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Eighteen years after their last joint effort was scuttled by the government of the day, Tata Sons and Singapore Airlines (SIA) have tied the knot again — this time to form a full-service domestic airline based in New Delhi.
The Tatas had entered the aviation space in February this year, with Tony Fernandes’ AirAsia. But that alliance was for low-cost operations and Tata Sons had made it clear that the joint venture (JV) would be run by AirAsia, which holds a 49 per cent stake. Delhi’s Bhatia family is also a partner in the JV, with a 21 per cent stake, while Tatas hold 30 per cent.
On the other hand, in the new venture, the brand name for which has yet to be announced, the Tatas will be the driving force with a 51 per cent stake, while SIA would take the rest. And, the two have made a commitment to the Foreign Investment Promotion Board (FIPB) to invest $100 million to begin with. In contrast, the initial equity investment in the AirAsia JV was less than a third of this — at $30 million.
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The three-member board of the Tata-SIA venture will have two Tata nominees — Tata Industries Director Prasad Menon as chairman, and member of Tata Sons’ executive council, Mukund Rajan. Mak Swee Wah, SIA’s executive vice-president (commercial) will represent the foreign carrier.
Given the capacity constraints at the Mumbai airport and better infrastructure facilities at the Delhi one, the two parties have decided to make Delhi their operational hub.
Analysts feared this new venture could impact the AirAsia JV. But Tata group sources said such fears were unfounded, as the Malaysian company was aware of the negotiations right from the beginning and had no objection to Tatas going ahead with such a deal.
A senior executive of a competing airline said, in a country where full-service carriers were competing with low-cost ones on tariffs and sometimes even offering lower pricing, there might be a conflict of business interest between the two JVs.
Sources in the know countered that, saying the two ventures would actually complement each other. For instance, AirAsia is launching its Indian operations with Airbus A-320, while SIA has a variety of Airbus aircraft. A common fleet, with common spares and maintenance support, could be one key area of synergy between the two. They also said there could be synergies in other areas like ground-handling, route planning, etc.
Explaining the role Tatas would play, Rajan said Tata Sons would fully participate in the management and operations of the airline. As with its other joint ventures with globally respected companies, Tata will play an active role in operations and leverage its understanding of the Indian industrial landscape.
He added, according to Centre for Asia Pacific Aviation (Capa) data for 2012, per-capita domestic airline seat in India was very low, at just 0.07. In comparison, the number stands at 3.35 in Australia, 2.49 in the US, 1.38 in Canada and 1.05 in Japan.
Menon said civil aviation in India offered sustainable growth potential, while Singapore Airlines CEO Goh Choon Phong said the airline had always been a strong believer in the growth potential of India’s aviation sector.
Civil Aviation Minister Ajit Singh said in New Delhi that he was informed about the joint venture on Thursday itself. “Prasad Menon came to apprise me of the plans for the new airline venture. This is the first time they have met me about the proposal,” he said.”
Civil aviation sources said the current rules were silent on whether an entity could own two separate airline companies. But a ministry official said this was not a problem. Air India, too, has Air India Express as a low-cost subsidiary.”
Even apart from their Air India connection, the Tatas have a long history in aviation. In 1991, the then prime minister P V Narasimha Rao had asked J R D Tata to explore setting up a domestic airline. Though nothing happened at that time, Rao revived a proposal to set up an airline in India during his meeting with his Singaporean counterpart, who insisted the Tatas be the partner. After this, an official from the Prime Minister’s Office spoke to Ratan Tata, former chairman of Tata Group, to consider such a proposal.
The move fructified in 1995 when the Tatas put in an application to set up a JV with SIA to start a domestic airline in which it would have a 40 per cent stake. However, a strong opposition from domestic private airlines hindered the project, which went through many phases. The government first asked the Tatas to bring down SIA’s share to 50 per cent and then to 40 per cent. Later, succumbing to stiff opposition, the government decided not to allow any foreign investment in the country’s aviation sector.
In 2001, the Tata group made another attempt to pick up a 40 per cent stake in Air India, with SIA as partner, through a disinvestment process. But opposition to the deal forced SIA to back out.
Kapil Kaul, head of Capa, welcomed the move but raised some key questions. “Capa believes approval of foreign airlines to invest in India was a game-changing decision and we have seen three serious announcements in the past year; one or two more are likely in the near term,” he said. However, there were regulatory and policy uncertainty and there still was no clarity on the issue of new airline licences, he added.
“Overall, government policies have always raised entry risks for serious players, Capa said, adding that the announcement could play out negatively on AirAsia’s regulatory approval.
For SIA, the deal makes perfect sense. The tie-up with the Tata group has come a few months after SIA sold its 49 per cent stake in Richard Branson’s Virgin Atlantic Airlines for $360 million. Analysts said continuing the Virgin Atlantic investment made little strategic sense for the airline, as Virgin’s main market was the US and the Carribean, whereas SIA had been increasingly focused on Asian and Australian markets for growth.
Another driver for the airline’s investment in India could be competition. Although SIA commands a 15-20 per cent capacity share of the India-South East Asia market — the highest among airlines operating from India — it faces challenge from the AirAsia group and Indian low-cost airlines like IndiGo. This competition will only intensify in the coming years, as both IndiGo and AirAsia have committed huge orders for Airbus A320 aircraft.
Singapore Airlines vice-president (public affairs) Nicholas Ionides said the new airline was likely to operate international flights from India, depending on government approvals. The Indian JV airline could also benefit from SIA’s expertise in running a cargo and engineering services company. Apart from revenue benefits, it could also help save cost. Ionides said it was premature to discuss the issue and refused to comment.
The Tata group has a long history of cooperation with Singapore. It runs a flight kitchen in a JV with Singapore Airport Terminal Services (TajSats) and has partnered with Changi airport to explore airport development in the country.
Success at last
* Early ’90s: Tatas envisage setting up a domestic airline but need a partner; the then PM meets Singapore PM, both agree on setting up a carrier in India under comprehensive economic cooperation; Tatas are sounded out
* 1995: Tatas apply to set up a JV, with SIA a 60% partner; SIA agrees to bring down equity to 40% after demands the Indian partner hold a majority stake; deal is blocked as domestic carriers oppose foreign investment in aviation
* 2001: With SIA, Tatas bid for a 40% stake in Air India and remain the sole bidder as Hindujas withdraw; but SIA backs out as opposition to divestment gets stronger
OPEN SKY
A look at the reach of Tatas’ JV partners in the aviation space
Singapore AIrlines
Business model: Full-service
Flies to: 63 destinations across Asia (11 in India), Australasia, Europe, N America, Africa, W Asia
Key markets: Heavily exposed to passenger markets in North America and Europe
Target: Has been trying to gain footprint in Asia-Pacific; raised frequencies to India by 24%, to China by 71% and to Australia by 45% over the past 3 years
Fleet: 101 aircraft
India market share: 2.7%
AirAsia
Business model: Low-cost
Flies to: 85 destinations in 20 countries (from Thailand and Malaysia to five Indian cities)
Fleet: 118 aircraft
India market share: 0.80%
