The Tata Sons, Singapore Airlines JV reaffirms the long-term potential of the Indian civil aviation and tourism industry. Both seem beset today with man-made problems like excessive taxation, poor infrastructure and cumbersome procedures. All these are likely to change as policy-making in India matures. The presence of Tata Sons, Singapore Airlines will speed that up. It will also give a boost to other leading global airlines currently engaged in conversation with prospective Indian partners.
The exit of Kingfisher Airlines created a void in the full service carrier (FSC) space. India now has only two full service domestic airlinesAir India (AI) and Jet Airways. The Tata Sons and Singapore Airlines JV will enhance options for passengers. The difference in fares on FSC and low cost carriers (LCC) is negligible. With the duration of most domestic flights being around 2 hours, the perceived luxury is for a very short duration. Both Jet and AI are relooking their business:economy seat configuration. Tata Sons and Singapore Airlines will therefore compete with both FSCs and LCCs and its all good for the Indian passenger who will now be wooed like never before.
But perhaps the biggest gain to India will be on the international sector. International traffic in and out of India, unlike domestic, has grown every year in the past decade, even during the economic slowdown. Nearly 70% of global traffic from India is West-bound, to the Middle East, Africa, EU and the Americas. Singapore Airlines biggest strength lies in inter-continental long-haul flights. Tata Sons and Singapore Airlines would compete on those routes on the Indian share of the bilateral quota. It may also examine the option of direct flights to the Far East and Australia from India. The competition on the West-bound routes will again improve services and bring down fares. That will help India attract more inbound tourists who otherwise head to locations like Thailand, Malaysia, Cambodia, etc.
Tata Sons and Singapore Airlines' global foray would require the abolition of the infamous 5/20 rule. It requires Indian carriers to operate in the domestic sector for 5 years and have a 20-aircraft fleet before it can fly international. No other country in the world has this bizarre rule. A one-day old airline established outside India with a one-aircraft fleet can fly to India with no restrictions, whereas world-class airlines like AirAsia and Singapore Airlines will have to wait for 5 years to be observed by Indian authorities. Such rules have only hurt Indian interests. The current leadership at MoCA has brought in a slew of far reaching reforms. We expect this unique, unilateral and discriminatory rule to be thrown into the dustbin.
Tata Sons and Singapore Airlines' arrival will help Delhis standing as a global hub. The new world-class terminal will see increased foot-falls, higher income from non-aeronautical sources and lower per-passenger charges. It will also help debunk fears that we have lost the hub to Abu Dhabi or Dubai.
Many feel this deal may create a conflict of interest with the Tata-AirAsia JV. As long as there is no violation of FDI norms and national security, the future of the two JVs is best left to the companies involved and market forces.
Tata Sons and Singapore Airlines may also get an entry into Star Alliance, which may enhance more benefits to passengers. Over six decades of government control has reduced AI to a loss-making, debt-ridden, highly unionised airline, surviving on taxpayers dole-outs. AI may consider a strategic and operational collaboration with Tata Sons and the Singapore Airlines JV. That would be a win-win for both.
Many progressive state governments are recognising the multiplier benefits of aviation and tourism. What they forego as excessive taxes on an industrial raw material like ATF and support services like MRO will come back to them manifold as growth in travel, trade and tourism. For every job created, nearly 50-55% comes back to the government treasury as income tax and consumption taxes (VAT, service tax, excise and customs duties). Thus, the Tata Sons and Singapore Airlines deal will pay off for states economy as well.
Overall, the Tata Sons and Singapore Airlines deal is a game-changer for India.
The author is partner & head, aerospace & defence at KPMG. Namrata Saigal, consultant, KPMG, contributed to this article. Views are personal
When Tata-SIA comes in, it will be two monoliths joining hands and coming up with a formidable airline. The Indian market already has quite a few players but they dont have big pockets like those of Tata-SIA. The existing players have also burnt a big hole in their pockets of late, be it Jet Airways, Air India (AI) or Spice Jet. So, though Tata-SIA is coming in late, it will start with a distinct advantage. It is true they will have to build up their market share from scratch. This should not be a major problem as both Jet and AI are operating with virtually constant market share, holding on to them by offering fares that do not even cover the cost of producing a seat. The trend in the last few weeks with fares reigning high has, of course, been an exception. The question is whether Tata-SIA would like to match their fares and sustain loss or not But Tata-SIA will have an edge as far as product quality is concerned. Passengers who have had an unpleasant experience with the existing players will look at the new airline favourably.
But then there are disadvantages also in operating in a market like ours. The Indian market is highly price-sensitive. Jet and AI are forced to attune their strategies with market needs. Even though they offer superior amenities, they are not able to compete with the low-cost airlines and command a premium on fares. This will be tough to handle. Take the case of Kingfisher Airlines: they had an excellent product but could never find adequate number of passengers who were willing to pay for their services. Kingfisher was thus not able to recover costs. This contributed to its demise in a major way. So, if you look at the market share from Tata-SIAs perspective, more than 60% of the domestic market share lies with the low-cost players. Tata-SIA, therefore, would be effectively targeting a segment that constitutes less than 40% market share. Further, even in this segment, there would be many travellers who dont care for services and fare offered is the sole determinant for their choice. This means the number of takers who would be willing to pay for Tata-SIAs services are unlikely to be substantial. In turn, they will also have to do what Jet and AI have donefill up the aircraft offering competitive fares that do not cover costs. This is the harsh reality of Indian civil aviation.
The cost of operating in India is quite high, as are ATF prices and airport charges. The problem gets compounded due to the propensity of Indian consumers to fly at a lower cost. This affects covering up of the operational cost and profit. This situation will become more challenging once AirAsia India comes in with its aggressive and innovative marketing strategythe size of the cake for full service carriers is set to diminish further.
The biggest problem is that India has been functioning without a proper civil aviation policy. The government is running the sector with ad hoc measures. It is hard to analyse competition pressures with certainty. Tata-SIA has sprung a surprise now by announcing their venture, there is no guarantee that there wont be another one soon. What is required is a civil aviation policy that clearly spells out the number of airlines that the country needs, the number of aircraft that should be permitted to fly. India needs a vibrant civil aviation sector and not a scenario in which one airline comes in and another goes or is financially crippled. The government should look at the complexities of the business and take decisions in a calibrated manner rather than go overboard as it has seemingly done in the case of Tata-SIA proposal. But the new venture is unlikely to serve the travel needs of the aam aadmi.
The business environment would be different if the government were to allow Tata-SIA to go international by changing the current regulation of 5 years of domestic operations before consideration to international operations. In such a scenario, the new airline might be able to give Gulf, European and South East Asian airlines a run for their money, but in the process harm the revival of Tatas original offering, the Air India.
The author is former executive director, Air India, and has authored the book The descent of Air India