Air India — A legacy to be restored or trouble in disguise for the TATAs?
By: The Strategist
Tags: Air India, Airlines, Consulting, Strategy, Mba

The Context

The Indian government (in the early 2000s), as a part of its ambitious plan towards long-term growth, identified 18 strategic sectors for privatization and disinvestment. Against this backdrop, the government proposed to divest Air India — a nation-owned international carrier with an 18.6% market share, operating around four continents and over 60 destinations. As of 2019, Air India’s total debt stood at over ₹ 60,000 crores — the government reported a loss of nearly ₹ 20 crores every day from operating it. Until recently, all efforts made by the government to sell this loss-making entity ended in vain as no bidder showed active interest.

In 2021, to further sweeten the deal, the current government decided to fully exit Air India by selling its 100% stake instead of 76% as stated in the earlier one. The Tata’s bid was much-anticipated as its name had been doing the rounds for some time. Air India has been sold for ₹ 18,000 crores to the TATA SONS, outbidding the call by SpiceJet for ₹ 15,000 crores. As a multinational conglomerate comprising 30 companies across ten verticals, Tatas have always reached for the skies. They have showcased credible expertise in the aviation industry by establishing a strategic joint venture with Air Asia India and Singapore Airlines and building a brand like Vistara. The interesting fact is that J.R.D Tata founded Air India, which later got acquired by the govt. (1953), as a part of its nationalization drive.

Cut to 2021, the agreement between the government and Tata is — Tata will pay ₹2700 crore in cash with immediate effect and take over the remaining debt of ₹15,300 crores. As part of the deal, the government will take on debt worth ₹46,262 crore and non-core assets including land and building worth ₹14,718. After five years, Tata Sons can transfer the brand but only to an Indian person so that the brand — Air India — remains Indian in perpetuity.

Air India has been juggled for a long time now. With the arrival of Maharaja back to his home, there is a legacy to be restored.

The Strategy

Why would a global enterprise like the TATA acquire a loss-making entity? What is the strategy behind it?

Air India operates over 4,480 domestic and 2,738 international airline slots. Vistara, owned by the Tatas, has only two wide-body aircraft (Air India has 47) that limit its International aspirations. On the other hand, Air India holds recognizable global brand assets, a large fleet size, and bilateral rights to fly to different geographies, which might help Tatas fulfill its international dream.

Tata group’s recent track record in aviation has not been impressive, both Vistara and Air Asia have been loss-making ventures, both have not reported profits since they began their operations. Tatas have neither been able to manage Vistara’s cost problem (expensive contracts with suppliers) nor have been able to attract traffic towards Air Asia. Though Air India has been in losses ever since its merger with the domestic operator Indian Airlines (in 2007), it had a profitable line of business with Air India Express that caters to the Gulf travel market. Air India Express network extends over 33 destinations and includes over 651 services a week to the Gulf destinations and operates an impressive fleet of 24 Boeing 737 next-generation aircraft, which supports its low-cost structure. Despite the pandemic, this subsidiary reported its highest-ever net profits of Rs.412 Crores in 2020 by utilizing assets and manpower effectively.

With Air India and Vistara concentrating on the middle income and luxury segment, respectively — Tata can capture a large share of the domestic market and pose a direct threat to Indigo and SpiceJet, who together hold a market share of 67%. AIR INDIA owning 171 aircraft, already has its advantages to capture the market if managed well. Air India also brings in a history of experience and is well known for being a full-service carrier. If the TATAS play it right, take advantage of the vacuum presented by a post-Covid landscape, they can carve a new future for the national airline.

India has got a lot for aviation — rising middle-class segment, strong growth in travel & tourism both from domestic and abroad, and a fortunate geographic positioning between the Gulf & Southeast Asia, an area of vast potential for low-cost international air travels. By building a strong value proposition and positioning, Tatas could mark a dent in the plans of other airlines. If Air India, as a full-service carrier, can reclaim its legacy by focusing on delivering exceptional service and on-time performance, it can effectively wean away passengers from competitors and could emerge as a greater threat to the other low-cost carriers, in the next five years.

Under Chandra’s (CEO of Tata Group) exemplar vision, we look forward to seeing Air India back to its glory days.

Until then…

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