Vistara eyes profitability by 2019-20
Vistara is taking a long-term view and investing upfront, says chairman Bhat, but analysts are sceptical
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Mumbai: Vistara, the full-service airline run by a joint venture between the Tata group and Singapore Airlines Ltd (SIA), is expected to turn profitable within five years of starting operations, chairman Bhaskar Bhat said in an interview on Tuesday.
Vistara started operations in January 2015, so Tata SIA Airlines Ltd is looking at turning a profit in fiscal year 2019-20.
“Vistara is here to stay. We are not taking a short-term view. Like any other Tata group company, Vistara is taking a 25-30 year view. Vistara needs to do a lot of upfront investments to create the value proposition,” said Bhat, who is also managing director of another Tata group firm, Titan Co. Ltd.
Tata Sons Ltd, the group holding company, holds a 51% stake in the airline, with Singapore Airlines owning the remainder. In 17 months of operations, Vistara has carried 2 million passengers; it now serves 17 destinations with 457 weekly frequencies.
Typically, an airline takes 18 to 36 months to achieve break-even considering the high-cost structure of Indian civil aviation, including expensive jet fuel and steep airport charges.
Low fuel costs helped airlines such as IndiGo, Jet Airways and SpiceJet post profits in the fiscal year ended 31 March.
But airlines in India are likely to face financial headwinds in 2016-17 in the face of rising risks from expanding capacity, pricing pressure and possible cost increases, according to a statement released in February by aviation consulting firm Capa.
Vistara is unlikely to turn profitable in five years given operational costs, including jet fuel prices, are rising, said Hormuz P. Mama, an aviation analyst.
“Vistara has hugely miscalculated the Indian traffic. They got several things wrong in their business model. There is intense competition out here in India. To add, jet fuel prices started shooting up,” Mama said.
On Wednesday, the government tweaked the so-called 5/20 rule, which required airlines to operate on domestic routes for at least five years and possess a fleet of at least 20 aircraft before starting international flights. Now, an airline still needs a fleet of 20 aircraft, but doesn’t need a five-year domestic track record before flying overseas.
Vistara had been lobbying the government to ease the 5/20 rule. Bhat couldn’t be contacted for comment on Wednesday on the new aviation policy.
In the interview on Tuesday, he said, “The potential of the domestic market is still very large in India. There is a game to be played in domestic and a game to be played in international. The convergence of these two will, of course, make for a bigger and better airline.”
Bhat said the airline had already placed orders for leasing 20 planes and that 11 had joined the fleet. The airline has leased the planes from the Airbus A-320 family from BOC Aviation Pte.
Asked about placing firm aircraft orders for expansion, Bhat said on Tuesday that the airline would order more planes once it got clarity on the 5/20 rule. “It is important to have clarity. For us, 5/20 is an unnecessary hurdle. Relaxing 5/20 will not only help Vistara but it will also open up Indian aviation,” Bhat said.
According to a 3 June report by Capa, Vistara could place firm orders for as many as 100 aircraft. Bhat denied that any such decision had been made.
India’s domestic traffic soared 21.8% in April, marking the 20th month of double-digit growth and the 13th consecutive month in which it had led traffic in domestic markets worldwide.
According to the International Air Transport Association (IATA), which represents some 260 airlines that make up 83% of global air traffic, growth in India is being propelled by a comparatively strong economic backdrop as well as by a substantial increase in service frequencies.
Vistara says it is focusing on delivering high-quality services and on-time performance.
“The value proposition you have in domestic has to carry forward to international. So your standards have to be similar to international even in domestic operations,” Bhat said.
He added that he is concerned about high taxation in Indian aviation, especially taxes on jet fuel, which accounts for nearly 50% of the operating cost of an airline. Airport costs are also high. “Ease of doing business is one thing. But we are equally concerned about cost of doing business,” Bhat said.