Two eggs too many in one basket

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Flying too high? The Tata-Singapore Airlines deal will launch a new full-service carrier in India
Flying too high? The Tata-Singapore Airlines deal will launch a new full-service carrier in India.
Photo: Getty Images

With the deal for a joint venture with Singapore Airlines, the Tata Group’s aviation dream has come full circle. The Indian corporation had first floated this idea in the late 1990s, but the government had then been reluctant to let a foreign airline into the country because of security concerns. Years later, both companies have now come together in a $100 million deal, in which the Tatas’ share will be 51 percent.

Although high on sentimental bonhomie, there are enough reasons to doubt the sagacity of the agreement. The country’s aviation sector — not too long ago considered a sunrise industry — continues to languish at a sliver of its potential, at just above $1.2 billion. There is definitely scope for growth; consumers will welcome more options. However, with an overall systemic weakness of low fares and high costs, there does not seem to be any clear initiatives underway, either by the industry or the government to correct the situation.

It is from this standpoint that the Tatas’ decision to float another airline seems interesting; to some, even naïve.

Does India’s aviation market need another player? How successful can a full-service carrier be in an environment where people are opting to fly via budget airlines? A ‘legacy’ or ‘full-service network carrier’ is an airline that focusses on providing a wide range of pre-flight and onboard services, including different service classes and connecting flights that permits them to ply long distance as well.

The one undeniable positive of this partnership is that it’s the first time such deep-pocketed firms are getting together to enter an industry known to traditionally burn money. Singapore Airlines’ cash pile of about $4.5 billion and the investment by the Tata Group will take care of early turbulence in setting up a worldclass airline.

Aviation has evolved significantly from the late 1990s, when India had a sluggish national carrier and a newbie, Jet Airways. The current environment has weighty no-frill carriers — Indigo, Spice-Jet — doing well to fend off competition and become preferred airlines as they offer better deals and more flights on many routes. Jet’s ticket prices as a full-service carrier is at least twice that of its budget section competition.

According to some experts, there is a slot yet for a full-service carrier that has been opened up by the weakening of Air India and Etihad’s buyout into Jet Airways. “Jet has, in effect, lost its control, in return for paying off debts and, in all probability, will become a feeder to Etihad with the traffic for the Gulf region,” says aviation expert Cyrus Guzder. “There is room for an Indian carrier to play the long-distance game.”

Guzder explains that while the Jet Airways-Etihad deal focusses entirely on the Gulf and onwards to Europe, the Tata- Singapore partnership will tap traffic towards Southeast Asia and use Singapore as a hub to the Americas. “Given the state of the dollar-rupee equation and the general love of Indians to travel to Southeast Asian countries,” he says, “this could become a preferred option for that sector.”

Profit, though, is not the only issue. A degree of financial robustness and discipline is needed to ensure longevity. We only need to look at the epic failure of Kingfisher Airlines to see how merciless the airline business can be. However, there are some who have set good examples of operations and management. “If you look at airlines like the Emirates and Etihad, then yes, full-service airlines can, and do, make money,” shares Saj Ahmed of Strategic Aero Research. “On the flipside, you only have to look at the likes of British Airways, Air India and a host of others who are loss makers.”

Within the Indian market, full-service or legacy carriers are struggling. The new entrants to the sector are decidedly going the budget way. Being the only private full-service airline for the moment, Jet Airways has been able to charge absurd fares like Rs 50,000 for a business class ticket between Delhi and Mumbai. Can such shortage (and hence higher pricing) be reason enough for the entry of another player? Kapil Kaul of the Centre of Asia Pacific Aviation (CAPA) isn’t convinced. “I don’t see a market for a full-service carrier in India with demand for business class at less than 50 percent,” he says. “We see the domestic market in two distinct segments: low-cost and hybrid low-cost.” The latter is a concept that adds a few frills to the basic low-cost such as premium economy and limited business class (where the seats aren’t bigger but the middle seat is kept empty to give more breathing space).

Outside of the sector’s inherent disadvantages, this new tie-up may have its own internal battles to fight. Singapore Airlines and AirAsia compete in their market, where the latter offers cheaper tickets and eats into Singapore Airlines owned low-cost players like Tiger and Silk Air. It would be interesting to see how the Tatas plan to balance the two competitors as partners in their different ventures. “There will be conflict of interest managing two different airlines. I don’t see this arrangement as realistic and feasible,” says CAPA’s Kapil Kaul. Arun Bhatia, an investor in AirAsia, has already opposed this deal and expressed surprise that he wasn’t even kept in the loop. On their part, the Tatas say that AirAsia was in the know of this deal.

On an interesting note, an expert close to the Tata Group has found a clear demarcation in the two deals. “It strikes me as if the first strategy was Ratan Tata’s and the second, the current Chairman Cyrus Mistry’s.” However, the Tata Sons spokesperson claims that it was a conscious move on the group’s part as there is “sufficient distinction in demand and that is the reason for Tata Sons to enter into two distinct initiatives. This allows us to play in the entire aviation sector”.

What should worry the group, though, is that past experiments at having carriers at both ends of the spectrum haven’t particularly been successful. Air India’s experiment with Air India Express, which failed despite plying mostly on attractive routes or Jet’s attempt to launch Jet Konnect and JetLite only to have a code-share agreement with Jet itself to not repeat routes, are enough reasons for any investor to be wary.

From a business point of view, “burning the candle at both ends is a strategy fraught with risk”, says Arvind Singhal, chairman of Technopak. “In aviation, the Tatas are not on either side of the rope, as both tie-ups with AirAsia and with Singapore Airlines are yet to take off. Even before stabilising one, they launched into the other simultaneously.”

In the past few years, the whole branding and business strategy of the group has come under a bit of a cloud. “Their experiment with the Nano has been an unqualified disaster and they didn’t build Jaguar, but acquired it,” says Singhal.

A Tata Sons spokesperson denied any confusion regarding strategy. “AirAsia India is in the low-cost carrier segment. This new airline is in the full-service segment, and will not offer air transport services that are operated on a low-cost model. The two airlines, therefore, do not compete in the same space.”

However, some questions do remain, not the least among them of strategic foresight. Why have your foot in both low- and high-cost airlines? Even more important, why get into a legacy carrier at a time when the model itself is under threat globally from low-cost carriers? Or, is it that the Tatas have struck an agreement of the Jet-Etihad kind, where the new airline formed will only be a feeder forward to Singapore Airlines? In that case, one can’t help but wonder why Singapore Airlines would want to start a new airline that would compete with them?

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