India’s cut-throat aviation sector prepares for consolidation

India’s dog-eat-dog aviation sector is on the cusp of a transformation.

After years of cut-throat pricing wars between Indian airlines, the landmark merger of former national carrier Air India with Vistara will shake up the fast-growing industry.

In a boom and bust sector where some analysts argue consolidation has been overdue, the deal will challenge the dominance of the country’s biggest domestic flyer IndiGo, analysts said.

An enlarged Air India group, with an estimated value of $4.4bn, will have just under a quarter of the domestic sector, making it the country’s second biggest carrier after IndiGo, which commands well over half of the market.

“The competitive dynamics in India are moving towards a two-pillar system around the Air India Group and IndiGo,” wrote CAPA India, an aviation advisory.

Significantly, it expects the two carriers between them will grow to claim about half of India’s international market, which is dominated by foreign carriers.

“You can’t have six to seven airlines competing, offering uneconomical fares and perishing,” said Air India’s former executive director Jitender Bhargava.

The merger of Air India and Vistara, after owners Singapore Airlines and Tata on Tuesday announced that the companies were set to combine, concludes a chapter started 22 years ago.

Singapore Airlines, which holds 49 per cent of Vistara, announced it would invest about $250mn in Air India group, giving it a 25.1 per cent stake in the entity, which will be “four to five times larger” than Vistara.

The story began back in 2000 when Indian conglomerate Tata, which owns 51 per cent of Vistara, joined forces with Singapore Airlines in a bid to buy part of Air India.

For Singapore Airlines, India, with the fastest growing air travel market of any large economy, is one of the most strategically important countries, alongside China, Indonesia and Australia.

Singapore also has close economic and cultural ties with India and huge passenger traffic flowing both ways.

The deal is another attempt by Singapore Airlines, which is majority owned by Singaporean wealth fund Temasek, to make a successful overseas investment after a number of setbacks.

Ten years ago, it took a painful loss when it sold its Virgin Atlantic stake to Delta Air Lines for $360mn, having bought it for $963mn in 1999.

And in 2020, Virgin Australia, in which Singapore Airlines had a 20 per cent stake, went into administration owing to the coronavirus pandemic. Vistara, which started operations in 2015, was unprofitable even before Covid-19.

“This time is a bit different because it is not a new overseas investment,” said Brendan Sobie, an independent aviation analyst based in Singapore.

“[Singapore Airlines] is converting its Vistara stake into a new entity with potentially a better chance down the track.”

He added: “They may be better off with a smaller share of something bigger rather than a larger share of a smaller airline.” The consolidated group will have 218 aircraft.

Founded by family patriarch JRD Tata in 1932, India’s government nationalised the glamorous international carrier in 1953.

But when Tata finally reclaimed the lossmaking airline in a $2.4bn deal last year, it faced a tough turnround job: Air India’s glittering reputation had been worn threadbare by traveller complaints over surly service, delayed take-offs and ageing seats.

Bhargava said the Vistara merger could help speed up a management transition at Air India, where “employees have been with a government psyche . . . Vistara employees have a different mindset”.

Tata is also restructuring its aviation portfolio. In November, Air India announced it had acquired majority Tata-owned budget carrier AirAsia India. It hoped to integrate it with Air India’s own low cost brand Air India Express.

However, restoring Air India will be expensive, with the need to buy new aircraft and overhaul existing planes.

Natarajan Chandrasekaran, chair of Tata Sons, parent of Tata Group, said Air India was focused on “growing both its network and fleet,” with the aim of offering “both full-service and low-cost services across domestic and international routes”.

But both airlines are unprofitable. In a reminder of the challenge ahead, Singapore Airlines calculates the enlarged Air India group’s net loss on a pro forma basis at S$2.4bn ($1.8bn) for the 2021-22 financial year.

Singapore Airlines said it expected to make further cash injections of up to $615mn after the merger, which is subject to approval by competition regulators and due for completion by March 2024.

However, the airline’s confidence in its investment has been helped by the appointment of Campbell Wilson, founder of Singapore Airlines’ budget subsidiary Scoot, to lead Air India.

A person familiar with Singapore Airlines’ thinking said the airline was more comfortable with the deal since he took the reins.

“They are confident in Campbell, who is straightforward and good at identifying and tackling issues,” the person said of the New Zealand-born executive. “He doesn’t beat around the bush.”