SIA-Tata airline | Readying for take-off

Singapore Airlines is preparing to launch domestic flights in India with partner Tata group and realize an ambition it has cherished for a decade-and-a-half

P.R. Sanjai & Joji Thomas Philip
Updated24 Jan 2014, 05:06 PM IST
Even before the Singapore Airlines-Tata partnership was forged in September, entities from Singapore have been building or seeking to build a presence across the entire value chain of Indian aviation&#8212;from catering, ground handling, engineering and maintenance to airport management. Photo: Bloomberg<br />
Even before the Singapore Airlines-Tata partnership was forged in September, entities from Singapore have been building or seeking to build a presence across the entire value chain of Indian aviation&#8212;from catering, ground handling, engineering and maintenance to airport management. Photo: Bloomberg

Mumbai/Singapore: Most of the pieces seem to be in place for the joint venture between Singapore Airlines Ltd (SIA) and Tata Sons Ltd to take off in India sometime early in the business year starting on 1 April.

A key decision came this month when SIA chose Airbus SAS’s A320 planes for the full-service airline, which will take up to 20 of the aircraft worth $1.83 billion at list price. The planes will be sourced from leasing companies and not directly from Airbus, Reuters reported on 9 January, citing people it didn’t name.

The partners have already incorporated the joint venture, with an initial investment of $100 million, as Tata SIA Airlines Ltd and have begun recruitment of pilots and other airline personnel after bringing key management and operational personnel on board.

Having already received the go-ahead from the Foreign Investment Promotion Board (FIPB), Tata SIA Airlines has to jump through two remaining regulatory hoops.

It has to secure a no-objection certificate from the ministry of civil aviation (the application is now being scrutinized by the home ministry) and then apply to the Directorate General of Civil Aviation (DGCA) for an air operating permit, which would be the greenlight for it to take off.

The launch would mark the realization of an ambition that Tata Sons and Singapore Airlines have together cherished for one-and-a-half decades, only to be thwarted twice.

In 2000, the two firms abandoned a joint attempt to buy a 40% stake in government-run Air India. An earlier attempt by the two companies to start an Indian airline with 40% equity contribution by SIA was also aborted. In both cases, political resistance and corporate rivalries were blamed.

For the Tata group, the launch of operations would mark the return to an industry it pioneered with Tata Airlines in 1932, which was renamed Air India in 1946 and eventually nationalized by the government in 1953.

For SIA, Southeast Asia’s biggest carrier, too, the success of the venture, in which it has a 49% stake and Tata group holds the remainder, is crucial. The carrier has been seeking other markets as competition intensifies on existing routes. Last year, it sold its 49% stake in Virgin Atlantic after the investment failed to yield the expected returns.

To be sure, the Indian market offers potential. India, the ninth largest aviation market, will become the fourth largest by 2016 with 107.2 million passengers, behind only the US, China and Brazil, the International Air Transport Association (Iata) said in a December report.

“I think the choice of India is probably obvious to most people, the kind of market potential that we could expect,” SIA’s chief executive officer Goh Choon Phong said at an analysts’ conference in November, two months after tying up with Tata Sons.

He listed the factors that made India an attractive market.

“The population is expected to reach 550 million people in the middle class by the year 2025; 430 million of the population are between 15 and 34, a very young population, productive, and very, very low trips per capita, 0.04. Contrast that with, let’s say, China, at 0.3, and with the developed countries like the US, Europe, at 2. So there is huge potential for this market,” Goh said.

He explained the significance of the joint venture.

“It allows us to participate directly in this huge growth market. India is obviously one of the two huge engines of growth in Asia. It allows us, therefore, also to diversify our traffic base and not just be only dependent solely on Singapore traffic base. And also because of the locations of both SIA in Singapore and this new venture in India, we see good commercial synergies in the future when this airline is set up.”

Even before Singapore Airlines tied up with the Tata group, entities from the city-state have been quietly building (or trying to build) a presence across the value chain of Indian aviation—catering and ground handling, engineering and airports.

SIA’s regional airline SilkAir (Singapore) Pte. Ltd and low fare unit Tiger Airways Singapore Pte. Ltd, in which SIA has a 40% stake, are flying to India already. Its ultra-low fare airline Scoot Pte. Ltd also has plans to fly to India.

SATS Ltd, formerly known as Singapore Airport Terminal Services Ltd, an airline catering and ground handling services provider, has two tie-ups in India.

SATS has forged a joint venture—TajSATS Air Catering Ltd—with Tata group-controlled Indian Hotels Co. Ltd, for in-flight catering at Mumbai, Delhi, Chennai, Kolkata, Amritsar, Goa and Bangalore, and manages airport lounges in Mumbai and Chennai.

Air India Ltd and SATS have a 50:50 joint venture—AISATS—to provide ground handling services such as passenger and baggage handling and aircraft interior cleaning.

Singapore’s Changi Airport Group tied up with another Tata group company, Tata Realty and Infrastructure Ltd, to bid for airport projects in smaller Indian cities, but that venture did not take off.

The airport operator is on the lookout for stakes in other Indian airport projects; SIA’s engineering arm SIA Engineering Co. is also exploring opportunities in India after a joint venture with the Wadia group for opening an aircraft maintenance and aerospace training centre failed to make headway.

Almost all aviation-related entities of Singapore are circling India.

“We are always on the lookout for new, promising and economically viable projects all over the world. Each airport project will be assessed on its merits and that will not be different for projects in India,” said See Ngee Muoy, general counsel of Changi Airports International Pte Ltd.

“From time to time, Changi Airports International will look at various airport projects; and where there is a strategic and financial fit, we will consider investment in these projects. We are studying the documents on the privatization of the Indian airports and have yet to form a view on our participation. We have no comment at this stage,” See added.

SIA is constantly looking at opportunities to enhance its presence in the country, said David Lau, the newly appointed general manager (India) at SIA.

Singapore Airlines currently operates 63 weekly flights from six cities in India. SilkAir operates 44 weekly flights from eight cities in India. Singapore Airlines’ and SilkAir’s combined schedule features 107 weekly flights from 11 cities in India, he said.

Meanwhile, on 16 December, SpiceJet Ltd, India’s second largest low-fare airline, signed a three-year inter-line agreement with Tiger Airways, which operates Tigerair, connecting 14 Indian cities to Singapore via Hyderabad.

SpiceJet, controlled by media baron Kalanithi Maran of Sun TV Network Ltd, has been in talks for the last one year with several airlines including Tigerair and private equity firms for selling a minority stake to fund its expansion plans. Many investors are assuming the deal to be a prelude to a possible equity infusion.

“We are definitely seeking to expand this model. We want to surprise you,” said SpiceJet’s chief operating officer Sanjiv Kapoor. Kapoor refused to disclose the commercial details of the partnership, describing it as a “win-win” for both the parties.

An inter-line agreement is the first step in the partnership between the two airlines, and it could lead to code sharing (where two airlines share the same flight) between the two low-cost carriers. “If interlining goes well, it’s the first step. Code sharing would follow. It depends on rights and technology to support,” Kapoor said, describing it as a “natural progression”.

Singapore Airlines launching flights in India would, of course, be the jewel in the crown of the city-state’s effort to build a presence in the country amid rising competition elsewhere.

“For carriers in Singapore, saturation forcing them to look at new markets like India is nothing new,” said Timothy Ross, Asian transport analyst at Credit Suisse AG.

“Singapore has a population of about 4.5 million people and they are the highest air travellers in the world, as per percentage of the population using airlines, and it is not possible to squeeze more travel dollars from them,” said Ross.

SIA and its units have been looking at China, Australasia and the UK, but not all its attempts in the past 20 years to expand its footprint through alliances, joint ventures and associate airlines have been particularly successful or profitable, Ross said.

For Singapore-based carriers, the focus is within Asia; so India and China are the two markets they have been looking at, said K. Ajith, associate director at UOB-Kay Hian Research Ltd.

It was only in September 2012 that India allowed overseas airlines to take stakes of up to 49% in local airlines.

“With the recent liberalization within India, it is easier for Singapore-based companies to invest in India as opposed to China. In China, the big three airlines account for close to 80% of all passengers, and it is difficult to pick equity stakes in those companies or form alliances or even have joint ventures,” Ajith said.

Not that everyone is expecting it to be a smooth ride for Tata SIA Airlines.

Competition is increasing in the airline industry in India with Etihad Airways PJSC taking a 24% stake in Jet Airways (India) Ltd and the Tata group taking a 30% stake in a budget airline being started by AirAsia Bhd.

Local airlines are weighed down by heavy debt, estimated by the Centre for Asia Pacific Aviation at $14.5 billion (around 89,000 crore) in the last business year. The airlines lost an estimated $1.95 billion in the year on a combined revenue of $9.5 billion, according to the consulting firm. An economic downturn has taken its toll on passenger traffic.

“Indian customers are highly price sensitive and there are also several carriers; unless some of these dynamics change, it will be difficult to make any money in domestic routes. For international routes, you need to have the critical mass—else, even that will be difficult,” said Ajith.

SIA group’s chief executive officer is aware of what the airline is getting into. “I have to add, of course, that by no means do we think that this is going to be a walk in the park. The venture setting up in India will have its challenges,” Goh said in November.

“It’s a very competitive market domestically and, as a new start-up, the current rule says that one has to operate for five years, and reach a fleet of 20 aircraft before you’re allowed to go overseas. And we all know how competitive the domestic market is and, therefore, it is going to be a highly challenging venture to actually make it work,” Goh said.

On 2 April 2013, India and Singapore signed a memorandum of understanding on bilateral air services that enhanced the capacity entitlement by 10%.

India’s airlines are now entitled to offer 29,400 weekly passenger seats from India to Singapore and the designated airlines of Singapore 28,700 weekly seats from the city-state to India.

“Initially, Tata-SIA will only be able to operate domestically. Eventually, once international services are established (hard to say when as that hinges on if the current five-year rule is lifted), SIA could use the new carrier to serve markets such as eastern North America via India,” said Brendan Sobie, chief analyst at the Centre for Asia Pacific Aviation.

But Tata-SIA could potentially become bigger than SIA itself in the next 10-20 years, analysts say.

Three things are working in the joint venture’s favour—the growth potential of aviation in India, the local market knowledge and the reach of the $100 billion Tata group and SIA’s world-class service.

“Becoming a major player in India is worth its weight in gold as there are too many players looking at China and the space is crowded. The key, of course, is for the players in India to identify and extract an equally important and strategic role,” said Nawal Taneja, professor emeritus in the department of aviation at Ohio State University, who writes on aviation.

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First Published:24 Jan 2014, 05:06 PM IST
HomeCompaniesNewsSIA-Tata airline | Readying for take-off

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