India’s Tough Aviation Sector Braces for Consolidation

India’s canine aviation sector is about to transform.

After years of fierce price wars between Indian airlines, former flag carrier Air India’s historic merger with Vistara will shake up the growing industry.

In a boom-and-bust industry where some analysts say consolidation is long overdue, the deal will challenge the dominance of the country’s biggest national flyer, IndiGo, analysts said.

An expanded Air India Group, worth an estimated $4.4 billion, will own just under a quarter of the domestic sector, making it the country’s second-largest carrier after IndiGo, which controls well over half of the market.

“Competitive dynamics in India are moving towards a two-pillar system around Air India Group and IndiGo,” wrote CAPA India, an aviation consultant.

Significantly, he expects the two carriers between them to grow to claim about half of India’s international market, which is dominated by foreign carriers.

The dominance of India’s largest domestic carrier, IndiGo, will be challenged by the Air India-Vistara deal © Roberto Schmidt/AFP via Getty Images

“You can’t have six or seven airlines competing, offering uneconomical fares and perishing,” said former Air India chief executive Jitender Bhargava.

The merger of Air India and Vistara, after owners Singapore Airlines and Tata announced on Tuesday that the companies were set to merge, concludes a chapter started 22 years ago.

Singapore Airlines, which owns 49% of Vistara, said it would invest around $250 million in the Air India Group, giving it a 25.1% stake in the entity, which will be “four to five times larger ” than Vistara.

The story began in 2000 when the Indian conglomerate Tata, which owns 51% of Vistara, have joined forces with Singapore Airlines to buy part of Air India.

For Singapore Airlines, India, with the fastest growing airline market of any major economy, is one of the most strategically important countries, along with China, Indonesia and Australia.

Singapore also has close economic and cultural ties with India and huge passenger traffic in both directions.

The deal is another attempt by Singapore Airlines, majority-owned by Singaporean fund Temasek, to make a successful overseas investment after a number of setbacks.

Ten years ago it suffered a painful loss when it sold its stake in Virgin Atlantic to Delta Air Lines for $360 million, having bought it for $963 million in 1999.

And in 2020, Virgin Australia, in which Singapore Airlines had a 20% stake, went into administration due to the coronavirus pandemic. Vistara, which started operations in 2015, was not profitable even before Covid-19.

“This time it’s a bit different because it’s not a new overseas investment,” said Brendan Sobie, an independent aviation analyst based in Singapore.

“[Singapore Airlines] converts its stake in Vistara into a new entity with potentially a better chance on the track.

He added: “They might be better off with a smaller slice of something bigger rather than a bigger slice of a smaller airline.” The consolidated group will have 218 aircraft.

Founded by family patriarch JRD Tata in 1932, the Indian government nationalized the prestigious international carrier in 1953.

But when Tata finally got the loss-making airline back in a $2.4 billion deal last year, it faced a tough turnaround job: Air India’s gleaming reputation had been worn down by traveler complaints about surly service, delayed takeoffs and aging seats.

Singapore Airlines sees India, with the fastest growing airline market of any major economy, as a strategically important country © Roslan Rahman/AFP via Getty Images

Bhargava said the Vistara merger could help accelerate a management transition at Air India, where “employees have been with a government psyche. . . Vistara employees have a different mindset.”

Tata is also restructuring its aircraft portfolio. In November, Air India announced that it had acquired the majority-owned Tata airline AirAsia India. He hoped to integrate it into Air India’s own low-cost brand, Air India Express.

However, restoring Air India will be expensive, with the need to purchase new aircraft and overhaul existing aircraft.

Natarajan Chandrasekaran, chairman of Tata Sons, parent company of Tata Group, said Air India was focusing on “growing its network and fleet”, with the aim of offering “comprehensive and low-cost services on national and international routes.

But both airlines are not profitable. As a reminder of the challenge ahead, Singapore Airlines calculates the expanded Air India Group’s net loss on a pro forma basis at S$2.4 billion ($1.8 billion) for the fiscal year 2021-22.

Singapore Airlines said it plans to make further cash injections of up to $615 million after the merger, which is subject to competition regulators’ approval and is expected to be completed by March 2024.

However, the airline’s confidence in its investment has been helped by the appointment of Campbell Wilson, founder of Singapore Airlines’ economy subsidiary Scoot, as head of Air India.

A person familiar with the thinking of Singapore Airlines said the airline was more comfortable with the deal since he took over the reins.

“They trust Campbell, who is straightforward and good at identifying and solving problems,” the person said of the New Zealand-born executive. “He doesn’t beat around the bush.”

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