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BW Businessworld

The Flight Plan

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Should everything go as planned, on 1 June 2014, a project conceived, conceptualised and considered as far back as the early 1990s will finally come to fruition. As the story goes, during Tata group patriarch J.R.D. Tata’s last days, India’s then prime minister, P.V. Narasimha Rao, had suggested that the Tatas should start a new airline in India (Air India, which had been founded and run by the Tatas in the 1930s, was nationalised in the 1960s). JRD responded by pointing out that the days when one could build a new world-class airline from scratch were over, that technology had moved on and to offer a world-class service, one would need to partner with a world-class airline.

Although J.R.D. died soon after, the idea stuck with Rao. As part of discussions on broader economic relations with Singapore, the topic of setting up a new airline in India was broached. Not only were the prime ministers of both countries excited by the idea, Singapore Airlines (SIA) too saw merit in it. When asked which Indian company SIA would like to partner with, it promptly said the Tatas. It believed the Tatas were a respected brand and, given that the group had set up Air India, had some experience as well.

A call from the Prime Minister’s Office to Ratan Tata, JRD’s successor, found the Tatas willing. The initial proposal chalked out by both sides envisaged a 60:40 ownership pattern in favour of SIA. This was revised to 50:50 and, eventually, to 51:49 in favour of the Tatas. SIA was unruffled by the changes. But the final clearance for the joint venture (JV) never came in time. The Narasimha Rao government was voted out in 1996  and a new coalition came to power.

With it came new thinking and foreign direct investment (FDI) by airlines in domestic carriers was disallowed. Jet Airways — the leading private carrier at the time — was asked to buy out the equity that two foreign airlines, Kuwait Air and Gulf Air , had in it. The Tatas were, however, undeterred and continued discussing options with their partner. It was then decided that Tata would go it alone, with a technical services and support agreement with SIA. But despite the Tatas’s backing and persistence, this revised proposal too never got the final nod.

Then, the BJP-led National Democratic Alliance (NDA) came to power. It put disinvestment at the forefront of its policies as it believed that running service sector companies was not the public sector’s strength. The Tatas were asked to bid for Air India, a proposal they discussed with SIA. Many twists and turns later, there were two bidders left in the fray — the Hindujas and the Tatas. The Hindujas were subsequently eliminated from the race but, for reasons unknown, the file divesting Air India in favour of the Tatas was never cleared.

It was at this point that a disgusted Ratan Tata decided to withdraw the application. It had become quite evident to the group that there were some vested interests blocking the Tatas’s entry. Although there was no clear evidence, fingers were pointed at a prominent rival airline.

It was perhaps poetic justice that the Tatas escaped going through one of the most turbulent periods in aviation following the events of 11 September 2001, when many an established airline shut shop and global travel plummeted.

The Tatas and SIA had all but forgotten about their partnership when the Congress-led United Progressive Alliance, in its second term (with Ajit Singh as civil aviation minister),  started making noises about letting foreign airlines invest in the aviation sector. It had become evident to the government that just permitting FDI in the sector was not enough. Indian airlines needed management expertise, technical know-how and financial muscle to survive.

Soon after a formal announcement was made, several Indian airlines made a beeline for SIA, hoping for a tie-up. SIA, however, decided to approach its former partner to see if it was still interested in the old proposal. Ratan Tata — still group chairman — decided to take a re-look at the sector; and several viability and market studies later (and after Cyrus Mistry had taken over), the Tata board cleared the proposal.

Almost simultaneously, Malaysia’s AirAsia contacted the Tatas for setting up a low-cost airline. The Tatas responded positively to that too. The board cleared the proposal  and the announcement was made ahead of  the Tata-SIA deal simply because AirAsia finished all the paperwork before SIA did. Although there was speculation that AirAsia’s Tony Fernandes was kept in the dark about the developments with SIA, Tata officials rubbish this, arguing that  both partners were in the know about the other deal.

The decision to enter two separate airline businesses is not without logic. Globally, the few full-service airlines that started low-cost operations have found that it doesn’t work for two reasons — one, the low-cost subsidiary often cannibalises the former’s business and, two, the work culture at both carriers is usually diametrically opposite.

The Tatas partnering in two separate airline ventures shows the group’s keen interest in the sector. “In both businesses, we have gone with the partner with best practices. How many airlines understand the low-cost business better than AirAsia and how many understand the full-service business as well as SIA,” asks brand custodian and chief ethics officer Mukund Rajan, who is also one of the Tata nominees on the board of  the Tata-SIA venture. Tata officials also clarify that questions of conflict of interest do not arise as both ventures deal with different sets of fliers. 

Rough Route
To meet aviation guidelines (domestic carriers need to be in operation for five years and have at least 20 aircraft before flying overseas), Tata-SIA Airlines is currently focusing on domestic operations for the first four years. The airline proposes to start operations with four narrow-bodied aircraft and intends, by the end of the fourth year, to have 16 aircraft plying on various domestic routes. The initial investment by the two partners is $100 million, with the initial startup cost pegged at $15 million.

The airline is headquartered in Delhi and is currently operating out of the Taj Vivanta in Gurgaon. A CEO is yet to be named. Prasad Menon (an old Tata hand) is the chairman of the airline. The maximum frequency of flights is propsed on the Delhi-Mumbai and Delhi-Bangalore sectors in the first four years (see chart on routes planned). Delhi is also intended to serve as the maintenance hub. 

Profitability projections (made on the assumption of only domestic operations for the first four years) envisage a small profit of $16 million by the fourth year, with revenues of almost $500 million. Projected losses for the first three years amount to less than $100 million.

In an email, the Tata-SIA spokesperson said the airline’s first commitment is to fly on domestic routes and a decision to fly overseas will depend upon an amendment to the ‘five years and 20 aircraft’ clause for Indian carriers flying abroad.

Even as Tata-SIA awaits a no-objection certificate (NOC) from the civil aviation ministry, the fate of the Tatas’s other venture with AirAsia is hanging fire. With Director General of Civil Aviation Prabhat Kumar inviting objections before issuing the final licence — the whole process is expected to be over by  mid-March, by which time the general elections will be around the corner — top officials are unsure if, at all, it will be issued, especially if the BJP comes to power.
“With Subramanian Swamy and other such leaders being part of the BJP, it is anybody’s guess if they will still look upon FDI in airlines favourably. I wouldn’t be too sure of either of the two Tata ventures getting a licence anytime soon,” says a top aviation ministry official. 

A Massive Opportunity
While competition on domestic routes remains stiff, several foreign airlines such as Emirates, SIA and Lufthansa earn increasingly higher revenues from flying Indian passengers to and from India.

“We have managed to offer our international traffic to every other airline except our own on a platter. Nothing has been more damaging for India,” says Amber Dubey, partner and head, aviation, KPMG India.

Indeed several carriers currently operating services to India, such as Air Arabia, Etihad, flydubai, Mihin Lanka, RAK Airways and tigerair, entered the Indian market well before they had been in operation for five years. These airlines have since grown to capture around 12 per cent of international traffic to and from India carried by foreign airlines. Air Arabia, which operated to India in its first year of operation, is now the third largest foreign carrier in the market. Meanwhile, several home carriers of similar vintage have been prevented from competing with them.

Tata-SIA’s entry will initially have a limited impact on the domestic market (especially since its fleet size will be small during the initial years). “International operations will truly be the key to making this work,” says Abhaya Krishna Agarwal, partner (infrastructure and PPP), EY India.

The Centre For Asia-Pacific Aviation (Capa) projects that international air traffic will touch 96 million passengers by FY23. However, this is based on the current regulatory environment. If the ‘5-20’ rule is amended, it could result in a significant acceleration of growth and the 100-million mark may be reached as early as FY21. At the end of FY14, the international traveller market stands at around 50 million. The country’s low air passenger base suggests that the growth potential is large. Right now, it ranks sixth in terms of domestic seat capacity, and 19th with regard to international seats. On a per capita basis, the number of seats in India is by far the lowest among the 20 largest international markets, and less than half China’s.

Even though Tata-SIA is currently silent on its international plans (its application for an NOC does not mention flying overseas), most experts and consultants argue that Tata-SIA will focus on international operations, especially since having a hub in India will allow SIA to vie for a slice of the west-bound market, that accounts for 70 per cent of the country’s international traffic.
‘Tie-up Will Benefit Fliers’
Union civil aviation minister Ajit Singh speaks to BW’s Anjuli Bhargava on the implications of the Tata-SIA venture

What are the chances of the Tata Sons-Singapore Airlines (SIA) tie-up obtaining a licence to operate an airline in India this time around, considering they have failed to do so on two earlier occasions?
I cannot speculate on what happened and what pressures there were in the past. Ratan Tata may be the best person to ask. However, this time I see no problem whatsoever with the proposed venture. If the two partners do their due diligence, there is no reason for us not to grant them a licence.
Click here to read full interview

Industry observers also argue that with the Tatas’s understanding of the Indian market and SIA’s experience of running a global airline, the joint venture will be a force to reckon with. The big difference, many believe, is that for the first time India is getting professional and experienced players in the market. If you look at the existing players, both IndiGo and Jet had experience in the aviation space and not in actually operating an airline . 

Now, with SIA and AirAsia as partners, management expertise, technology and world-class practices will be brought in — whether it is in aircraft purchase, MRO (maintenance, repair and operations) deals or in cutting costs.  “The game-changer is not just the setting up of new airlines but the new players that are coming in and what they bring to the table,” says Dhiraj Mathur, executive director, PricewaterhouseCoopers India. 

However, many are sceptical of the Tatas’s two-pronged entry. But the group argues that though India’s civil aviation market is nascent, there is sufficient distinction in demand. That is the reason for Tatas entering two distinct initiatives — with AirAsia and SIA. This strategy allows the group to participate in all segments of the aviation sector. “Greater competition in civil aviation will foster benefits for the passenger in terms of greater choice in fares and services,” adds Sanjay Singh, VP and a Tata group spokesperson.

Many feel travelling to India will also be easier.  “Foreign tourist arrivals in India are an abysmal 7 million a year. The small island of Singapore gets 14 million, Thailand 19 million, Malaysia 24 million and China 58 million. Our numbers should be similar to China, given India’s tourist attractions.  Absence of convenient and inexpensive flight connections to India has been a weak spot for Indian tourism. All this is likely to change now, for the better,” says Dubey.

There is no denying that a lot could change for the better for Indian aviation with the entry of a well capitalised Indian carrier. But, as with all such proposals, there is often many a slip between the cup and the lip.

(This story was published in BW | Businessworld Issue Dated 10-03-2014)