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A Red Carpet For The Maharajah
This time the Government of India’s disinvestment plan is focused on a quicker deal closure and on making the transaction fructify. If announced over the next few days, this deal could see closure in a few months (this financial year itself).
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A decision on the sale of Air India is expected anytime soon. There is much speculation on Tata Sons winning the race and clinching the deal. The deal has received much media coverage over the past few days, along with an equivalent spate of denials about a decision having been taken in the first place.
The decisioning process has the approvals needed from the special panel led by Union Home Minister Amit Shah and now needs to be ratified by the Union Cabinet. In the Air India disinvestment deal, the winner not only gets 100 per cent stake in Air India, but also 100 per cent of Air India Express and 50 per cent of Air India SATS Airport Services. This writer assumes that Tata Sons could be the new incumbent-owner of Air India.
This time the Government of India’s disinvestment plan is focused on a quicker deal closure and on making the transaction fructify. If announced over the next few days, this deal could see closure in a few months (this financial year itself). The Tatas were also the potential bidders when the GoI ran a process to sell stake in Air India in 2001 and 2017. This time around, only one more eligible bid came through along with that of the Tatas. The Tatas already have an airline joint venture (JV) with Singapore Airlines ‒ ‘Vistara’, as well as AirAsia India (the erstwhile JV with AirAsia for a low- cost carrier business).
*Home Coming or Sweet Revenge?
Tata Airlines, the airline founded by the gentleman-industrialist and India’s first licenced pilot ‒ JRD Tata ‒ operated its first flight in 1932. This is the airline that became Air India! It was nationalised abruptly in 1953. JRD Tata’s involvement as the chairman of the airline went beyond setting the vision or reviewing the airline’s business performance. He was hands-on about customer service and the minutest details pertaining to consumer experience.
Sadly, that cannot be said of Air India in recent times. Known for decades as ‘The Maharajah’, Air India decayed under a listless leadership, political and bureaucratic nonchalance, poor fiscal management and ended up being a forced travel choice for public sector businesses. As a consequence, it incurred losses of several thousands of crores of rupees.
Air India currently operates nearly 4,500 domestic and 2,700 international airline slots. Yet it not built sustainable economies of scale or engaged in sectoral planning and has lost monies. Air India was merged with the state-owned domestic operator Indian Airlines in 2007. The government's last bid to sell a stake in Air India was in 2017 when it approved a disinvestment and a committee was set up to start the process. This deal will spare the government further undue expenditure and bring to closure attempts to rein in the public money spent and lost on the airline.
The Air India that the Tatas will now acquire is a very different airline from the one they operated decades ago. For the Tatas, getting back a much larger airline might be the sweet revenge for the airline having been plucked away from them. Will this ‘sweetness’ pay back financially? And with investor activism on the rise, will shareholders of listed Tata companies or institutional investors ask questions about using the financing comfort of listed entities (if any are used) or the Tata Sons shareholding in them?
*A2I Aspects of the AI Deal
The qualitative aspects of this deal are crucial. A look at the qualitative A to I of this deal are as below:
*Aspiration & Ambitions
The success of any deal is measured in long-term business-viability and returns on investment. As in any business, the investment risk is part of the deal assessment. With the talent bandwidth that the Tatas have, all the requisite risk and feasibility assessments would have been done as a process. But the previous large ticket size global deals of their’s have not gone well and certain quarters in the markets have been unfair in insinuating that decisions have been influenced by individual personalities.
In this airline acquisition deal, it is very important to understand the aspirations of the Tatas in the aviation business and their outlook for business investments into this sector for the next decade. It is especially critical, as they would end up with three different airline companies post this deal, and the aviation sector has a high capital requirement.
The Indian airline industry has seen the confusion of multiple brands within the same airline fold. Jet Airways is an example, with Jet Air, Jet Lite and Jet Konnect under its umbrella ‒ each airline purportedly targeting different consumer segments, using different seating configurations and different types of aircraft. This added to brand confusion as well as losing out on operating synergies, and consequently financial losses. Surely, the Tatas have knowledge of their own multiple brands synergy issues that they have solved in their hotels
business. And they know that the branding synergies don’t necessarily stay only with branding gurus, but need inputs from the technical and commercial side of the airline business.
For the airline to be seen as ‘The Maharajah’ again and with respect, the passengers truly have to be treated with the “passenger is queen / king” attitude. To get this into the organisational DNA won’t be easy and will require deft leadership and much management time. The toughest challenge for the new owners of the airline will be to change the culture of the organisation towards customer delight. The quality and consistency of the service has been a yo-yo and such an offering won’t cut ice in the current highly competitive airlines sector.
Also the consumer perception will take time to change. Will the new owners have the luxury of waiting for a new culture to seep in and keep counting losses till then? Will they have the deep pockets to ensure that their other businesses don’t bleed in the process of trying to make an airline soar higher again?
Polity and Policy will have to get this disinvestment right. And all the steps that they are said to be doing so far, be it dealing with pilot unions, or payment of salaries on time or the supposed deal point about vacating the staff quarters within a certain timeframe of the deal being signed, point to a serious disinvestment intent and process.
Getting this AI deal done will strengthen the opinion that the GoI is serious about its disinvestment objectives. Assuming that the same pace and pressure is kept up for other disinvestment exercises, the GoI will be richer and the overall fiscal pressure will ease for them. It would send a loud and clear message that the GoI disinvestment process will not be stalled by staid-old-rent-seekers in the name of precedence. In addition, it would send a stronger signal to global and domestic investors about the seriousness of the disinvestment process. Will this add a notch or two higher to the sovereign rating by the global rating agencies?
When most airline promoters globally, including sovereigns, are shying away from being in that business, the pressures and (stock market) expectations from the Tatas could be high. The larger question and the elephant in the room is: “is this acquisition based on ego” or a strong business rationale? Either way, there would be “I told you so” views, based on the outcome of the business over the next few years.
*Financing, the Final Word
The deal size may not sound as high as a Unicorn valuation today! Yet the financing of this deal would shine the spotlight again on TCS. Tata Sons looks to TCS for nearly 90 per cent of its income. Hence any non-routine business expense such as this acquisition, might have to be financed from the earnings of TCS. Even if the deal does not directly have any covenants on TCS, the implied covenants would need prudence in ensuring that the airline business takes to the skies soon and starts churning profits.
For the Tatas, other businesses in their enterprise might also need growth-funding. For example, their finance business has not been spectacular compared to various other competitors and for any meaningful scale and relevance to the industry, that business vertical might need to do capacity building in equity capital and digital, which requires funding. The recent foray of the group through inorganic growth of their digital business (Tata Digital) would mean that they need to keep ready cash for further acquisitions, in the quest to build their ‘Super-app’ ecosystem. Digital acquisitions are expensive with current valuations. While debt financing is available globally, all across for a blue chip group like the Tatas, are there sufficient sources of equity-capital available?
It has also been reported and speculated in media that the Tatas have kept Singapore Airlines (SIA) informed about this merger and acquisition (M&A) process and that their JV Vistara airline would be part of the combined airline that the Tatas might want to shape their business vertical into.
The SIA is majority owned by Singapore government entities. Singapore, being a strategic partner-nation for India, plays an important card for SIA to show interest in playing a larger role in shaping or partnering or collaborating with the Tatas for their overall combined aviation play.
The larger strategic question is whether the cost of financing the deal as well as bringing operating expertise could be an advantage that the SIA could get to the table? And if yes, at what price?
With more than sufficient learnings available across the global aviation industry on the need to harmonise operations, fleet management and to have simpler-to-relate consumer brands, the Tatas will have to work hard and quick.
They will need to rationalise the choice of airline brands they would want to operate and how they would position them in the domestic and global sectors would be a critical decision. They further need to streamline the choice of aircraft to optimise capacities to offer in their flying routes, as well as to save maintenance and operating costs.
Further, the route planning across Vistara, Air India and AirAsia India’s domestic routes have to be combined for operational efficiencies. And the international routes have to connect with AI and SIA global network to enable meaningful consumer offerings. One conflict that could arise is how SIA will see the Tatas making India the connectivity-hub for their global network, with the current Air India bases.
As a part of the overhauling, the new owners will need to make the airline relevant and contemporary. This might include tough decisions like cutting costs significantly by selling or writing off old assets (including aircraft), rationalising manpower and bringing in industry leaders for their C-suite roles.
*India’s National Carrier
From being the national airline (an emotion not necessarily shared by consumers), Air India will become a private sector airline. Hopefully the new owners will be able to bring in operational excellence, consumer centricity and business profitability that could make the markets look at the airline with almost the same reverence as they would a national carrier and not compel others to look away sheepishly whenever the brand 'Air India is mentioned in a global audience.
#V.A.A - New vistas with Vistara, AirAsia India & Air India
The deal would make the Tata Group the second-largest airline operator in the Indian market, with over 26 per cent market share (the leader being IndiGo with over 56 per cent market share). The domestic aviation market is largely inclined towards LCC (low-cost carriers). Even though Vistara is a full-service carrier (FSC), its back-end is operated like an LCC.
If the Tatas get this acquisition and the post-deal transformation right, they can use the combined larger market share to shave off operating costs, and be a significant challenger brand in setting newer and higher standards, not only in domestic markets but also for foreign airlines flying to India.
Can the erstwhile Maharajah of the skies regain lost heights? More importantly, from the point of view of the Tatas, can this deal victory stay sweet for a longer time, and can they showcase financial-profits in the short to medium term? And with the bulk of earnings for Tata Sons coming from TCS, will this deal make them change the moniker of a “salt to software” conglomerate to “super-app to skies, powered by software” conglomerate?
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.