Homecoming of Air India - Are Good Old Days Back?

The airline was started by J.R.D. Tata in the 1930s, Air India, is all set to return to the Tata fold after a 68-year-long journey as India’s state-owned flag carrier.

INTRODUCTION

The airline has had a very fascinating start, with many ups and downs along the road. JRD Tata founded Tata Airlines in 1932, but nationalism rose to prominence following the country’s independence, leading to the nationalization of several businesses, including Tata Airlines. This marked the beginning of Air India. Air India has seen both good and bad times. The fact that the airlines haven’t made a profit since 2007 is a measure of how poorly it was operated.

As of August 2021, Air India owed 61.5 thousand crores. Furthermore, for every additional day that Air India operated, the government lost a total of Rs. 20 crore. Now, the salt-to-software conglomerate has taken over the national carrier they once founded with a whopping winning bid of Rs 18,000 crore. It is now hoped that under the Tata regime, Air India will reclaim its lost glory – becoming highly profitable and customer’s prime preference at the same time!

STORY TILL DATE

1932: Jehangir Ratanji Dadabhoy Tata founded the Tata Airlines

1946: The aviation division of Tata Sons was listed as Air India, with the government acquiring 49% share

1948: Air India International was launched with flights to Europe

1953: Air India was nationalized for Rs. 2.8 crore

2000: Attempts were made to privatize Air India under NEP

2007: Suffered losses after merger with Indian Airlines

2010: Less lucrative routes were finally terminated

2012: A study commissioned by MCA recommended that Air India should be partly privatized

2017: GOI approved privatization of Air India but was ultimately postponed

2020: The government released the Expression of Interest (EOI) to invite bidders

2021: Tata wins bid to acquire Air India, Maharaja heads home again (after 68 years)

INDUSTRY AND COMPANY OVERVIEW

Aviation Industry:

• India has become the third-largest domestic aviation market in the world.

• India is expected to overtake China and the United States as the world’s largest air passenger market in the next ten years, by 2030, according to the International Air Transport Association (IATA).

• India’s aviation industry is expected to witness Rs. 35,000 crore (US$ 4.99 billion) investment in the next four years.

• Affected by Covid, it is expected to grow at a CAGR of 3.3% until 2030.

• However, this industry is largely untapped with huge growth opportunities.

Air India:

• 102 domestic and international destinations

• Largest international carrier of India with an 18.6% market share

• Member of Star Alliance, the world’s largest global airline alliance

• Air India’s mascot is the Maharajah and the logo consists of a flying swan with the wheel of Konark inside it.

SWOT ANALYSIS

Strengths:

• Air India is India’s finest flying Ambassador. It is the largest air carrier in India in terms of traffic volume and business.

• It consists of the most updated fleet and repair and maintenance expertise.

• Efficient usage of information technology for providing customer services such as flight information and online booking.

• Good brand value at both domestic and global levels.

• Firmly established infrastructure

• Monopoly in specific international routes

Weaknesses:

• Declines in the profits and poor utilization of capacity

• Lack of clarity in strategic planning and poor management planning

• Intense competition at the level of low-cost carriers and the decrement in market share

• The high-cost structures of Air India are pushing the company into losses

• The company’s strategies in the perspective of human resources are substandard

• Poor performance in terms of overhead cost controlling and high manpower ratio to aircrafts

Opportunities:

• The faster-growing aviation industry in India

• The regulations of aviation, at the global level, are made easy by the world aviation authority, leading to easy access to route clearances

• Strong security system attracting more tourists despite the threat from the terrorists

• Very good time to introduce low cost carriers (LCCs)

• The business class customers are less price conscious and expect quality service, it will be a great opportunity for Air-India to gain more customers by providing high-quality services

• Availability of highly skilled native-born pilots at low costs

Threats:

• Many new entrants in the aviation industry at the domestic level

• The price war triggered by the major airline industries, all over the world

• Immense and aggressive competition from the rival airline companies

• Increase in fuel prices, all over the world

• The Indian railway provides quality, speed, and affordability at the same time

WHAT WENT DOWNHILL

It is not the structure that matters when constructing a castle. However, it is the pillars that support it are most important. If anything goes wrong with these pillars, it can cause the building to collapse.

Some are listed below :

Ordering new fleet: In its early years, it was involved in an acquisition spree. Instead of 10 airbuses, nearly 111 Boeing aircraft were bought for a sum of 70,000 crores.

Faulty aircraft configuration: Boeing 777 had a vanity first-class cabin that was rarely filled adding to costs unnecessarily.

Besides, Air India estimated a loss of 671 crores after the disastrous move of selling 5 Boeing 777 – 200 aircraft below its estimated price.

Inability to offer: Air India was unable to offer direct flights especially from Kerala to the Middle East or from Bengaluru to the US adding 8 – 16 extra hours to the total travel time, annoying the passengers too.

Heterogeneity of fleet: Usually for its short-haul services, airbus was a user but adding Boeing too here added to inventory costs, training, etc.

Forced (failed) marriage: The main motive of the merger was to increase the synergy but things turned the other way round and this deal has remained only on paper to date. Equity of 48,212 was also introduced but the government could not meet the interest payment obligations and eventually, they had to face a loss of 52000 crores. Alongside, debts kept burdening the financial statements and the merger together showed a debt of 2000 crores.

Poor Maharajah but rich employees: Ultimately to buy peace with the Unions of pilots, Air India had to pay US equivalent salaries in terms of rupees to all its engineers and pilots too.

Inability to face change: Air India failed to keep pace with time leading to a lack of customer focus, poor financial management, etc. Then the arrogance of unionized employees made things even worse.

Lack of professional management: Most people who were a part of Air India’s operations had a lack of expertise in the field of aviation.

Greed at the highest level: In the airline which got the status of a Navratna, the CMD’s started pursuing their own goals, handsome increase in flying ‘shortfall allowances’, incentives, etc.

Failure of asset monetization: Air India, was doing a lot but fruitlessly. It tried to set up its own resorts, hotels near the airports but nothing paid off and eventually got sold for just a song.

FESTIVITY FOR TATA

Welcome back, Air India!” the Tata Sons chairman emeritus tweeted. The acquisition completes a full circle, as Air India was launched in 1932 as Tata Airlines by JRD Tata, a family scion, and aviation enthusiast.

Deconstructing the deal :

Talace Pvt Ltd, a Tata group subsidiary The total bid is Rs 18,000 crore based on the enterprise valuation. The airline’s debt would be taken over by the Tatas for Rs 15,300 crore, with the remaining Rs 2,700 crore paid to the government in cash.

Rs 12,906 crore was designated as the reserve price. Air India’s debt had swelled to a huge Rs 61,562 crore as of August 31, 2021, mostly funded by sovereign guarantees to cover its losses. As of March 31, 2021, the airline had accrued losses of Rs 70,820 crore.

Following the agreement, the government will assume debt of Rs 46,262 crore and assets worth Rs 14,718 crore, including real estate. Everything will be loaded onto a special purpose van.

To sum up, The Tata group has effectively taken over a fourth of Air India’s total debt, as part of the disinvestment deal, the company must keep at least 51 percent of its stock and 12,000 employees for a year, adhere to a three-year business continuity clause, and keep its brand for five years.

FUTURE OF AIR INDIA

There is a distinction between a vyapari (merchant) and an udyogpati (government official) (industrialist). An industrialist will stay invested if he expects a return of at least 25 to 30 years. So there is no greater combination than this, and from a long-term perspective, India will benefit greatly from it.

Will Tatas be able to turn around Air India?

Well analysing the facts we can definitely say that The Tatas are a wealthy family and have witnessed worse turnarounds with Tisco, and turned Telco into a hybrid advanced automotive manufacturer today that owns Jaguar Land Rover. So, The Tatas will be a very strategic market offering, similar to what the Lufthansa Group has done. This will be the most powerful comeback of an airline that was the trend setter and the benchmark for our region in the 1950s and 1960s. It’ll be Tata’s blue-eyed boy, and India is going to be at maximum capacity. It is envisioned that under Tata’s leadership, Air India will not only be profitable but also achieve “wow” status in terms of customer service.

Air India being an international airline can be a reason for a surge in Forex earnings as well.

Do you still remember Air India’s Mascot? Tatas have the power to bring back that age of glory. The good news for Air India is that it will reclaim what it has lost over the last 40 to 50 years, such as African routes, bilateral flights, and routes across Southeast Asia, Australia, the Pacific, and Latin America. The world-famous Air India is returning.

With the Government exiting Maharaja’s cockpit, can Tatas pilot the airline to glory?

Managing a multi-brand aviation portfolio, Tatas can be strategic about consolidating them.

The firm has made it very clear that if and when the Air India transaction is completed, it intends to operate as a single business. Increase the game’s difficulty and become the best player in the area. Because AirAsia is now a Tata company, merging the two companies will be easy. Additionally, having various cost structures would be inefficient in a low-margin competitive business. The intent has been communicated to SIA [Singapore Airlines], and a conversation is underway.”

KEY TAKEAWAYS

Air India’s case is a real example of how the most profitable airline can suffer a tremendous loss. Adding to the list of cases to learn from, it has now become a perfect example of how not to handle stressed assets”

Despite having the largest workforce, Air India struggled with low productivity and a negative reputation, both of which are inexorably related to unprofessional management that lacks autonomy and accountability and is plagued by political and bureaucratic intervention. Too many people were taking advantage of the poor maharaja.

Now, in such a situation when you see your business bleeding and there’s no light at the end of the tunnel, retaining it is not a wise decision at all and you will have to exit without any delay because if one does not know which boat they are sailing in, no wind is favorable.

Now, as the nation heaves a sigh of fiscal relief we should gather some insights for future management too. Of all the privatizations, that of Air India has been the most contentious one and a long list still awaits this.

Credits-:

Content- Rajat Vashisth & Yuvika Puri

Infographics- Harshit Jain & Shruti