Buying Air India Not Enough For Tata To Take On IndiGo

For nearly a decade, India’s largest airline IndiGo has had a dream run as it doubled its share to more than 50% in one of the world’s fastest-growing aviation markets. Now, it will face more competition.

The Tata Group emerged as the winning bidder for state-run Air India, with landing slots in key airports across the world. Jet Airways Ltd. is expected to resume operations in the first quarter of the next fiscal. And billionaire investor Rakesh Jhunjhunwala-backed Akasa Air will likely launch soon.

For Interglobe Aviation Ltd., the listed parent of low-cost carrier IndiGo, that comes when the country’s aviation industry is yet to recover from pandemic curbs. While capacity restrictions were revoked only earlier this month, fuel costs have spiked as Brent is trading above $80 a barrel.

“...Today, margins are already squeezed ... [and there's] uncertainty of a third wave," Jagannarayan Padmanabhan, practice leader and director-transport and logistics at Crisil Ltd., told BloombergQuint over the phone. "On top of that, the competition landscape is intensifying.”

All major airlines reported losses during the pandemic. Aviation consultancy CAPA expects Indian airlines to lose $4.1 billion (Rs 30,750 crore) in the ongoing financial year, up from about $3.6 billion (Rs 26,686 crore) lost in the preceding fiscal. IndiGo reported a loss for the sixth straight quarter in the three months through June, at Rs 3,179 crore.

The stress for the sector predates the pandemic though.

Earnings of India’s airlines have fluctuated sharply over the years, and many were forced to shut amid financial stress, according to Suprio Banerjee, vice president and sector head of corporate ratings, ICRA Ltd. “While the sector has a strong potential given the low penetration levels at present, foray of new airlines always adds to the competitive intensity.”

Next year is likely to be packed with action, not just because travel is picking up gradually but also the competition.

“Indian aviation is headed to a very interesting 2022,” Ameya Joshi, founder of aviation analysis blog Network Thoughts, said. “After 2019 Jet (Airways) fallout and 2020 Covid, nobody would have thought that 2022 could get interesting for Indian aviation.”

With Air India in its kitty, Tata Sons Pvt.'s share in the domestic market expands as it already owns Vistara, a full-service joint venture with Singapore Airlines; and budget carrier AirAsia India, in which Tata Sons holds 84% stake. Together, the three carriers will have a share of around 26%. A distant second behind IndiGo’s 60%.

Air India, however, is the leader in the international segment. Its competitive advantage on overseas routes lies in its ability to fly non-stop to destinations like the U.S. and Europe, as it enjoys lucrative landing rights.

India’s largest corporate group would find it challenging to integrate the three airlines, according to Nripendra Singh, global research director of aerospace and defense at Frost & Sullivan.

“Integration is going to be complex since AirAsia is a low-cost carrier, Vistara is a full-service carrier, and Air India has a bit of both,” Singh said. To make it work, Tata needs to focus on slot alignment across the three airlines that would make it a feeder for Air India, revamp flight experience in the former state-run carrier and replace old planes wherever required.

“[But] extra investment into revamping of the flights wouldn’t require more than Rs 3,000-4,000 crore,” he said.

Akasa is looking to position itself as an ultra-low-cost carrier—or an operator that offers fewer amenities than budget airlines and charges for everything apart from the seat fare between destinations. It has hired Aditya Ghosh, former president of IndiGo; and Vinay Dube, former chief executive at Jet Airways, to run operations.

Jet Airways, now owned by the Kalrock Capital-Murari Lal Jalan consortium, has already lost key slots and planes.

“Jet 2.0 and Akasa are still in early stages, and to be sure many airlines have gone back to the drawing board,” Joshi said. With Jhunjhunwala’s backing, Akasa looks headed for a start, while a “substantial question mark” remains on Jet Airways 2.0, he said.

SpiceJet Ltd., the second bidder for Air India, has troubles aplenty of its own, and the onslaught of the competition will only make things difficult for it.

The low-cost carrier headed by Ajay Singh informed the exchanges that it has negative net worth of Rs 3,333.4 crore as of June 30. It attributed the trend to higher fuel prices, pricing pressures and the impact of both the waves of the Covid-19 pandemic.

“On account of its operational and financial position, and the impact of the ongoing Covid-19 pandemic, the group has deferred payments to various parties, including lessors and other vendors, and its dues to statutory authorities,” the airline said.

Centrum Broking said in a report that SpiceJet is cutting costs aggressively, re-negotiating contract terms and deferring payments. “We remain concerned about the fragile liquidity position of the company,” the brokerage said.

Go First, earlier known as Go Air, is now positioning itself as the country’s first ultra-low-cost carrier and has put in place a turnaround plan as it heads for a market listing. It aims to corner 20% market share in India in the next two years.

Yet, it won’t be easy to beat IndiGo in its own game, which is already building its own line of defense, according to Padmanabhan of Crisil.

“IndiGo’s strategy of sticking to low-cost carrier model coupled with good expansion strategy to regional routes have ensured they remain the market leader.”