How Tata's Plan To Consolidate Its Airlines May Shape The Industry
The aviation industry could become a duopoly, bringing pricing discipline but also impacting consumer interest and competition.
The Tata Group’s plan to consolidate its airlines could turn the aviation industry into a duopoly, bringing pricing discipline but could also critically impact consumer interest and competition, according to experts.
“(With the) Tatas' buying Air India and integrating into the group, a new structure will emerge in one to two years,” Manvi Hooda, practice lead–consulting and research at aviation consulting firm CAPA India, told BQ Prime.
Along with IndiGo (InterGlobe Aviation Ltd.), both airlines will be closer to 75% plus market share in domestic and closer to 40% plus in international, and the two airlines will lead the industry in the next decade, said Hooda.
It has been nearly 11 months since the Tatas took over Air India. The former national carrier has signed a pact to buy AirAsia Aviation Group’s remaining stake in AirAsia India, whose merger with Air India’s low-cost arm Air India Express is also underway.
The announcement to merge Vistara with Air India may also come soon, the Economic Times and Bloomberg reported. It will effectively mean that all Tata Group airlines will be housed under a single entity.
“There has never been such a strong market share concentration as in present times—neither in the days of Jet Airways nor during the Kingfisher era,” an Edelweiss Securities report in September, quoted CAPA India’s Hooda as saying.
“On prospects of industry revival, the anticipated duopoly would surely bring pricing discipline among large carriers and that should improve their financial performance.”
"Pricing discipline" refers to a reduction in the practice of lowering ticket prices to undercut competition, helping the airlines turn profitable.
However, Edelweiss Securities has a slightly different view. IndiGo is staring at a market share loss across categories amid likely consolidation of Air India and aggressive pricing from Akasa Air and Jet Airways Ltd., the brokerage said in the report.
According to it, the industry could consolidate to two–three players, critically impacting consumer interest and competition in the near term, it said.
A Herculean Turnaround Mission
A potential consolidation of Air India would influence the future of the Indian aviation industry, but it would also require navigating through key issues.
“Air India continues to be one of the most challenging turnaround in aviation history,” Satyendra Pandey, managing partner at the aviation advisory firm AT-TV, said.
The Maharaja, as Air India is referred to as, will have to deal with several fleet and engine types—which complicates the task of optimising operations as it cannot have a common pool of spare parts or technical staff—along with quickly finding a path to profitability.
“In the beginning, one expects teething troubles. That’s why the Tatas are taking things slowly and have hired consultants and advisors for it,” said Nitin Sarin, managing partner at Sarin & Co., which advises aircraft lessors and airlines.
Then, there’s the challenge of turning profitable, which has not been the case for these airlines for many years now. AirAsia India and Vistara have not reported profitability even once, since the start of their operations in 2014 and 2015, respectively.
"Air India was in a critical condition when the Tatas took over with systems, processes, debt levels, aircraft availability and cost base–all facing challenges,” Pandey said.
He cites an analogy of a patient who is bleeding and needs its vitals stabilised. "...that’s what Tatas have done with Air India by improving things like on-time performance, aircraft availability and the web interfaces," he said.
But consolidation could be challenging as "...bringing in two more ailing folks in the picture will require additional efforts, making the recovery harder", he said.
Tailwinds From Scale
It’s assumed that a bigger scale of operations in a business spreads out costs and gives heft to the organisation for negotiating favourable contracts.
“If you talk to any vendors, you’ll find that they (Tatas) are very respected,” Sarin said. “IndiGo has earned that reputation over the years and Air India will benefit from the goodwill of Tatas.”
The backing of the salt-to-software conglomerate gives the airline better creditworthiness.
While giving AAA/Stable rating to Air India’s long-term debt, Crisil Ratings said it factors in the group’s intent to maintain majority shareholding and to assist the airline in servicing its obligations in a full and timely manner.
“The rating considers the outstanding track record of need-based support extended by Tata Sons to its group companies,” it said.
To be sure, the consolidation of airlines would lend some operational benefits.
In a tight supply market due to challenges faced by aircraft and engine makers, the consolidation will give Air India immediate access to a bigger fleet, AT-TV’s Pandey said. However, when you’re losing money, a bigger scale isn’t necessarily a good thing, he said.
CAPA India’s Hooda said that with the integration, the entire revenue and cost structures—including all contracts—will be overhauled, which will help the management to turn it around structurally and financially.
Currently, Indian carriers are struggling, with an airline like SpiceJet Ltd. hitting its most-turbulent patch yet, as it struggles with its financial health and safety snags.
In the past few months, travel agents, who spoke on condition of anonymity, said they have witnessed cases where IndiGo has gained because some corporate travellers are wary of flying with other carriers.
In such a scenario, Air India’s evolution into a stable carrier becomes crucial. However, the company’s revival plan Vihaan—which means dawn in Sanskrit—has remained unclear.
But as Hooda puts it, “Only the Tata Group is capable of turning around the loss-making airline into a profitable one, even if it takes a little longer.”