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Given domestic passenger traffic grew just 1% yoy in Q1FY14 after 3 quarters of contraction—international passenger traffic grew 6% after 4 contracting quarters—and how many airlines have been run into the ground in India and overseas, the new Tata airline venture comes as a surprise. More so since the proposed JV with Singapore Airlines is a full-service one while the Indian market is dominated with low-cost carriers controlling over 61% of the market—in the last two years, industry losses total over R22,000 crore.
That a group like the Tatas sees things differently, of course, is welcome since it shows no lack of confidence in the country’s medium-term future; indeed, others like Etihad that has just signed up with Jet and the likes of Qatar who are lining up for more bilaterals show a similar confidence in the market’s potential—it grew at 14% per annum in the decade till 2012—even though the immediate short-run looks bleak. Apart from banking on SIA’s great brandname, the business is no longer as capital intensive as it once was since aircraft are available on lease—lease rentals account for 65-70% of costs. But not being capital intensive doesn’t mean the business doesn’t require deep pockets, particularly when there is so much competition. Which is why it is curious the Tatas are venturing into this space when so much of the group, under a new chairman, needs fixing. After investing upwards of R22,000 crore, the telecom piece continues to bleed and Corus hasn’t turned around like JLR had. The electricity piece always looked good in a power-starved country but till the state electricity boards get viable, its future will always be iffy—the recent problem with its ultra-mega power plant, hopefully on its way to getting resolved, should also give the group pause. So while preparing for take off—the venture could take 12-24 months—Cyrus Mistry needs to clean up the group’s financials, perhaps sell off part of TCS’s equity to retire part of Tata Steel’s debt. And pay heed to Ratan Tata’s dictum that if the group is not among the top 3 in the industry, does it need to even be there?