Air India acquisition: Few challenges, many opportunities

Probably the most promising aviation market in the world, India forms only between 2 per cent and 3 per cent of global domestic aviation, way behind China at about 20 per cent, US at about 17 per cent and Europe at about 12 per cent. Between scheduled, chartered, cargo and others, there are over 35 operators in the Indian market of which Indigo, Air India, Spice Jet, Go Air, Vistara and Air Asia India constitute the top six. While global air connectivity for India increased by around 90 per cent from April 2014 to 2019, in the ensuing two years, it has fallen by a similar amount due to Covid-19. 

After six consecutive quarterly losses, most of India’s domestic air carriers have virtually or actually eroded their net worth and are either out raising funds, delving into borrowings, or other resources, for cash, to reinvigorate their operations. In spite of having taken an estimated combined hit of around US$ 5-6 billion (versus an estimated IATA airlines global hit of US$ 120 billion), our key carriers have so far avoided bankruptcy or shutdown. 

In February 2019, before Covid-19, airlines in India were carrying 4.12 lakh passengers per day which is likely to get achieved, on a steady state basis, only in late 2022. While Indigo has been the lead player, controlling around half the market share, the purchase of Air India by the Tatas (Talace), for around US$ 2.4 billion augurs well for customers as well as the country. 

Incubated by them about 90 years ago and acquired by the Government for about Rs 2.6 crore, Air India is back in the Tata fold after a gap of about 68 years. The Delhi-based airline comes with approximately 140 aircraft of which only 120 are fly-worthy. It also comes with 8,000 permanent staff and 4,000 contract employees. As add-ons, Kochi-based Air India Express and 50 per cent of AI SATS are also part of the transaction, which is likely to close by the end of the year. 

The acquisition entails quite a few challenges, but also throws up many interesting opportunities. A further investment of US$ 1 billion may be necessary to refurbish, reorganise and operate the airline with full synergies. Initially, the debt of Rs 15,300 crore may need to be refinanced. On the customer side, the loyalty and reservations systems would need to be improved. Vendors, suppliers and lessors contracts may need to be rewritten and front ending of refurbishment and maintenance costs may be required. Rising Air Turbine Fuel prices and substantial ‘Low Cost Carrier’ competition could also provide some headwinds in the next couple of years. 

On the other hand, bilateral and other landing rights across multiple geographies and preferential slots at important domestic and international airports would prove to be a major boon. The Frequent Flyer base of three-four million good net worth customers could also provide wonderful cross-sell and combined product opportunities with IHCL (Taj Mahal Hotels Group) and for Tata “Neu”, the sales inducing app across all group entities (eg Croma, Westside, Big Basket, Starbucks, 1mg, Star Bazar etc). TCS would undoubtedly be the lead developer for all of Air India’s customer facing and backend software development. The potential integrations with Vistara and Air Asia India could be game changing as and when they are executed. 

Domestic capacity curbs have already been lifted and international travel may be eased in the coming weeks. In addition, the Indian Government has announced half-a-million free visas for inbound travel. On the back of “revenge tourism”, both domestic and international air travel are likely to grow, enhanced by the rising middle-class and geographical advantages that India will continue to enjoy in the longer term. 

These developments coupled with the potential relaunch of Jet Airways in April 2022, the new launch of Akasa Airlines backed by R Jhunjunwala and the renewed interest of global carriers in the Indian market vis-a-vis China, could bring glad tidings to Indian flyers and the Indian airline industry in the coming years.