Tata-SIA JV may finally take off

New Delhi/Mumbai | Updated: Sep 20 2013, 09:00am hrs
Eighteen years on and after being three times unlucky, the diversified, $100-billion Tata Group on Thursday announced a 51:49 joint venture with Singapore Airlines (SIA) for a full-service carrier under the governments new aviation policy, which allows foreign carriers to take up to 49% stake in Indian airline firms.

The new JV firm comes six months after Tata Sons, the holding company of the group, floated another airline under the governments new policy with Malaysian budget carrier AirAsia to set up a low-cost airline. The group believes there could be synergies between its two airline ventures and exuded confidence about growth in the full-services stream on the back of low penetration levels in the Indian market.

However, analysts said that much has changed in the Indian aviation sector since the Tatas first tried to enter the segment, and that the ride could be tough. Back then it was a nascent market with little competition, with a handful of players like Jet Airways, Air India and ModiLuft. There were no low-cost carriers, which today command 61.3% of the market, have completely changed the travel style of Indians and indulge in regular price wars. This led to bleeding margins in the industry, and saw the exit of Sahara Airlines, which was bought up by jet, and the grounding of Kingfisher Airlines recently.

Further, with its recent JV with the UAEs Etihad, the loss-making Jet has emerged as a formidable rival Etihad will infuse cash, give it low-cost loans and the ability to buy lower-cost jet fuel. Though fresh bilaterals have been put on hold for a few months, more deals like Jet-Etihad are possible for airlines like SpiceJet and GoAir with carriers such as Qatar Airways, in which case the competition is set to grow exponentially.

Indian airlines have posted collective losses in the last two fiscal years of R12,809 crore and R9,270 crore, respectively, underlying the tough nature of the business.

Unlike its JV with AirAsia, where the Tatas dont have the majority stake nor an operational role, the venture with SIA would have them in the drivers seat. However, the group has yet not disclosed details about branding and the management team.

Tata Sons and Singapore Airlines have signed a memorandum of understanding and applied for Foreign Investment Promotion Board (FIPB) approval to establish a new airline that will help further stimulate demand for air travel, Tata Sons said in a statement. Subject to FIBP and other regulatory approvals, the airline will be based in New Delhi and will operate under the full-service model.

The initial board will have three members, two nominated by Tata Sons and one nominated by Singapore Airlines, the statement added. The chairman will be Prasad Menon nominated by Tata Sons.

Menon is also the chairman of Tata Quality Management Services and serves on the board of several other group companies including Tata Industries and Tata Chemicals.

Apart from Menon, Tata Sons has nominated Mukund Rajan, who is part of the group executive council at Tata Sons, to the board of the new joint venture. Singapore Airlines will be initially represented by Mark See Wah, executive vice-president (promotion).

Tata Sons will fully participate in the management and operations of the airline, said Rajan. 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 and contribute with its long years of experience towards the creation of a fruitful partnership and collaboration.

The Tatas first formed a JV with SIA in1995 to enter the aviation sector, which was approved by the government but later revoked in 1997 due to a change in the policy which barred foreign carriers from taking a stake in Indian airline companies.

The group again tried to enter the aviation space in 2000 by forming a JV with SIA to bid for a 40% stake in Air India, which the government then planned to divest. The JV was once again abandoned as in 2001, due to political opposition, the government dropped the disinvestment plan.

With a new aviation policy announced in September allowing foreign carriers to have stakes up to 49% in Indian airline firms, the Tatas were the first to announce the JV with AirAsia in February this year.

Singapore Airlines, a subsidiary of Temasek Holdings, is one of the largest airlines in the world and had a revenue of $14.8 billion in 2012 with a net income of $335 million. It carried around 18 million passengers in 2012.

It is the Tata Sons evaluation that civil aviation in India offers sustainable growth potential, said Menon. We now have the opportunity to launch a world-class full service airline in India. We are delighted that we are partnering in this endeavour with the world-renowned Singapore Airlines.

We have always been a strong believer in the growth potential of Indias aviation sector and are excited about the opportunity to partner Tata Sons, said Goh Choon Phong, chief executive officer of Singapore Airlines. Tata Sons is one of the most established and respected names in India. With the recent liberalisation, the time is right to jointly bring consumers with a fresh new option for full-service air travel.

Theres going to be a blood bath in the full-service category with the two recent joint ventures Tata Sons and Singapore Airlines and Jet Airways and Etihad, said Amber Dubey, partner and head (aerospace) at global audit and consultancy firm KPMG. That being said, Tata Sons joint venture with Singapore Airlines will completely change the rules of the game.

Commenting on the competition, Rajan said, Greater competition in civil aviation in India will foster benefits for the passenger in terms of greater choice in fares and services.

Ruling out any any cannibalisation or conflict of interest between its two JVs, a Tata Sons spokesperson said that to the contrary there would be complementarity. One would be a low-cost carrier and the other a full-services one. Going forward, there could be synergies between them, the spokesperson added, stating that the formation of the JV with SIA was not a surprise for AirAsia.

Industry analysts said that the Tata-SIA would fly from New Delhi and is expected to connect major metros, while AirAsia India has already said that it will not fly to high-cost airports like those in New Delhi and Mumbai and restrict itself to connecting Tier II and Tier III destinations with a low-cost business model.