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Wednesday, December 01, 2021

Why Air India going back to Tatas could be an example of successful privatisation

Tata’s management efficiency will allow Air India to better exploit operating assets like the lucrative routes to South east Asia, Latin America and Australia. With simple improvements in consistency of service, Air India’s existing bilaterals are goldmines.

Written by Parvez Damania |
Updated: October 21, 2021 1:35:45 pm
'Whether it is a full-service airline or a budget carrier, the single-most important factor for an airline’s profitability is its yield and usage of fleet. Planes need to be in air — the fewer hours they are parked, the better the return on capital.'

After a patient close look at the terms of Tata’s acquisition of Air India – one that was rumoured to be in the offing for a long time now – it seems that we have in front of us all the right ingredients for one of India’s most successful privatisation efforts yet – one that should allow the national carrier to create shareholder value by benefiting both its employees and customers and the entire aviation ecosystem in India.

Here’s why I look at Maharaja’s future with optimism.

The Tata Group has a rich history of authoring some splendid turnaround stories

By purchasing the asset only after the government had absorbed 80 per cent of the debt, the Tata pockets have been left deep enough to do to Air India what they achieved with Tisco, Telco, and arguably even Indian Hotels – turning all these companies into extremely successful, globally recognised consumer-facing brands. Indeed, Tata Motors today is a hybrid advanced automotive manufacturer that owns Jaguar and Land Rover.

Whether it is a full-service airline or a budget carrier, the single-most important factor for an airline’s profitability is its yield and usage of fleet. Planes need to be in air — the fewer hours they are parked, the better the return on capital. The most profitable airlines like Indigo achieve an average of 13.5 hours of flying time per aircraft per day. Air India, industry insiders tell me, was struggling to hit an average of four-and-a-half hours per aircraft per day. Imagine the low-hanging returns available for the new management.

Tata’s management efficiency will allow Air India to better exploit operating assets like the lucrative routes to South east Asia, Latin America and Australia. With simple improvements in consistency of service, Air India’s existing bilaterals are goldmines. The key to reviving the fortunes of the airline could be the synergy between various Tata group firms like TCS, Taj Sats and Tata Advanced systems, which have deep experiences in serving the airline business worldwide.

A high-flying Air India will have a huge positive impact on the entire aviation industry. Increased footfall in airports, superior lounges for passengers of codeshare airlines all mean improved yield for those who invested in F&B and retail establishments at airports. Indeed, with streamlined operations and best-in-class services, a strong international carrier in India will give an impetus to major metropolitan cities, and the airline will be able to win back some tourist dollars from Indians travelling abroad on foreign carriers currently. As we have seen with Emirates and Qatar, aviation has a multiplier effect on the economy, and a successful national carrier can be a major catalyst to economic growth.

By committing to retain all the staff at least for the first year, Tata Group will be able to create seamless continuity of service. Also, it sends a strong message that the new management has a willingness to understand the existing Air India DNA and culture, and create an environment where staff will be retained or let go based on merit. Safe to say that those who will be asked to leave will be offered voluntary retirement packages. This creates healthy competition among employees to provide better service, and gives them the safety net of recognising that the new management intends to be fair.

The position of the airline

With an increasing interest in Asia, Air India stands to benefit from the organic growth of passenger traffic. And, there is the pedigree of service and qualified, experienced staff that Air India has. Of Air India’s 25,000 staff members, 10,000 have retired over the past two years. Of the remaining 15,000, approximately 6,500 will retire in the next three years. So, in the next three years, the remaining 7,000-odd workers will be a reasonably healthy number of permanent employees. There are around 2,000-plus highly-experienced pilots, aircraft maintenance engineers and other trained staff. These are an asset to further help the Tatas expand their network, as they will focus on increasing their fleet capacity.

Also, today the Mumbai airport’s capacity is 43 million passengers a year. The new airport coming up in Navi Mumbai is going to eventually have a capacity of above 90 million passengers a year which will make it one of the five largest airports in the world. This means Air India — the Indian airline with the most number of parking spots in Mumbai — has great potential to grow from its present four-and-a-half hours in terms of just fleet utilisation.

Leveraging the assets of the Tata Group

Taj SATS – the inflight catering arm of the TATA Group, is today a three-way joint venture between Singapore Airlines, Indian Hotels and Airports Authority of India. If the Tatas buy out the Airports Authority of India, they will have lots to gain from a key spoke in the aviation wheel.

Part of the acquisition is Air India’s ground handling unit, which is a joint venture with Singapore Airlines — this too they are buying from Airports Authority of India.

The backend technology will be given to TCS and Tata Advanced Systems to handle. Imagine boarding passes on your cellphone’s native Air India app, satellite telephony on both domestic and international routes, and several other industry-leading initiatives that will enable Air India to run efficiently by leveraging technology.

Contrast this with the poor technology that Air India – probably given the constraints of a PSU – is operating with today: I discovered recently that Air India stopped using the ‘Amadeus’ ticket booking system (one that is used by most of the best airlines around the world). Air India was forced to exit it as another service – one owned by Indigo Airlines – was offered to them at a cheaper price.

As a privately owned airline, Air India will be able to hire tech talent and/or work with TCS to either build their own or deploy the best software to power ticketing, rather than share their precious passenger data with a software owned by a competing airline.

Indian Hotels is an expert in negotiating and handling leases and I am confident that of the 50-60 leased aircraft, Tata will be able to bring the price of leases down by 25 per cent at the minimum.

After all this, the aviation sector will likely see a merger of Air Asia and Air India Express to create a large low-cost carrier. With majority stake in three domestic carriers, Vistara, Air Asia and Air India, the Tata group airlines will cumulatively enjoy the second largest domestic market share at around 25 per cent. Indigo now has close to 50 per cent market share. The new mix is exactly what is needed to create healthy, sustainable and scalable competition in the industry.

Then, leasing companies will give a huge discount to the Tata group given than their finances are so secure and their decision making is fast. So if an Airbus A320 costs about $33 million, as it used to during my Kingfisher Airlines days, and leasing companies rent it out to carriers between 0.8 -1 per cent a month, (approx $320,000). The Tatas will be able to get leasing companies to offer closer to 0.5 per cent interest on the aircraft per month. The immediate savings from renegotiating leasing terms are significant.

The deal was a significant and bold one from the government’s perspective. Air India’s disinvestment plan was successful this time because the government came up with a more lucrative offer and toned down some requirements the bidders had to meet. This included a 100 per cent stake as opposed to the 76 per cent earlier. The government also slashed the debt ratio to Rs 23,286 crore from Rs 60,000 crore. Earlier, the bidders were required to have a net worth of Rs 5,000 crore, which was relaxed to Rs 3,500 crore.

The public at large is hoping that with Air India passing into the private sector, its operations and costs will be streamlined, services onboard will improve, and it will offer best-in-class services. For the Maharaja, it will be a new journey, and for the Tata group, an emotional one, as it regains its airline after 68 years. They have already made robust strategies and plans that will allow cost-cutting and make the airline competitive.

This a historic deal. Disinvestment was the only way to ensure Air India keeps flying. The debt was way too high for a single entity to manage and the Indian government was constantly funding Air India’s losses with hard-earned taxpayer money. Air India may not have been as good an airline as it was expected to be, but conversely, it had the fleet, the pedigree of employees and the infrastructure to be run as a decent, sustainable airline, not one that should have required a frequent bail-out.

In the last decades, Air India had introduced various cost cutting measures, which impacted product quality and drove passengers away. Now, since the ball is in the Tatas’ court, they will be able to successfully improvise, with a visionary leadership, professional managers, and a burning desire, as Air India was the creation of JRD Tata.

On the brand name and logo, I believe that the Tatas will continue to stick to ‘Air India’, as it comes with the prestige and responsibility of being a global ambassador of Indian hospitality. The name invokes a love or a bond with our motherland, and the Tatas take this aspect very seriously.

Air India has got a lot of assets that may not have a tangible value but a significant bilateral value. The Tatas will now enjoy a huge international network that no other carrier in India has. Congested airports like Hong Kong, London Heathrow, New York and JFK all have enormous slot constraints, and several new airlines are waiting in a long queue for landing and parking slots. Air India has the advantage of having access to these today. The Tata group will have a great opportunity to grab all slots at Delhi and other cities, thereby getting a larger market share.

This is a long-term investment for the Tata group and in the next five years they may even come up with an IPO. At the end of the day, I am certain the winner is going to be the Indian government, Indian investors and Indian passengers.

The writer is an aviation expert and founder of Damania Airways

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