The government of India on Friday (September 8) finally took the monumental step of unloading the loss-making national carrier Air India to the highest bidder. The Tata Group emerged as the winner to acquire the airline with its Rs 18,000 crore bid. While the announcement was euphoric and naturally invited emotional reactions, the company has a humongous task ahead of it in resurrecting the airline which is on a ventilator for the better part of the last two decades.
In its Rs 18,000-crore bid, the Tata Sons will be taking over Rs 15,300 crore debt of the bleeding airline and infuse Rs 2,700 crore into the coffers of the government. Meanwhile, the rest of AI’s burgeoning debt which stood at Rs 61,562 as of August 2021 will be borne by the government.
A tale of two failed airline businesses — Kingfisher and Jet Airways
The aviation sector is a tricky business. Liquor baron Vijay Mallya found it the hard way and so did Jet Airways’ Naresh Goyal.
Born with a silver spoon, courtesy of his father Vittal Mallya — Mallya Jr. didn’t want the Kingfisher brand limited to the spirits industry. He wanted its name in the Indian skies and thus focused on establishing a premium airline.
The suave, debonair Mallaya wanted to serve luxury to the Indian masses but in an over-regulated country like India where much of the aviation fuel has to be imported and is heavily taxed, the running costs of the airline turned to red in no time. And despite the airline running to full capacity, it had had very little chance of profitability considering the high initial investment and mounting slabs of debt from the banks.
Things reached a head when a takeover of Air Deccan pushed his company deeper into the red, a situation which only got exacerbated with time. With the company now defunct, unpaid loans in the range of a few thousand crores, Mallya proceeded to liquidate his share in UB and USL. But struck by the Murphy law, everything that could go wrong for Mallaya, went even awry. Vijay Mallya tried hard to model himself as India’s Richard Branson but eventually became a fugitive of the law.
The story of Jet Airways
Similarly, the downfall of Jet Airways started after acquiring debt-ridden Air Sahara in an attempt to challenge Mallya’s Kingfisher, which in hindsight proved to be a horrid decision. In 2013, it sold a 24 per cent stake to Etihad Airways. However, this could not save the debt-ridden company and its market leadership continued to weaken.
The entry of other low-cost airlines like IndiGo and SpiceJet further dampened the chances of revival as the debts amounted to $1.7 billion. Jet Airways could not weather the competition posed by other efficient low-cost airlines in the market and perished.
The former Chairman of Jet Airways, Naresh Goyal even tried to pull off a Vijay Mallya and Nirav Modi. Barely two days after PM Modi’s coronation as the country’s leader for the second time, Goyal, along with his wife, boarded a flight attempting to flee when the authorities intervened at the eleventh hour and stopped them from leaving the country
Tata is already a part of the Indian aviation sector
It’s not as if Tata is starting afresh in the aviation sector and needs any lecture about the risks of plunging neck first into the industry. Tata Sons is an active part of Air Vistara and Air Asia – two airlines with considerable business in the Indian stratosphere.
The former has been hit hard by the Covid pandemic and is in a serious debt crunch. Reportedly, in FY 20, Vistara’s pre-tax loss widened to Rs 1,814 crore against Rs 831 crore in FY19 due to higher operating costs.
Even for Air Asia, all is not hunky-dory. According to an Asia Nikkei report, hit by a price war and the plunge in air travel, the company incurred net losses for seven straight three-month periods from the third quarter of 2019 through 2021’s first quarter.
Air Asia last October slashed 10% of its workforce of 24,000 people, including those at long-haul airline AirAsia X and offloaded a major chunk of shareholdings to the Tata Group.
Tata Sons now own 84 per cent of shares in AirAsia India, with an option to buy the remaining 16 per cent shares by next year. In a nutshell, Tata has invested Rs 6,000 crores in the two airlines since commencing operations and lost over Rs 9,000 crores.
Razor-thin margins for profits
The airline business is a capital-guzzling and money-losing venture. The airlines operate on razor-thin margins, as far as profits are concerned. So, even small fluctuations in say – interest rate, taxes, fuel prices hurt them significantly. Any kind of natural disaster or man-made disaster like COVID or crash accident, or any other unexpected event ensures that the company has a hard time balancing its accounting books.
Tata is not expected to make any profit for the next five years through AI, according to its internal surveys. And thus, it will put a lot of pressure on its other money-minting businesses such as TCS and the steel companies to bail it out. Some experts remark that Tata will have to spend the same amount of money as its winning bid to restructure the airline and get anywhere close to breaking even.
Tata might merge the three entities
There have been murmurs that after receiving keys to the cockpit of AI, Tata Sons could potentially merge its operations with Air Asia and Vistara, making it one of the biggest airline entities in the country.
It will also help minimize the operational costs of running three airline businesses concurrently. N Chandrasekaran, Chairman, Tata Sons in an interview with TOI in 2019 had remarked that he would not run a third airline unless they are merged.
Need a lean cost structure plan
Over the last decade, more than Rs 1.10 lakh crore was infused by way of cash support and loan guarantees in the loss-making airline to keep it afloat. The government was bleeding Rs 20 crore every day to keep the airline afloat. The takeover is expected to be completed by December and unless Tata has a ‘lean cost structure plan’ already in place, it will continue to burn cash.
Moreover, Tata is expected to renegotiate the expensive vendor contracts, bring down the bloated headcount of 214 employees per plane, which in other airlines such as Singapore Airlines and British Airways is limited to 160 and 178, respectively. Moreover, TCS can be roped in to fix the archaic software of the aeroplanes, which still reminds one of the days of British raj whilst travelling in them.
Air India’s mass network to help Tata
Air India is India’s major airliner which connects almost all parts of the world to our country. It has a vast fleet of jets. As of August 2021, Air India operates no less than 127 aircraft, which include fleets of Boeing 777-300ER, Boeing 777-200LR, Boeing 747-400 and Airbus A320neo among others.
If there is one corporate group that can turn around the fortunes of Air India, it is the Tata Sons. Air India was snatched away from JRD Tata, and now, Ratan Tata is bringing the airline back to the empire.
There is a sense of emotional value which the Tatas’ attach to Air India. And then, the Tatas’ have the potential of making Air India the country’s global airline offering, which not just Indians fly on, but people from across countries use for air travel as well.
It’s a hefty challenge but if Tata group pulls its socks and gets the basics right, India’s aviation sector could be all set for a revolution. The Tatas’ must implement their plan for Air India with the utmost care, as the future of Indian aviation has now come to depend on them in a big way.