Mumbai: After being thwarted twice by political and corporate intrigue, Tata Sons Ltd and Singapore Airlines Ltd (SIA) have teamed up for a third time to jointly enter the Indian aviation market with a proposal to invest $100 million (around Rs.620 crore) in a full-service airline.
Tata Sons, the holding company of the tea-to-telecom Tata group, and SIA have signed an agreement and applied to India’s Foreign Investment Promotion Board (FIPB) for approval to set up the new airline, the companies said on Thursday. Tata Sons will own 51% and SIA will own 49% of the proposed joint venture, to be based in New Delhi.
The announcement surprised some analysts, given that Tata Sons has already agreed to join a venture with Malaysia-based AirAsia Bhd and Arun Bhatia of Telestra Tradeplace Pvt. Ltd to form a local low-fare airline that’s waiting for the civil aviation ministry’s final go-ahead.
AirAsia has a 49% stake in that venture, with Tata Sons taking 30% and Bhatia holding the rest.
The proposal comes at a time when India’s weakest economic growth in 10 years— 5% in the year ended 31 March—has suppressed demand for air travel, and airlines are burdened by heavy debt and accumulated losses in the face of high fuel costs, airport fees and intense competition.
Nevertheless, both partners were upbeat about the long-term potential of the Indian air travel market.
“We have always been a strong believer in the growth potential of India’s aviation sector and are excited about the opportunity to partner Tata Sons in contributing to the future expansion of the market,” SIA chief executive officer Goh Choon Phong said.
The chairman of the joint venture, Prasad Menon, a nominee of Tata Sons, was equally optimistic .
“It is Tata Sons’ evaluation that civil aviation in India offers sustainable growth potential. We now have the opportunity to launch a world-class full-service airline in India,” Menon said in a statement.
“We are delighted that we are partnering in this endeavour with the world renowned Singapore Airlines.”
In 2000, the two firms abandoned a joint attempt to buy a 40% stake in Air India—an airline which the group founded as Tata Airlines in the 1930s before it was nationalized in 1953. Political resistance and corporate rivalries were blamed for the Tata group abandoning the project.
An earlier attempt by the two companies to start an Indian airline with 40% equity contribution by SIA was also aborted.
In 2010, then Tata Sons chairman Ratan Tata hinted that he had to abandon plans to launch an airline because he refused to pay bribes to authorities to secure the necessary approvals.
“I happened to be on a flight once; a fellow industrialist sitting on the seat next to me said, ‘You know, I don’t understand, you people are very stupid. You know the minister wants Rs.15 crore. Why don’t you just pay, you want the airlines.’ I said, you will never understand this; I just want to go to bed at night knowing I haven’t got the airline by paying for it,” Ratan Tata said in a speech.
In their third partnership, the two firms are likely to initially invest around $100 million, a Tata group executive said, speaking on condition of anonymity.
The fact that Tata Sons already has a joint venture with AirAsia wouldn’t come in the way of the partnership, civil aviation minister Ajit Singh said. No rules in civil aviation requirements bar Tata Sons from investing in two airlines, but a final call will be taken by FIPB after it consults other ministries, including the ministries of corporate affairs and law, he added.
A civil aviation ministry official, who declined to be named, said the number of airlines the Tata group invests in does not matter as long as each venture has a separate airline licence. A department of industrial policy and promotion official said that as long as the foreign investment remains within the allowed limits, there should be no problem.
In September last year, the government allowed overseas airlines to invest up to 49% in local airlines. Previously foreign investors, but not airlines, had been allowed to hold up to a 49% stake in local airlines.
That led to two announcements this year—an investment of $379 million by Abu Dhabi-based Etihad Airways PJSC in Jet Airways (India) Ltd to buy a 24% stake, and the Tata Sons venture with AirAsia and Bhatia.
“I don’t understand the logic of working with two airlines simultaneously,” said aerospace journalist Hormuz P. Mama. “It seems peculiar to work with AirAsia and Singapore Airlines as both will compete each other irrespective of low-fare and full-service business models.”
But Mama said India does need a large airline to compete with big international airlines such as Emirates and Deutsche Lufthansa AG.
“If things work well, deeper pocket, better resilience and competitiveness, these are the three things that Tata and Singapore Airlines will be bringing to the table,” he said.
Consulting firm Capa Centre for Aviation, too, said India needs strong, well-capitalized airlines run by companies with proven credentials.
“Tata-Singapore Airlines venture was long overdue, should have started 15 years back. Capa believes approval of foreign airlines to invest in India was a game-changing decision,” Kapil Kaul, chief executive officer (South Asia) at Capa, said. He cautioned that regulatory and policy uncertainty still dog the aviation sector.
“We have no clarity on the issue of new airline licences. Overall, government policies have always raised entry risks for serious players,” Kaul said. “We operate in a policy and regulatory vacuum. However, Tatas may have discussed this project at the highest levels in the government.”
The Tata group’s interest in aviation goes all the way back to 1932, when its holding company Tata Sons established an aviation department.
In the same year, Tata Sons operated the first Karachi-Ahmedabad-Mumbai-Bellary-Chennai mail service to connect with Imperial Airways’ London-Karachi services.
The first flight of Tata Airlines was operated by a De Havilland Puss Moth plane flown by J.R.D. Tata from Karachi to Mumbai.
In 1946, Tata Airlines was converted into a public company and renamed as Air India Ltd. In 1953, Air India was nationalized.
Mukund Rajan, Tata Sons’ nominee for a board seat on the proposed airline and a member of the group executive council at the holding company, said that based on Capa data for 2012, the number of domestic airline seats per capita is very low in India at just 0.07, compared with 3.35 for Australia, 2.49 for the US and 1.38 for Canada.
“Greater competition in civil aviation in India will foster benefits for the passenger in terms of greater choice in fares and services,” he said.
“The history of previous efforts of Tatas and SIA (Singapore Airlines) to partner with each other and launch a world-class airline in India is well known. We would like to ensure that we are able to realize the original vision of launching a full-service, world-class airline that India can be proud of,” Rajan said.
The partnership, if it takes off, will open up competition in West-bound routes from India, said Amber Dubey, partner and head (aerospace and defence) at audit and consulting firm KPMG.
“Nearly 70% of global traffic from India is West bound—to Middle East, EU and Americas. With this JV (joint venture), SIA gets a play in the growing international travel from India. SIA can also operate direct flights to Far East and Australia from India or route them through Singapore,” he said.
Tarun Shukla in New Delhi contributed to this story.