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A merger of budget airline AirAsia India with full-service carrier Vistara is among options considered by the Tata group as it gears up for a wider play in the aviation business.

The salt-to-software conglomerate has set up a strategy team headed by Tata Sons Pvt. Ltd’s chief financial officer Saurabh Agrawal to explore options, including mergers, consolidation and rebranding of its airline ventures, two people aware of the matter said, requesting anonymity.

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Tata group, which placed an expression of interest for Air India, recently announced its decision to raise its stake in AirAsia India to 84% by buying out a part of its Malaysian partner AirAsia Bhd’s shares.

A decision on the way forward with AirAsia India is expected to be taken by March-end by when there will likely be more clarity on Tata’s bid for Air India, the people cited above said.

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“A final decision in this regard depends on whether AirAsia continues as a minority investor in the airline or not," one of the two people cited above said. “In the event of AirAsia Bhd continuing to stay invested in AirAsia India, the Tata group may not be required to pay a royalty for the use of the brand name, which is a key factor," the person added.

Tata group also owns 51% of Vistara, with the rest held by Singapore Airlines (SIA). Meanwhile, under the share-purchase pact with AirAsia Bhd, Tata Sons has the option to raise its stake to 100% in AirAsia India. The pact, may however, be terminated if Tata Sons doesn’t close the deal to first buy the 32.67% additional stake in AirAsia India by March-end.

A potential merger of AirAsia India with Vistara to operate a single airline under the Vistara brand would require the consent of SIA, the people cited above said. “A merger (of AirAsia India) with Vistara depends on many factors, including improvement in load factor, cash flows, vaccination, global lockdown and travel restrictions, the proposed deal with Air India, consent of Singapore Airlines, completion of pending aircraft orders and competition from other airlines in India," the first person said. “If this works, several sectors will open up for flying, thus, improving cash flows for AirAsia India," the person added.

The person said Tata group is also examining the option of merging AirAsia India, Vistara and Air India, if it wins the bid for the national carrier, and run them under a new brand provided it is agreeable to SIA.

“The Air India deal will depend on the government as it may absorb a large part of the airline’s debt. If the government keeps conditions, which includes keeping the Air India brand name intact for a time period, a different strategy will be required," the person said.

If the airline businesses are not merged, Tata group may either continue to run Air India separately or merge AirAsia India with Air India. It may also run Air India separately and merge Vistara and AirAsia India under one entity, with the consent of SIA, the first person said.

“The first will depend on the conditionality kept by the government and the price at which the proposed deal is formalized. The second will depend a lot on how the balance sheet of AirAsia India improves, how the covid-19 situation subsides, air routes open up and whether Singapore Airlines agrees for a merger or not at a future date after 31 March," the person said.

“All the different scenarios are being assessed by a dedicated team," the person added.

A spokesperson for Tata Sons declined to comment.

A strategic consolidation among Indian airlines is inevitable and could result in the total number of airlines coming down to two to three from six, aviation consultant Capa India said in a 4 January report.

Anirudh Laskar
Anirudh Laskar is a senior editor at Mint, with 17 years of experience. He has reported on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the financial services industry. Based out of Mint’s Mumbai bureau, Anirudh has worked with Business Standard and The Telegraph before joining Mint in 2009.
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