Much nostalgia has been invoked in celebrating the return of Air India (AI) to Tata Sons, its original founder. But whatever role nostalgia and a sense of history played, it will have ended even before the decision to bid for it was taken at Bombay House. Beyond that Air India's past is irrelevant.
The Air India that JRD Tata set up in 1932 and ran successfully till it was nationalized in 1953, or even the version which he chaired till 1978, belongs to an era of flying that is long gone. Airlines like Pan American World Airways and Trans World Airlines that dominated the global market in that period, don't exist today having become victims of the radical shifts in the nature of the business.
The Tata group which already runs two airlines will be well aware of that. What’s more, in the failure of the Nano and the burden of the Corus takeover, it has two lessons from the past that it will want to avoid at all costs come January 2022 when it takes control of the bleeding public sector company that has been the despair of successive governments in the last 20 years.
Already it is evident that learnings from those two costly missteps have gone into the plan for the takeover. Thus, Nano was a mistake of the wrong product and Corus of the wrong pricing. With its winning bid just a shade ahead of SpiceJet’s rival bid, Tata clearly got its math right on the acquisition price.
But, it is in getting the product and its positioning right that the new owners will face their biggest challenge. Up against Indigo, an incumbent who has a 55 percent market share and a razor sharp focus on fleet utilization, Tata’s only real strength seems to be its deep pockets and the kind of joint ventures it should be able to stitch together even if Singapore Airlines, its existing partner in Vistara, seems reluctant to play any role for now.
The acquired airline adds about 12 percent market share to Tata’s aviation business but also brings with it an ageing fleet of aircraft, half of which it owns. Indigo, by contrast, doesn’t own any of its aircraft which means its capital cost is zero.
Where AI will give Tata an edge is in its international operations with existing flights to most of the world’s travel hotspots. That’s an area Indigo is just getting into. These routes are lucrative and AI already has the widebody aircraft needed to fly on them though most of them are Boeing 737-Maxs and not the Airbus A-520 Neos which Indigo has and which offer higher fleet utilization. In a business where margins are wafer thin, that can be a sharp competitive edge.
Yet all of this is well-known and would have been factored in by the Tata think tank before it made the bid. The business case then, must be predicated on the prospect of upping its presence in the world’s fourth largest and fastest growing market. Having got back into the airline business through Vistara and AirAsia India eight years ago after a hiatus of 60 years, Tata hasn’t had it easy. The troubled AirAsia India joint venture has managed a bare 3.3 percent share of the market while it posted a loss of Rs 1,532 crore for 2020-21.
Vistara has a market share of 8.1 percent and lost Rs 11,612 crore in the same period. The losses aren’t significant in a year when all airlines including market leader Indigo have been slammed by the pandemic but its inability to gain more market share is crucial. Indigo, became India’s largest airline by market share in 2012 dethroning a still solvent Jet Airways. That year its market share was 27 percent. Over the next nine years, it has more than doubled that number.
Boston Consulting Group (BCG) founder Bruce Henderson’s famous Rule of Three and Four states that anything less than 30 percent of the relevant market or at least half the share of the leader is a high risk position if maintained. Tata’s combined 11 percent market share in aviation, after seven years in the business, doesn’t stand up to that test. Given AirAsia’s ongoing troubles, its share was on the decline which meant all the heavy lifting would have to be done by Vistara, a full-service airline, in a market that is overwhelmingly cost-conscious.
Henderson’s Rule also says that all except the two largest share competitors will be either losers and eventually eliminated or be marginal cash traps reporting profits periodically and reinvesting forever.
To avoid that fate, Tata needed an instant booster which is what Air India may turn out to be.