Home / Market / Mark-to-market /  Is the Tata group’s love for aviation blind?

A recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you’ve lost your trousers—you’re in the airline business," said Sir Adam Thomson, founder of the private airline, British Caledonian. Closer home, Vijay Mallya, once nicknamed “India’s Richard Branson", was brought low by the failure of Kingfisher Airlines.

Still, the airline business continues to have an irresistible allure for some. Tata Sons Ltd has held discussions to acquire a controlling stake in Jet Airways (India) Ltd, according to news reports.

Interestingly, when N. Chandrasekaran took over as chairman of Tata Sons early last year, he had stated that one of his key strategic priorities would be to “bring greater rigor to capital allocation policies and deliver superior returns to shareholders".

It’s difficult to see how doubling down on aviation amounts to efficient use of capital. A look at the chart above shows that even the well-regarded Singapore Airlines Ltd, its joint venture partner in India, has been living with sub-par returns in recent years.

To be fair to the Tata Group, it hasn’t rushed into a decision. Tata Sons has said that the discussions were only preliminary. And from the looks of it, Singapore Airlines is on board, which means losses, if any, will be split. And who knows, if it strikes a deal with favourable terms, making decent returns from the aviation business might just be possible.

The big reason being given for the merger is that it will help the Tata Group gain scale—its market share will jump threefold to 24% in the domestic market, if it acquires Jet Airways.

Besides, Jet Airways brings the added attraction of flying international routes. Currently, the Tatas have two joint ventures with Singapore Airlines and AirAsia, which serve only the domestic market. Both companies run losses, which essentially means they need capital to keep running. Last month, Vistara, the full-service airline in collaboration with Singapore Airlines, raised 2,000 crore from the two promoters.

While a higher market share and Jet Airways’ prized slots in important airports will undoubtedly help, questions on profitability remain. It mustn’t be forgotten that returns will eventually depend on factors that are largely outside of the Tata Group’s control. Large costs such as fuel and lease rentals are impacted by fluctuations in crude oil and forex markets, and tariffs are dictated by competitors such as IndiGo (InterGlobe Aviation Ltd) and SpiceJet Ltd.

Vistara and Jet Airways are positioned as full-service airlines, but their tariffs aren’t commensurately higher than, say, IndiGo’s low-cost service. Any attempt to demand a premium for their brand and better services is met with a drop in load factors, showing clearly that pricing power remains weak.

In recent quarters, low-cost airlines seemed content to sell tickets even below their own cost, resulting in larger-than-expected losses for full-service airlines. It’s little wonder Jet Airways is in the position it is, desperately seeking out a buyer. The fact that none of the mergers in Indian aviation have worked out can’t be ignored either.

From the Tata group’s perspective, this seems a good opportunity to drive a hard bargain and better its chances of making some returns on its aviation portfolio. Else, it would be fair to conclude that its love for the aviation business is blind.

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