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Business News/ Opinion / Online Views/  Is Tata Sons’ two-pronged aviation strategy sound?

Is Tata Sons’ two-pronged aviation strategy sound?

Tata Sons needs to clearly define the difference between Tata-AirAsia and Tata-SIA in terms of routes and fares

Tata-SIA needs to focus on keeping its cost structure low and having a “Scoot mindset” when building its full-service airline. Photo: Bloomberg  (Bloomberg )Premium
Tata-SIA needs to focus on keeping its cost structure low and having a “Scoot mindset” when building its full-service airline. Photo: Bloomberg
(Bloomberg )

Tata Sons Ltd has invested in two different airline ventures over the past seven months. Is this a sound strategy, especially since they could end up competing with each other in an aviation market where the lines between low-fare and full-service airlines are unusually blurred?

The holding company of the Tata conglomerate took markets by surprise when it said last week that it had sought government approval for a new airline in collaboration with Singapore Airlines Ltd (SIA). This follows an earlier decision in February to begin a low-fare airline in collaboration with AirAsia Bhd and Arun Bhatia of Telestra Tradeplace Pvt Ltd.

Tata Sons will own 51% of the joint venture with SIA while its stake in the earlier venture will be a more modest 30%.

So it could be argued that Tata Sons has its heart in the full-service venture and its head in the low-fare one.

To be sure, it is common for airlines to use multiple business models. In 2009 India’s largest full-service airline Jet Airways (India) Ltd came out with a no-frills service called Jet Konnect. Most recently, Singapore Airlines launched a low-fare airline in Singapore, called Scoot Pte Ltd, for medium and long-haul routes, offering 40% cheaper tickets compared to full-service airlines.

But the Tata case is different: two separate companies with two different sets of partners.

The Tatas are familiar with this—when they moved into the technology sector in the 1980s, they had a range of global partners such as International Business Machines Corp. (IBM), Unisys Corp. and Honeywell International Inc.

Tata Sons has had a long tryst with the airline industry. This is its third attempt to launch a full-service airline, after being thwarted twice by political and corporate intrigue.

In 2000, Tata Sons and SIA abandoned a joint attempt to buy a 40% stake in Air India Ltd—an airline which the group founded as Tata Airlines in the 1930s before it was nationalized in 1953. In 1996, Tata-SIA had made an abortive bid to start an airline in India with 40% equity contribution by Singapore Airlines.

Tata Sons says that the AirAsia and the Singapore Airlines ventures will cater to different market segments—one will be an ultra-low fare airline while the other will be a premium airline.

In that context, Tata has managed get two of the best partners possible—AirAsia has the lowest unit cost in the world and Singapore Airlines’s expertise in running a full-service airline is unrivalled.

AirAsia India will compete against low-fare carriers that have over 60% market share while Tata-Singapore Airlines will have to fight off rivals Air India and Jet Airways in the full-service space.

The third full-service airline, Kingfisher Airlines Ltd, has been grounded since last October owing to a workers’ strike and financial difficulties.

Tata-SIA can easily fill the vacuum created by Kingfisher Airlines. There is still a market for premium airlines in the key metro cities. On the other hand, AirAsia India would be flying other key markets, offering frills for a fee.

From a timing and positioning perspective, the Tata Group seems to have got it right by pulling two formidable partners with two different business models.

If the entry of SIA and AirAsia was facilitated by last September’s decision to allow foreign airlines to invest up to 49% in local airlines, the landscape could change even more dramatically if the government drops its rule of allowing airlines to fly international routes only after five years of flying on domestic routes.

The aviation ministry is considering such a move.

Tata Sons’ re-entry into the Indian skies has several positives. It could bring in more competition, higher service standards, low fares and better resilience as the promoters have deep pockets.

It will bring competition to Jet Airways, which is in the process of selling a 24% stake for $379 million to Abu Dhabi-based Etihad Airways PJSC, and plans to move a third of its international operations to Abu Dhabi. Tata-SIA could offer more hub options. The venture will be based out of New Delhi and hence it will fuel the ambitions of Delhi airport of becoming a hub. Air India also operates out of Delhi.

Tata-SIA will force Air India, which mostly runs with government cash injections, to be on its toes. Going by the current scenario, three full-service airlines and three low-fare airlines could rule Indian skies after further consolidation.

But the key thing here is: who will be having last laugh? Tata-Asia or Tata-SIA? Globally, full-service airlines are facing a tough time with high operating costs while low-fare airlines are flying with a little less turbulence.

In India, however, there is no great difference between low-fare and full-service airlines in terms of fares and operating costs.

Though Tata Sons could convince itself that AirAsia is at the low-fare end and the SIA venture is at the full-service end of the aviation market, the businesses may end up competing against each other for the same set of passengers. The cost of fuel, airport charges, employees’ salaries and others would be same for both ventures, apart from other common challenges.

India’s first low-fare airline Air Deccan could not withstand competition and was finally acquired by full-service airline Kingfisher Airlines, which also ended up in a mess. Most of airlines are making huge losses and their debts are ballooning.

So the unsolicited advice to Tata Sons would be to take a leaf out of SIA’s low- cost airline Scoot.

Most full-service airlines overinvest, Vijay Mallya’s Kingfisher Airlines being a good example.

Tata-SIA needs to focus on keeping its cost structure low and having a “Scoot mindset" when building its full-service airline. Also, it needs to clearly define the difference between Tata-AirAsia and Tata-SIA in terms of routes, management, fares and strategy. It can exit from one or consolidate in the future, its equity partners permitting.

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Updated: 24 Sep 2013, 11:38 PM IST
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