globally do reflect values and heritage of the country -- as Tata's original offering Air India did till a series of unfortunate events reduced it from the iconic status it once commanded to an also-ran. How about government handing over Air India, with due financial compensation, back to the Tatas so that Air India can survive? With government ownership its future is undoubtedly bleak.
The industry, for sure, is heading for exciting times as new players prepare to take off, even though it appears the industry is overcrowded and beset with structural and economic constraints that await resolution by an unconcerned government.
(The author is a former executive director, Air India, whose book 'The Descent of Air India' is due for release soon)
Which leads one to a bigger issue: why is the country functioning without a comprehensive civil aviation policy? Only if the country had a well-deliberated policy there would have been rules laying down the number of airlines that the country could effectively have; and the number of aircraft or seats that can be gainfully operated for domestic operations. In the absence of a transparent mechanism, the government is taking decisions on a case-by-case basis which hasn't helped the industry so far and is unlikely to assist in the future too. One can clearly visualise a scenario of eligibility conditions for international operations being changed in the near future -- not necessarily to facilitate the new entity - which will have existing players likely crying foul. There is thus an emergent need to formulate a national policy for transforming aviation into a vibrant sector, as it is in China.
The other question that begs an answer is whether it is desirable for the Tatas to be stakeholders in two airlines, ostensibly serving different segments of air passengers. Will there be a conflict of interest with both Air Asia India and the new airline operating on the same routes? In the pre-merger era, Indian Airlines always objected to Air India's domestic operations; and Air India did the same with regard to Indian Airlines' international flights on the grounds that it was hurting its commercial interests by charging lower fares.
India Connect
It also remains to be seen if the Tata-Singapore tie-up will lead to a grant of additional seats on the India-Singapore sector for Singapore Airlines - in a manner similar to how the Jet-Etihad FDI agreement was facilitated by doling out of 37,000 additional seats on the Abu Dhabi sector by the Indian government.
While the Tatas' entry is certainly desirable and welcome notwithstanding the questions that it raises or the impact it will have on other players, one hopes that the name assigned to the new airline represents India because unlike in Air Asia's case where the Tatas have a minority stake, in the new entity it has a majority 51 per cent stake. Airlines when operating globally do reflect values and heritage of the country -- as Tata's original offering Air India did till a series of unfortunate events reduced it from the iconic status it once commanded to an also-ran. How about government handing over Air India, with due financial compensation, back to the Tatas so that Air India can survive? With government ownership its future is undoubtedly bleak.
The industry, for sure, is heading for exciting times as new players prepare to take off, even though it appears the industry is overcrowded and beset with structural and economic constraints that await resolution by an unconcerned government.
(The author is a former executive director, Air India, whose book 'The Descent of Air India' is due for release soon)
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