Shishir Asthana
The Tata group is close to buying a controlling stake in Jet Airways, say news reports. If a deal fructifies, it will be a lifeline of sorts for Jet Airways promoter Naresh Goyal. Employees of the beleaguered airline can now hope for a regular salary cheque by the end of the month. However, as far as the shareholders are concerned, the company has merely survived another crisis.
The price conscious Indian airline space has been a graveyard for many promoters. Low-cost airlines compete in the same space as full-service airlines, which has resulted in severe damage to the latter. Kingfisher Airlines, Air India, Jet Airways and Tata’s partly owned Vistara have all been badly hit by the price competition.
The competition is so high that any increase in oil prices cannot be passed on to consumers; airlines end up absorbing the hike and increasing their losses. In the present scenario, even highly cost-efficient airlines such as Indigo and SpiceJet are facing losses.
That’s the lens to view Tata’s acquisition of Jet Airways. No doubt that the Tata group will increase its market share in the airline space. The group presently owns 51 percent in Vistara and 49 percent in low-cost carrier AirAsia India. If the deal goes through and Jet Airways comes under the Tata banner, the group would then have a combined market share of around 23.6 percent.
What is interesting in the acquisition is that there will be intense competition within the Tata group itself with three different airlines vying for attention and capital. A certain amount of cannibalisation cannot be ruled out. One will have to wait and see which airline will be sacrificing its share for Jet Airways or if it will be the other way around.
To add to the complexity, AirAsia is a low-cost airline with a DNA of aggressive pricing. AirAsia recently announced a new promotional offer of Rs 399 for domestic flights and Rs 1,999 for international ones. Such pricing will cannibalize Jet Airway’s market share along with others.
In any case, the Tata group has not yet proved itself as an efficient operator of airlines. The group may have been the first to operate an airline in India (erstwhile Air India), but those were times when there were no other operators. Both Vistara and AirAsia have been loss-making. The only thing that the Tatas bring to the table is the money bag.
Still, the acquisition of Jet brings with it the promise of geographical expansion. Both Vistara and AirAsia largely cater to East Asia. Jet Airways because of its association with Etihad will bring the western world to its fold.
Though seeking control from Naresh Goyal is natural as the Tatas would like to have control over the purse string and not give a blank cheque to Goyal, whether the salt-to-software conglomerate has the chops to revive the airline is another question altogether. The current fall in crude oil prices, if it sustains, may offer some relief.
The likely deal valuation floating about also raised questions. As the Tatas will be taking control of the airline, the acquisition will be triggering the takeover code irrespective of the stake that the Tatas will ultimately own. Jet Airway’s stock is up 5 percent on the news which brings its market capitalization to around Rs 2,900 crore, much lower than the likely acquisition valuation of $ 1 billion or Rs 7,200 crore.
While the deal is not yet done, the market’s response is muted perhaps on account of the competitive scenario and the little leg room that any promoter of Jet Airways will have to operate in. In a way with Tatas at the pilot’s seat, they might get more aggressive with pricing in order to capture market share. A fare-war may only disturb the overall market equilibrium.
To top it all, the Tatas will have to perform a tight balancing act with two other partners who would not only like to concede market share but would now be more aggressive fearing a threat to their investment in India.
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