Tata Group is often singled out by local media as the most likely suitor. (Archive)
Ratan Tata is no stranger to flying. When he was 17, the patriarch of India’s largest conglomerate once landed a plane that had lost its only engine in mid-flight. He has also flown the F-16 supersonic fighter jet.
However, that love of aviation hasn’t always translated into business success. The two airlines of the Tata Group, AirAsia India and Vistara, were struggling before the coronavirus pandemic. Covid-19 has put Tata Sons Ltd., which owns a 51% stake in each, at a crossroads. Or go big, buying state-owned Air India Ltd., for example, or walk away before spilling more red ink.
The Tatas “are caught between a rock and a hard place,” said Mukund Rajan, a former member of the group’s executive council who is now president of an investment advisory firm focused on environmental, social and governance issues. “The only option for running a successful airline is to seek scale. This would require the Tatas to deploy significantly more capital than they have done so far. Without ambition and scale, the prospects for success are probably very remote.”
India has been trying unsuccessfully to sell its unprofitable national airline for years. Tata Group, although aviation only accounts for a small part of its total revenue, is often singled out by local media as the most likely suitor. The administration of Prime Minister Narendra Modi has repeatedly sweetened the terms to attract buyers, but the Tata Group, which was previously evaluating the proposal, has not said whether it will submit a bid.
Tata’s airline situation is not unique. Warren Buffett abandoned his positions in all airline stocks earlier this year saying the pandemic may have fundamentally changed the business. And Richard Branson once said, “If you want to be a millionaire, start with a billion dollars and launch a new airline.”
First pilot
But what sets the Tata Group apart is its seemingly determined devotion to making an airline work at any cost. Vistara and AirAsia India have never made any money and have lost a combined $ 845 million as of March this year, according to estimates from the CAPA Aviation Center.
Even Cyrus Mistry, who succeeded Ratan Tata as president but was later ousted in India’s most prominent boardroom coup, raised the alarm, saying in an October 2016 letter that his rejection regarding a partnership with AirAsia Group Bhd. It was “useless”. Mistry was equally displeased with the Vistara company with Singapore Airlines Ltd.
For the $ 113 billion Tata Group, it’s also about preserving a rich heritage. Ratan Tata’s predecessor, legendary industrialist and philanthropist JRD Tata, was India’s first licensed pilot and founded Tata Airlines in 1932 as the nation’s first airline, flying mail between Karachi in then-undivided India and Bombay, ruled for Great Britain. (Tata Airlines was later nationalized and transformed into Air India at the time of India’s independence).
‘Capital intensive’
When India began allowing private airlines in the early 1990s, Tata’s interest was piqued again. In 1994, the group devised an ambitious plan to start an airline with 100 aircraft in association with Singapore Airlines, but the government refused to allow a foreign participant and the project was canceled. In 2000, Tata again partnered with Singapore Air to bid for a stake in Air India when the then government tried to sell shares of the state airline. The plan was later abandoned due to political opposition.
“Airlines are very competitive and capital intensive and operating one is difficult,” said Shriram Subramanian, founder of proxy advisory firm InGovern Research Services. “Tata Group invested in two with two different partners. It is unclear what the group was trying to achieve.”
Both AirAsia India and Vistara have their different problems. The fate of the former, a low-cost joint venture with Malaysian magnate Tony Fernandes’ AirAsia, is at stake after the Malaysian group halted any new funding. Launched in 2014, AirAsia India promised to make money in four months and planned to attract train and bus passengers at affordable prices. But it faced fierce competition in a crowded market where airfares cost just a few pennies.
Vistara, which started in 2015, launched at the other end of the spectrum: an airline with a business class cabin on all planes offering to fly wealthy Indian businessmen to London and New York. Its stated goal: to redefine air travel in India with a “personalized flight experience”. However, if video technology limited the need for corporate travel, the coronavirus ended it. Vistara has delayed delivery of some new planes as demand plummets, delaying its expansion plans.
But even before Covid, a culture that saw both airlines operated almost exclusively by foreign partners was a key problem, according to people familiar with the inner workings of Tata Group’s aviation business. Top management of Vistara and AirAsia India were appointed by executives in Singapore or Malaysia and had trouble implementing a working business plan for India, they said, and asked not to be identified when discussing confidential information in public.
Representatives for the Tata Group and AirAsia India declined to comment. A representative for Vistara also declined to comment.
Five star hotels
At high-end restaurants around Vistara’s headquarters near New Delhi, Singapore Airlines appointees regularly ate lunch together, creating a culture of exclusion, two of the people said. Singapore Airlines, and not Vistara, reviews the annual performance of the persons designated by the foreign airline and the so-called “Singapore Airlines collaborators” also reside in five-star hotels during their term and send their children to the most expensive schools as part of his compensation package, people said. Those benefits were not given to the individuals designated by the Indian group, they said.
At AirAsia India, local executives had to obtain Malaysia’s approval for each decision until the end of 2018, before the Tata Group intervened after a series of corruption allegations tarnished the brand’s image. The Central Bureau of Investigation of India, the equivalent of the FBI, is investigating Fernandes and other officials for allegedly paying bribes to influence local politics. Both AirAsia Group and AirAsia India have denied any wrongdoing.
The lack of a person in charge of aviation at Tata Group was also a challenge and meant that Vistara and AirAsia India ended up competing for the same fliers on key routes, the people said. The business model of the market leader IndiGo, which is run by InterGlobe Aviation Ltd. and which has made money year after year selling cheap tickets for on-time flights, was not seriously studied or replicated, they said.
Aside from Ratan Tata, who retired around the time the companies were established only to return as interim chairman in 2016, other board members were unfamiliar with or interested in addressing the needs of the businesses, preventing that the two competing airlines expand or order mega jets to secure deep discounts, one said.
Other struggles
Airlines aren’t the only sector in which the 152-year-old conglomerate, which sells everything from cars to real estate, has struggled.
Tata Steel Ltd., which bought Corus Group Plc for about $ 13 billion in 2007, recently said it is reviewing its options to make the UK business self-sufficient. Tata Motors Ltd., which bought Jaguar Land Rover in 2008 for $ 2.3 billion, has faced losses amid intense competition, prompting analysts at Sanford C. Bernstein to say that BMW AG should buy the automaker. luxury “severely challenged”. The company’s telecommunications business was also embroiled in a $ 1.2 billion dispute with Japanese telecommunications company NTT Docomo Inc., a disagreement that was resolved in 2017.
“If you take all of Tata’s companies, their profitability record is not exactly brilliant, only Tata Consultancy Services has been a consistent performer for them,” said Deepak Mohoni, founder of business consulting firm Trendwatch India Pvt. “We really have to ask ourselves. Why are the Tatas trying to get into the airlines in the first place? Nostalgia for JRD? “
Air india
With a more focused approach, Tatas can still succeed in aviation, according to Vaniki Joshi Lohani, associate dean of the business school at Jawaharlal Nehru University in New Delhi.
Lohani, who is studying Tata’s foray into airlines, says the group should make a move for Air India.
“Tata should focus on creating a low-cost airline in a price-sensitive market,” he said. “Operating expenses, higher taxes and government regulations in India can make full service carriers unsustainable.”
Although Air India has not made any money since a 2007 merger with Indian Airlines and is surviving on a large taxpayer-funded bailout, an acquisition would give Tata almost overnight access to “hundreds of trained pilots, a fleet out of the box and an opportunity to expand quickly at the lucrative airports of London and New York, “said Lohani.
It would not be easy either. Air India also comes with a highly bureaucratic structure, a unionized workforce, and branding complications. It’s also unclear whether the government would allow a new buyer to lay off surplus staff or remove Air India’s legacy brand, a politically sensitive issue in India.
According to an Economic Times report last month that cited unidentified officials, Tata Sons is in talks with Singapore Airlines to remove a non-compete clause so that Vistara can bid for Air India. The Tata Group president has stated that its airline businesses should be consolidated into one, the newspaper reported. Singapore Airlines declined to comment for the newspaper, while Vistara and Tata Sons did not comment.
“Ratan Tata is obsessed with airlines and it cannot be taken out of the blood,” said Arun Kejriwal, founder of Mumbai-based investment advisory firm Kris Capital. “He won’t give up so easily on the airlines.”
(Except for the headline, this story has not been edited by NDTV staff and is posted from a syndicated channel.)
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