After the Tata Group regained ownership of the national flagship carrier, Air India, seven decades after it was nationalised, it has consolidated other airlines under its charge to become a much larger entity. Earlier this year, it initiated the merger of Air Asia India with Air India Express. The Group and Singapore Airlines have agreed to merge Vistara—in which they have a share of 51% and 49% respectively—with Air India, which would comprise a single full service airline and a single low-cost operating in a coordinated and optimised manner, stated CEO of Air India Campbell Wilson. It also becomes India’s second largest domestic and largest international carrier with a fleet of 218 aircraft. India’s civil aviation joins a growing list of sectors like telecom, steel, cement, cars and trucks, in which the top two players enjoy a commanding market share of 75%. With 4,400 domestic and 1,800 international landing and parking slots, including ones at Heathrow in London and JFK airport in New York, the flagship carrier can step up its international flights. Air India also can access best practices across training, customer service, IT and engineering that are the hallmark of Singapore Airlines.
While that is the good news, the group faces serious challenges in turning around Air India in a high-cost environment. If the Tatas have the magic wand to make it a world-class airline (which it once was), what prevented them to do so for Air Asia India and Vistara? Why couldn’t Air Asia replicate its success in Malaysia and Thailand after it entered India in 2014? Vistara’s fortunes were no doubt upended by Covid-19 but it was hemorrhaging even before that, with losses of Rs 1,813 crore in FY20. Air Asia India and Vistara’s losses widened in FY22. However, the Tatas’ experience is not exceptional. The state of civil aviation is best described as being chronically ill. All the leading players were awash in red by as much as Rs 20,000 crore in FY22, although domestic traffic improved, reflected in higher passenger load factors and restrictions eased after successive waves of Covid-19 during the last couple of years. This largely stems from the industry having no control over costly aviation turbine fuel which accounts for one-third of operating costs. Moreover, when they lease aircraft, they pay rentals in costly US dollars while revenues are in rupees. A weaker rupee adversely impacts their costs.
What is the future of civil aviation and Air India? The immediate outlook is that will take beyond FY 23 for returning to any semblance of pre-pandemic normalcy. A rule of thumb is that the natural growth of the aviation market is 1.5 times India’s GDP growth. Thus with a realistic GDP growth rate of 6 to 7% in FY 23 and beyond, the ideal growth of the market thus is 9 to 10.5% per annum. That is the scenario ahead for the industry. Looking ahead, the prospects of Air India appear favourable as it will be much better managed under the Tatas with superior inflight services and professionalism. Even if it stays in the red, this might reduce quickly as synergies between a full service and low cost airline improve its financials. More importantly, Singapore Airlines will infuse more capital in the new entity which will definitely help in expanding its fleet by 25%.