The return of Air India into private hands

Since its nationalisation in 1953, Air India has not had consistent success under state control. It has accumulated losses currently worth $9.5 billion and has struggled to compete, especially following the emergence of low-cost carriers (LCC), which now dominate India’s airline industry. Therefore, in June 2017 the Government of India approved its privatisation and have since released several different Expressions of Interest (EOI) with different plans to attract bidders. The latest, released in September 2021, attracted the attention of a consortium led by the principal shareholder of Spice Jet and Tata Group. The latter has previously owned Air India, after being sold to them on the 8th of October 2021 for 2.4 billion USD.

The prospect of increasing their market share is a likely cause of the acquisition. Tata Group already hold stakes in AirAsia India and Vistara, both of which are Indian airlines with market shares of around 7.2% and 4.7% respectively. However, the two aforementioned companies have been consistently losing money, with AirAsia India losing 204 million USD in 2020-21 and Vistara losing 259 million USD. Additionally, Air India suffered greater losses than these at USD 936 million for the same financial year, despite an increase in revenue. This revenue increase has likely occured due to Air India, a full-service carrier (FSC), recently focusing more on domestic and international flights. This follows a stabilisation of the market after they and other FSCs experienced a drop in market share, as LCCs grew their market share through the pandemic to a record 86.8% in July 2020.

The whole Indian airline industry has suffered because of the pandemic. The Sydney-based CAPA Centre for Aviation estimated that it will post combined losses for the 2021 and 2022 financial years of over US$8 billion. Moreover, they stated that “the industry is standing on the edge of a cliff.”

The deal doubles Tata Group’s domestic market share to around 27% and offers avenues for further expansion into lucrative destinations, such as New York and London, due to Air India’s 1800 valuable international landing and parking slots. Approximately 67% of Air India’s current revenue is from international operations so there will likely be an opportunity to further grow in the international market. This market appears more open than the domestic market which is saturated with LCCs that they have struggled to compete with. Additionally, Air India’s long haul non-stop flights offer an advantage over their local competition with direct international flights tending to  have higher profit margins than regional and domestic flights.

The acquisition will likely result in Air India Express, an LCC which is a subsidiary of Air India, joining with AirAsia India as they are both more focused on domestic and regional flights. The former has destinations in India, the Middle East, and Southeast Asia; the latter is focused solely within India. Conversely, Vistara, which offers long-haul international travel to 37 destinations across 9 countries, will be joined by Air India with their 117 destinations across 31 countries, as well as membership in the Star Alliance, the world’s largest global airline alliance. This significant growth of the Tata Group offers a clear reason behind their motivation in acquiring Air India.

In the future, Air India may struggle to grow their domestic market share much further. Despite opportunities for economies of scale due to their new partners and the increased market share, the domestic market is dominated by IndiGo, an LCC with a market share of around 50%. However, alongside the other airlines, IndiGo experienced massive losses throughout the pandemic, partly due to national lookdowns which caused a 61.7% decline in domestic air passenger throughput. Nevertheless, they still maintain the largest fleet in India at around 270 planes and the fourth largest in Asia, which is greater than Tata Groups combined fleet of over 200 planes. Therefore, it will likely be a challenge to turn around the recently poor financial situation of Air India, which was only previously kept operational due to taxpayer bailouts, but with yearly passenger growth in India at an estimated 20% there will certainly be an opportunity for them to grow.

By Kristian Eklund

Sector Head: Gregor MacDonald

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