As rumours abound about a potential Tata group investment into Air India, questions have started to emerge into the group's entry into the airline business itself.
The Tata group’s current airline portfolio includes Vistara and AirAsia India. Both are 51:49 joint ventures – Vistara between Tata Sons and Singapore Airlines and AirAsia India between Tata Sons and AirAsia Berhad.
Combined, these airlines command a market share of 13.4 per cent, with a fleet of 77 aircraft flying to 34 domestic destinations and six international destinations.
AirAsia India is geared towards the leisure market, and is focussed on offering the lowest fares while Vistara is a more premium offering, geared towards the business traveller and based around customer experience.
Since inception, both have been forced to change strategic direction more than once — largely because of an incorrect reading of the market.
And with the ongoing pandemic, it will be a while before the Tata’s airline portfolio sees a return of capital, let alone a return on capital.
The question on everyone’s mind: what is the flight-plan, going forward?
A brief history of the Tata group's interest in re-entering the airline business
To understand the Tata group's interest in re-entering the airline business, one has to go back to the 1990s. With liberalisation on the horizon, the airline sector also was one that generated much interest.
In 1994, the Prime Minister of Singapore met the Prime Minister of India and a part of the discussion was an Indian joint venture with Singapore Airlines.
Multiple meetings followed including some where the Chairman of the Tata group was himself present.
A formal proposal was floated in 1995 and then again in subsequent years.
Yet, these proposals never saw the light of day. Indeed in 2010, in a speech, the Chairman of the Tata group surmised that Tata’s interest to enter the airlines sector were thwarted by three governments, and as many prime ministers, and that the group would only enter via clear and transparent dealings.
Equally interesting was the fact that the group was quite clear on Singapore Airlines as a joint venture partner. An opportunity presented itself finally in 2011 when the government revised the FDI guidelines for the aviation sector.
Foreign airlines could now invest 49 per cent in an Indian airline. The decks had finally cleared. And within a year, the Tatas had not one but two airline ventures.
Tatas entered the airline arena via a joint venture with AirAsia Berhad – the parent of AirAsia - then a powerhouse in Asian aviation and Telstra Tradeplace Pvt Ltd (an India based firm).
The official company was formed in February 2013 with Tatas owning 30 per cent, Telstra owning 21 per cent and AirAsia Berhad owning 49 per cent in the joint venture.
Very soon thereafter, Tatas also formed a joint venture with Singapore Airlines. In this case, there were only two partners: the Tatas with 51 per cent and Singapore Airlines with 49 per cent.
The first JV airline would be named AirAsia India, while the latter was named Vistara. With the foreign investment promotion board (FIPB) approvals in place and USD 150 million of startup capital allocated between both, the two airlines started to prepare plans for the flight path ahead.
The launch of AirAsia India and Vistara — the first few years
AirAsia India took to the skies on 12th June 2014 with a flight between Bengaluru and Goa, while Vistara took to the skies on January 9 2015 with a flight between Delhi and Mumbai.
The first flights were indicative of future route choices. One airline focused on capturing premium demand which was mostly between metro cities while the other focused on pure leisure demand.
There was much fanfare but the path to profitability was not quite clear from the get-go.
Within a few months of launch, it was evident that the competition clearly saw both as a threat. What followed was a series of overt and covert tactics, intense competition and heavy discounting. With voluminous fleet orders and continued expansion of operations, everyone wanted to lay claim to the 200+ million passengers flying in and out of India forecast to grow to 500+ million passengers.
The Tatas had entered Indian aviation and would surely have planned for turbulence. Instead, what they encountered was a storm.
Both the Tata group airlines were targeted towards particular segments. Vistara was positioned as a full-service carrier that would cater to the business traveller and the higher yielding economy traveller who would (in theory) pay for a better experience.
AirAsia India was targeted towards the extremely cost conscious leisure traveller who cared solely about price. In theory, these were distinct segments and would not cannibalise each other’s offerings.
Yet, what looked good on paper didn’t quite translate into market reality. The challenges were especially hard when it came to the network – which forms the heart of any airline.
Passengers choose flights based on prices, schedules and frequency. Depending on the nature of the traveller, these elements take a different priority but in the Indian context, price is almost always on top.
An effective network then translates into offering choices for passengers and capturing a premium. AirAsia India initially developed a network that would focus on Tier2 and Tier3 cities.
On the other hand, Vistara started by connecting Delhi and Mumbai and soon started connecting other metros. AirAsia based itself in the city of Bengaluru while Vistara remained Delhi centric – already home to three other airlines.
Over time, as the networks evolved, AirAsia India came to include 30 domestic cities and dreamed of international flights while Vistara included 30 domestic cities and four international cities.
There were clear gaps in the network which posed a huge challenge as these gaps were not conducive to capturing business or leisure demand. And then, there was also the question of product.
AirAsia India had a product that was similar to any other low-cost airline. A standard aircraft packed in with as many seats as possible (referred to as a high density configuration) and selling through the very same channels as competitors.
Vistara on the other hand inducted aircraft with a mixed configuration introducing a premium economy product to the skies.
It entered multiple commercial agreements in anticipation of international flights in the future and also had a loyalty program which should have helped with the willingness to pay and better pricing.
But it did not quite deliver. The Vistara configuration included 16 business class seats, 36 premium economy class seats and 96 economy class seats.
The idea was that the premium demand could compensate for lower number of seats in economy.
But in a textbook example of why western models cannot be force-fit in the Indian context, Vistara soon found itself revisiting the configuration.
Mid 2016 saw a reconfiguration with a reduction in the premium seats. The new configuration would have eight business class seats, 24 premium economy seats and 126 economy seats.
The configuration was to change again in the future for some aircraft which were inducted with only economy seating.
When it came to brand and positioning, Vistara positioned itself around customer experience.
Whether the cleanliness of the counters, the music on-board, the food choices or working towards delivering on their tagline “Fly the new feeling”, it certainly made efforts in this direction.
But as with any differentiated product, the difference must be so unique that the customer is willing to pay a premium for it. This just did not happen. And thus, to get revenues, Vistara started to increasingly focus on the economy segment – driven by pricing and volumes.
AirAsia attempted to brand itself as the tech-savvy, millennial airline, but when revenues did not come, it attempted to eat into the premium segment.
Cannibalisation of each others' demand segment continued which then impacted pricing power —- which for the Tata group did not quite bode well.
Culture, costs and cash-flow challenges
Both airlines focussed on creating a unique culture. Yet in an ecosystem that demands an acute understanding of consumer psyche, processes and policies that may have delivered strong success in Malaysia and Singapore did not quite translate to the same here.
As both airlines flew higher, the losses continued to mount – and both airlines found themselves challenged on the cost base. Vistara, because it had been over-ambitious in getting the best of everything, while AirAsia India because of structures used where AirAsia Berhad was paid for leases and other items.
Three years into flight, AirAsia India had bled more than Rs 300 crores while for Vistara thus number was more than double of this amount.
There were calls on capital and equity infusions were required. The parent company did just that.
To partially alleviate this challenge, both airlines needed to scale up, which in turn, would drive efficiency, help amortize costs and provide a better offering.
But that effort progressed at a snail's pace due to airport constraints and competitive intensity. The financials continued to deteriorate and never quite turned around.
As of now, in the most recent financial year, the combined losses of Vistara and AirAsia India are estimated to be in excess of Rs 2,400 crore. Neither airline has had even one quarter of profitable operations (on a net level) since inception.
The losses are forecast to continue for a while. As the Chairman of Tata Sons indicated in an interview in 2019, “…we are not going to see those companies generating profits or cash at least until 2025.”
2019 and the changed scenario
As Vistara and AirAsia continued to bleed, the industry took an interesting turn in 2019. Jet Airways – the oldest private airline in the country – collapsed due to an inability to service the debt.
This effectively changed the dynamics of the industry. Moreso for Vistara which was competing in the premium segment with dreams of flying international – the very same segments that had catapulted Jet Airways to a strong position before a series of bad decisions led to a nosedive.
But given the competitive intensity of the market, the void left by Jet was filled by domestic carriers. Ironically, post the Jet Airways’ collapse, the supply demand spread decreased.
There were now more seats chasing the same number of passengers and downward pressure on pricing became more pronounced.
2019 also saw the government announce changes to parameters for privatisation of the national airline Air India. Bidders were offered 100 per cent ownership with no government intervention.
Additionally the debt burden on Air India would be reduced. Almost immediately, the speculation began. The Tatas were thought to be an ideal fit. Not only because they were the first owners of Air India but also because an acquisition of this size and scale would require patient capital.
And because the group has demonstrated that once it has committed to an investment, it has the wherewithal to see it through.
Whether it was their acquisition of Tetley Tea that broke even after 11 years or their patience with the integration and turnaround of Corus Group plc as a part of the overall Steel business or the turnaround with JLR and the continued patience with its international operations. The stellar credit rating, availability of talent well versed with complexity, and the ability to borrow at very competitive rates were also feathers in their cap.
Yet the announcement never came.
For the Tata Group, the decision was and is complex, given that they had and have the option to expand organically with their current airlines.
This not only gives them a clean slate, it also helps identify marketplace weaknesses and wait out a possible wave of consolidation, exits or further policy changes.
Additionally, for Tatas, if they are to go ahead with the Air India purchase, the challenge is also the return on investment. Even assuming all past losses are written off, with the current airline portfolio losses estimated to be north of Rs 5,100 crores, the path to profitability has to deliver revenues that at least cover this in addition to the purchase price for Air India.
That too on a net basis. On a back of the envelope calculation, that equates to an amount north of USD 1.5bn which even the best of airlines are unable to deliver at scale.
The flight-plan and the flight-path ahead
Fast forward to the present day and for the Tatas, in spite of their strong capital base, the airline portfolio poses a challenge. The portfolio consistently bled cash since inception and FY20 will see another 2400+ crores if losses.
There is also the ED investigation into AirAsia India, the changing nature of air-travel driven by the Corona pandemic, a global slowdown coupled with geopolitical tensions and challenges within the airlines that are to be addressed.
Both airlines are continuing and there have been indications that Tatas will see the ventures through to success. Yet, the losses cannot be wished away.
It is not the losses alone that are worrying. Rather, there are several open ended questions on how to manage the portfolio and the partnership, how to structure potential deals deal, whether the airlines should continue as stand-alone entities or are merged and ultimately the path to profitability.
On the fleet and financing front, the group continues to leverage on OEM relationships held by partners and requires talent that can help evolve these relationships within the group — not only towards cost savings but also structures that can be cash accretive.
Same goes for their commercial strategy. On the AirAsia India front, there is a marked move away from processes and systems that were earlier influenced by the parent.
How this evolves is yet to be seen, but industry insiders indicate that the AirAsia India brand as it stands is being revisited in its entirety.
Another aspect that often finds mention is that given the Tata group's footprint, there is significant synergy that can be realised. Between the hotels, the insurance arm, the food and beverage ventures and even the services arm. But realising these gains will be an uphill task. Managing the airline portfolio will also include carving out distinct market segments, targeting those segments, driving yield, driving efficiency and revisiting the overall strategy.
Decisions will include where to compete and where not to compete, commercial agreements, procurement, technology and talent. This includes the frequent flyer programme, revisiting the product, the MRO setup, OEM agreements and talent induction — to name a few.
The complete list is fairly exhaustive.
For the Tatas, with the right strategy, discipline and execution, the portfolio can be EBITDA positive within three to five years and depending on the strategy, financing structures and cost of capital, it could possibly breakeven soon thereafter.
For now, passengers can take to the skies on either of the group’s airlines knowing that their air-ticket has partly been funded by the strongest business group in the country.
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