Tata’s Dance To Reunite With Air India Has Potential Challenges With Its JV Partners

Tata Group’s bid to acquire Air India would bring the conglomerate back full circle as it was the founder of the airline’s predecessor Tata Airlines, but the pragmatists among us have to question whether it’s a strategy that would be sustainable for India’s airline sector. 

Tata Airlines was started in 1932 as India’s first carrier. After World War II, it became a public limited company and brought in the current branding. Most importantly, it was also a profitable airline until 2000-2001 when it suffered losses after 9/11. A botched and failed merger with the domestic national carrier Indian Airlines in 2007 deepened the losses further.

Tata already has investments in the airline sector. Currently, the group has 51% stake in two startup airlines: Air Asia India, a partnership with Malaysia’s Air Asia that pursues a low-cost strategy, and the other is Vistara, a joint venture with Singapore Airlines that employs a full-service strategy. Both ventures are still not profitable, and there have been reports that Air Asia is looking for a way out as it’s hemorrhaging cash in other ventures which could see it shut down AirAsia X and its Japan affiliate.

Air Asia India competes with Indigo, Spicejet and Go Air with Vistara having a strategy that is as confusing as Singapore Airlines’ investments in other airlines.

Tata group seems to be satisfied by continuing to generate other revenues from these airlines with related units serving Tata’s branded water, branded tea, using services of its air catering units, etc. This is not one-sided as SIA and Air Asia have been getting benefits with arranging aircraft leases, etc. for their JVs, but now the ventures need cash injections to survive with demand being depressed for everyone. The issue now is what’s in it for Air Asia and Singapore Airlines to continue to invest in Indian carriers when the mothership entity and their home markets are severely struggling? Both of these JV airlines’ market share is lowest among Indian carriers with Air Asia at 7.1% and Vistara at 6.2%. (YTD as of October 2020)

Airlines in India have been significant players in the sale and leaseback financing market as they have been able to command a premium for the aircraft with attached lease compared to aircraft without lease attached prices. This has been a key area of positive cashflows for operations in the highly competitive Indian airline market. 

Air India has the largest market share for international routes among the Indian carriers, but on any specific routes, it isn’t ranked No. 1 in any of the markets where it has direct competition. Even for the U.S. market, where Air India has more non-stop flights than any other carrier, soon will be losing to United Airlines as it has planned to add another 3 daily non-stop flights.

Many hurdles need to be overcome before a bid can even come to fruition. Some of these hurdles lie in the relations and other non-compete legal agreements that Tata has to overcome with its JV partners. Tata will have to build the right synergy strategy among its three airlines and look at closing the market share gap in domestic as well as its international market for its combined entity along with avoiding conflict pitfalls.

Air India’s bidding has changed many times after the failed 2017 privatization attempt and now is bidding based on enterprise value with 15% as equity and the rest as debt. Previously, the government indicated absorption of $3.1 billion in debt which would imply an asking enterprise value closer to $3.6 billion based on the same 15/85 equity to debt ratio. Even this was a lower debt figure from before. From Tata’s perspective, it would have a different valuation of Air India compared to other bidders given the increased synergies it can capture that are not available to other bidders. 

India cannot afford to have a business that continues to drain its exchequer and is not of national importance. Air India also doesn’t accurately represent India, and its products and services are not at par with other national carriers of the region. One can assume Air India is responsible to restrict the growth of other Indian carriers as it holds key bilateral routes and slots at access strained airports.

There are plenty of opportunities, challenges, and synergies waiting for Tata if they can eventually work through its issues and acquire Air India. Even if they don’t, they should leverage the current downturn in terms of looking for new ways to rejuvenate their Air Asia and Vistara JVs. Options are abroad, acquisition of partner stakes, or even to exchange equity in a bigger merged entity. If indeed it can consolidate all its stakes in Air Asia and Vistara and eventually Air India, it will then have a market share of 28%, the second largest in the domestic market and first in the international outbound and inbound market.

Other challengers for Air India also exist such as Spicejet, combining with it would enable Tata to command a strong second-place position in India’s domestic sector and leapfrog to number one in the international market. Synergies can also be found with Air India serving as a strong full-service international carrier, while Spicejet focuses on a domestic low-cost carrier strategy. But the key issue is where is the new capital coming from and how do you deal with their existing operational issues like other airlines given the Covid disruption.

We will see when the preliminary expressions of interest are due on December 14. There exists a lot of possibilities in the chess masters game currently ongoing in the Indian airline space.

David Yu is the author of the recently released book: “Aircraft Valuation: Airplane Investments as an Asset Class” published by Palgrave Macmillan.

— With Sandeep Bahl, Managing Director of Asia Aviation Valuation Advisors.

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