Tata Sons in the cockpit again 09-20

Tata Sons in the cockpit again

Eighteen years after their last joint effort was scuttled by the government of the day, Tata Sons and Singapore Airlines (SIA) have tied the knot again — this time to form a full-service domestic airline based in New Delhi.



The Tatas had entered the aviation space in February this year, with Tony Fernandes’ AirAsia. But that alliance was for low-cost operations and Tata Sons had made it clear that the joint venture (JV) would be run by AirAsia, which holds a 49 per cent stake. Delhi’s Bhatia family is also a partner in the JV, with a 21 per cent stake, while Tatas hold 30 per cent.

On the other hand, in the new venture, the brand name for which has yet to be announced, the Tatas will be the driving force with a 51 per cent stake, while SIA would take the rest. And, the two have made a commitment to the Foreign Investment Promotion Board (FIPB) to invest $100 million to begin with. In contrast, the initial equity investment in the AirAsia JV was less than a third of this — at $30 million.

ALSO READ: Tatas and Aviation: 5 interesting facts

The three-member board of the Tata-SIA venture will have two Tata nominees — Tata Industries Director Prasad Menon as chairman, and member of Tata Sons’ executive council, Mukund Rajan. Mak Swee Wah, SIA’s executive vice-president (commercial) will represent the foreign carrier.

Given the capacity constraints at the Mumbai airport and better infrastructure facilities at the Delhi one, the two parties have decided to make Delhi their operational hub.

Analysts feared this new venture could impact the AirAsia JV. But Tata group sources said such fears were unfounded, as the Malaysian company was aware of the negotiations right from the beginning and had no objection to Tatas going ahead with such a deal.

A senior executive of a competing airline said, in a country where full-service carriers were competing with low-cost ones on tariffs and sometimes even offering lower pricing, there might be a conflict of business interest between the two JVs.

Sources in the know countered that, saying the two ventures would actually complement each other. For instance, AirAsia is launching its Indian operations with Airbus A-320, while SIA has a variety of Airbus aircraft. A common fleet, with common spares and maintenance support, could be one key area of synergy between the two. They also said there could be synergies in other areas like ground-handling, route planning, etc.

Explaining the role Tatas would play, Rajan said Tata Sons would fully participate in the management and operations of the airline. As with its other joint ventures with globally respected companies, Tata will play an active role in operations and leverage its understanding of the Indian industrial landscape.

He added, according to Centre for Asia Pacific Aviation (Capa) data for 2012, per-capita domestic airline seat in India was very low, at just 0.07. In comparison, the number stands at 3.35 in Australia, 2.49 in the US, 1.38 in Canada and 1.05 in Japan.

Menon said civil aviation in India offered sustainable growth potential, while Singapore Airlines CEO Goh Choon Phong said the airline had always been a strong believer in the growth potential of India’s aviation sector.

Civil Aviation Minister Ajit Singh said in New Delhi that he was informed about the joint venture on Thursday itself. “Prasad Menon came to apprise me of the plans for the new airline venture. This is the first time they have met me about the proposal,” he said.”

Civil aviation sources said the current rules were silent on whether an entity could own two separate airline companies. But a ministry official said this was not a problem. Air India, too, has Air India Express as a low-cost subsidiary.”

Even apart from their Air India connection, the Tatas have a long history in aviation. In 1991, the then prime minister P V Narasimha Rao had asked J R D Tata to explore setting up a domestic airline. Though nothing happened at that time, Rao revived a proposal to set up an airline in India during his meeting with his Singaporean counterpart, who insisted the Tatas be the partner. After this, an official from the Prime Minister’s Office spoke to Ratan Tata, former chairman of Tata Group, to consider such a proposal.

The move fructified in 1995 when the Tatas put in an application to set up a JV with SIA to start a domestic airline in which it would have a 40 per cent stake. However, a strong opposition from domestic private airlines hindered the project, which went through many phases. The government first asked the Tatas to bring down SIA’s share to 50 per cent and then to 40 per cent. Later, succumbing to stiff opposition, the government decided not to allow any foreign investment in the country’s aviation sector.

In 2001, the Tata group made another attempt to pick up a 40 per cent stake in Air India, with SIA as partner, through a disinvestment process. But opposition to the deal forced SIA to back out.

Kapil Kaul, head of Capa, welcomed the move but raised some key questions. “Capa believes approval of foreign airlines to invest in India was a game-changing decision and we have seen three serious announcements in the past year; one or two more are likely in the near term,” he said. However, there were regulatory and policy uncertainty and there still was no clarity on the issue of new airline licences, he added.

“Overall, government policies have always raised entry risks for serious players, Capa said, adding that the announcement could play out negatively on AirAsia’s regulatory approval.

For SIA, the deal makes perfect sense. The tie-up with the Tata group has come a few months after SIA sold its 49 per cent stake in Richard Branson’s Virgin Atlantic Airlines for $360 million. Analysts said continuing the Virgin Atlantic investment made little strategic sense for the airline, as Virgin’s main market was the US and the Carribean, whereas SIA had been increasingly focused on Asian and Australian markets for growth.

Another driver for the airline’s investment in India could be competition. Although SIA commands a 15-20 per cent capacity share of the India-South East Asia market — the highest among airlines operating from India — it faces challenge from the AirAsia group and Indian low-cost airlines like IndiGo. This competition will only intensify in the coming years, as both IndiGo and AirAsia have committed huge orders for Airbus A320 aircraft.

Singapore Airlines vice-president (public affairs) Nicholas Ionides said the new airline was likely to operate international flights from India, depending on government approvals. The Indian JV airline could also benefit from SIA’s expertise in running a cargo and engineering services company. Apart from revenue benefits, it could also help save cost. Ionides said it was premature to discuss the issue and refused to comment.

The Tata group has a long history of cooperation with Singapore. It runs a flight kitchen in a JV with Singapore Airport Terminal Services (TajSats) and has partnered with Changi airport to explore airport development in the country.

Success at last

* Early ’90s: Tatas envisage setting up a domestic airline but need a partner; the then PM meets Singapore PM, both agree on setting up a carrier in India under comprehensive economic cooperation; Tatas are sounded out

* 1995: Tatas apply to set up a JV, with SIA a 60% partner; SIA agrees to bring down equity to 40% after demands the Indian partner hold a majority stake; deal is blocked as domestic carriers oppose foreign investment in aviation

* 2001: With SIA, Tatas bid for a 40% stake in Air India and remain the sole bidder as Hindujas withdraw; but SIA backs out as opposition to divestment gets stronger

OPEN SKY
A look at the reach of Tatas’ JV partners in the aviation space

Singapore AIrlines

Business model: Full-service
Flies to: 63 destinations across Asia (11 in India), Australasia, Europe, N America, Africa, W Asia
Key markets: Heavily exposed to passenger markets in North America and Europe
Target: Has been trying to gain footprint in Asia-Pacific; raised frequencies to India by 24%, to China by 71% and to Australia by 45% over the past 3 years
Fleet: 101 aircraft
India market share: 2.7%

AirAsia

Business model: Low-cost

Flies to: 85 destinations in 20 countries (from Thailand and Malaysia to five Indian cities)

Fleet: 118 aircraft

India market share: 0.80%

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Airbus & Boeing say Indian aviation growth story is intact in long term 09-01

Airbus & Boeing say Indian aviation growth story is intact in long term

India continues to be one of the fastest-growing regions for aviation traffic growth through the next 20 years. So, Airbus doesn't see its forecast for new aircraft changing dramatically

Despite slowing growth in India, Airbus and Boeing remain bullish on the demand for civilian aircraft from the country. Analysts and industry experts, however, warn of lower-than-anticipated passenger growth, unless urgent steps are taken to revive the sector.

In their market forecasts last year, Airbus and Boeing had estimated demand for 1,232 and 1,450 planes from India, respectively through the next two decades. However, that was at a time whenKingfisher Airlines was still in service. Also, they had estimated growth in India’s gross domestic product (GDP) at about eight per cent. Similarly, a civil aviation ministry report for the formulation of the 12th five-year Plan (2012-17) had factored in 12 per cent average annual growth in domestic air traffic between 2012 and 2017.

Last financial year, GDP growth slowed to five per cent; this year, it is estimated to grow about six per cent. Domestic air traffic growth, too, is subdued. Analysts and airlines expect growth of about six per cent this year.

Despite the slowdown, aircraft manufacturers remain optimistic. “Our forecasts look at passenger traffic growth through a 20-year period, which takes peaks and troughs into account. This growth is translated into demand for aircraft. India continues to be one of the fastest-growing regions for aviation traffic growth in the world through the next 20 years. So, our forecast for new aircraft in India will not be dramatically adjusted,” Airbus said in an email response.

A Boeing spokesperson said, “Our airline customers have indicated they will continue with their fleet plans. India is projected to have the highest passenger traffic growth in the world. Over the next twenty years, the forecast passenger growth is expected to be driven by an underlying economy with long-term growth projections of twice the world average, supported by continued economic prosperity among a growing segment of the large Indian population, higher discretionary incomes, business progress and easier access to airports.”

Domestic airlines did not respond to emails on the subject. A Jet Airways source said though the domestic market was slow, it could cross-utilise Boeing 737s for international operations. Jet Airways has pending deliveries of 46 Boeing 737s and expects to induct a plane each month through the next three-four years.

It is expected IndiGo would add 50 planes to its existing 70 Airbus A320s by 2017. SpiceJet planned to add eleven Boeing 737s to its 55-aircraft fleet by the end of 2014-15 and was seeking early deliveries, a source said. Though the airline has an option include an additional 15 Bombardier Q400 turbo props to its fleet, it has held back the decision due to subdued passenger demand.

In 2010, the Centre for Asia Pacific Aviation (Capa) had estimated airline traffic in India would touch 450 million (domestic and international) by 2020-21. Capa is set to revise its 10-year India forecast in September. Now, it feels airline traffic at 375-400 million by 2020-21.

“We expect the industry fundamentals to be positive from 2015 due to introduction of Gagan (GPS and geo-augmented navigation system) and the implementation of flexible use of air space, which would reduce fuel consumption. I expect aviation turbine fuel to be given a declared-good status in the next 12-18 months, or key states would reduce sales tax to four per cent, and this would bring very significant cost advantages. The introduction of Airbus A320neos and Boeing 737 Max would further reduce operating costs and the focus on building the ancillary business could create additional revenues of $400-500 million a year in the next two-three years. 

Capa expects the Indian economy to be back on the growth path from 2015-16. However, the next 12-18 months are critical because the trading conditions would be very tough, costs and risks will be at a peak and holding costs for some will become unbearable. Raising funds will be fundamental to survival in the near term, especially the next 12 months,” Capa’s Kapil Kaul said.

“In 2013-14, air traffic is likely to see five-eight per cent growth, buoyed primarily by international traffic. The rising dollar has helped bring down the cost of travel and accommodation in India for foreign travellers. With the continued hammering of the rupee and the Indian economy in deep distress, domestic traffic growth might be nearly flat or in a low single digit,” said Amber Dubey, partner and head (aerospace and defence) at global consultancy KPMG .“Projections for 2014-15 and thereafter would be pure speculation. It depends entirely on the outcome of the 2014 general elections and what the new government does to boost investment, aviation and tourism,” he added.

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