If costs are lowered, infrastructure improved and government policies made more aviation friendly, it’s only a question of time before high growth resumes. Tata-SIA may be entering an apparently unattractive market, but it could be a well-timed move to become a key player eventually.

Sixty years after a renowned airline owned by Tata was gracelessly taken over by the government, another Tata carrier is getting ready for launch. In 1932, JRD Tata, the first Indian to acquire a commercial pilot’s licence in India, started Tata Aviation Service, the country’s first airline. It was later renamed Tata Airlines and eventually became the world-famous Air India International. Even after Air India was nationalised in 1953, gradually losing most of its lustre, Tata Sons kept its aviation dream alive. But the company had to mark time till the government relaxed its policies and the environment became more commercially conducive. Now, it’s the turn of Ratan Tata, himself a qualified pilot, to pick up the threads. Although he handed over the reins of the Tata group last December, the move to set up an airline in partnership with Singapore Airlines Limited (SIA) bears his stamp.

Time and Tide Wait for No One

Announced in mid-September, this deal involves an initial investment of $100 million ( Rs. 620 crore), of which Tata Sons will contribute 51 per cent and SIA the remaining. It would have been unthinkable even a year ago due to the country’s strict airline ownership laws. The tide turned in September 2012 when foreign carriers were permitted to acquire up to 49 per cent stake in an Indian carrier. First Malaysia’s AirAsia Berhad teamed up with Tata Sons and Telestra Tradeplace to set up AirAsia India. Next, Abu Dhabi’s flag carrier Etihad Airways acquired a stake in Jet Airways. And SIA is the third to throw its hat in the ring. It is unlikely to be the last.

Following AirAsia’s bid, the question was asked: Is foreign investment permitted only in existing carriers or in new ones? “Both,” said the government. So the coast seems clear for Tata-SIA with a yet unspecified brand name and fleet, to take wing by mid-2014. It’s still early days and many pitfalls remain to be negotiated, but the government seems overtly keen for the airline to succeed. The first hurdle, clearance by the Foreign Investment Promotion Board (FIPB), was smoothly negotiated on October 24, in record time with no riders.

Perhaps this is officialdom’s way of making reparation for its sins of omission and commission that have brought the airline industry to its knees. What better way than to speed the launch of a potential world-class carrier that bears the name Tata? The Perhaps this is officialdom’s way of making reparation for its sins of omission and commission that have brought the airline industry to its knees. What better way than to speed the launch of a potential world-class carrier that bears the name Tata? The

But is this the right time to launch another major airline? Going by conventional wisdom, the answer is no. The industry is reeling under a burden of debt and mounting losses. There’s cut-throat competition for passengers, hardnosed folk who will only fly if fares are low. Whenever the airlines raise ticket prices, growth plunges. It doesn’t help that operational costs are insanely high because of unreasonable taxes on aviation fuel plus steep airport charges. According to the Centre for Asia Pacific Aviation (CAPA) the combined losses of domestic airlines during the quarter ending September 30 are likely to exceed Rs. 3,000 crore. Every carrier is probably in the red. All in all, India has the well-earned reputation of being one of the world’s toughest aviation markets. Why would foreign carriers risk so much to enter now? Do they see something the rest don’t?

It’s a Tough World Out There!

The suitors are not small-timers. Etihad is a rising star in the Middle East and one of the world’s fastest growing airlines. AirAsia has time and again been chosen as the world’s best low-cost carrier (LCC) and has perhaps the lowest cost base in the world and SIA is one of the world’s most successful full-service carriers (FSC).

SIA was among the first foreign carriers to attempt entry into India. In 1997, it tried to set up a joint venture with Tata Sons. And in 2000, when Air India seemed ripe for disinvestment, it again bid for the airline in association with the Tatas. Both times, shortsighted politicians and self-seeking rivals scuttled the attempt. But SIA has an abiding interest in India thanks to the strong Indian presence in Singapore and the large number of Indian tourists who flock there. And the Tata Group is not known to act on a mere whim. Could this indeed be a marriage made in heaven?

India’s domestic market has about 65 per cent LCC penetration with demand for premium service mainly between the metros at peak times. And except for people travelling at company or government expense, even high-end passengers routinely select the lowest fare available. Since Tata-SIA has made known its intention of targeting the full-service segment, it would be competing with Air India and Jet Airways for the remaining 35 per cent of passengers. The size of the full-service pie could shrink further if AirAsia India grabs significant market share.

Indeed, LCCs everywhere are doing better than FSCs and both are struggling to keep costs low. In many short-haul markets, FSCs are forced to price economy tickets low, sometimes even lower than LCCs. That’s why CAPA says the industry must eventually move to a hybrid model, combining low cost and premium service. Starting from scratch, the new Tata-SIA airline may succeed in offering reasonably-priced business and economy tickets coupled with superior service, for which both partners have a formidable reputation. It just might work. But the fledgling airline will encounter real competition from IndiGo, the only consistently profitable carrier. Will it be able to match the steady growth, high load factor and on-time performance of IndiGo? Or will it merely mark time in the ruthless domestic market and spread its wings abroad as soon as possible?

According to CAPA, India is currently the world’s sixth largest domestic aviation market but only the 19th internationally. Domestic traffic may be in a spot of bother due to the country’s floundering economy but the more benign international market has been growing every year for a decade or more. With spreading affluence and an upwardly-mobile middle class, continued growth in the international arena seems assured. So just as the Jet-Etihad deal fructified only after a steep increase in bilateral quotas between India and Abu Dhabi, the Tata-SIA combine is obviously hoping to fly overseas from day one. If the favourable noises emanating from the government are reliable, the demise of the indefensible rule that mandates Indian carriers to complete five years and have a fleet of at least 20 aircraft to start international flying is imminent. That would truly be cause for celebration.

Geography puts India in the middle of traffic flows from both West and East. Delhi, Mumbai and other Indian metros could become natural transit hubs between Europe and West Asia on the one hand and Australia and the Far East on the other. This may be Tata-SIA’s dream since SIA’s core competence is intercontinental flights. Even before the so-called 5/20 rule is abolished, SIA, in conjunction with its Indian joint venture, can tap the domestic market and fully utilise its India-Singapore bilateral rights thus gaining an edge over competitors like Malaysia Airlines and Cathay Pacific. SIA already operates the world’s largest commercial aircraft, the 471-seat Airbus A380-800 that is ideal for long-haul flights. And India’s skies may finally welcome this behemoth.

However, can AirAsia India and Tata-SIA Airlines, both underpinned by Tata investment, avoid treading on each other’s toes? Most analysts, including CAPA, believe a conflict of interest is likely to emerge. Tata executives claim that the two new carriers target discrete passenger segments, one the low end, the other the high. But unlike in other markets, aviation fuel, airport charges, maintenance, salaries and everything else cost the same for any airline operating in India. Since all carriers are striving to lower operational costs they are forced into practically the same fare band. Yet while AirAsia reportedly enjoys nearly 20 per cent operating profit, SIA is languishing at two per cent currently. Perhaps the sagacious Ratan Tata has a contingency plan, depending on which venture fares better!

An Eye on the Future

Few would disagree that India’s airline sector has tremendous potential in the long run. If costs are lowered, infrastructure improved and government policies made more aviation friendly, it’s only a question of time before high growth resumes. Tata-SIA may be entering an apparently unattractive market, but it could be a well-timed move to become a key player eventually.

Whatever happens, 2014 is shaping up to be a year of reckoning for Indian aviation. Regional airline Air Costa entered the fray in October 2013 and intends to expand further afield. Air One has applied for a pan-India licence. The other Tata enterprise, AirAsia India, plans to scale up rapidly, perhaps reaching 50 aircraft in three years. And the existing airlines are busy adding capacity. All this should greatly please India’s air passengers. However, with competition intensifying, another bruising price war seems likely, unless the passenger pool expands quickly. Consolidation seems inevitable, and within three or four years, there may be only three to five strong airlines left.

If Tata-SIA prospers, it may well be at the expense of Air India that has been teetering on the brink for many years and might once again be offered to the highest bidder. And who would be better suited to acquire it than its original owner, Tata Sons backed to the hilt by SIA? “As and when it [privatisation] happens, we would be very happy to look at it,” says Ratan Tata candidly. On the other hand, if AirAsia India thrives, Tata will be there too. Either way, Tata would be the winner.