Air India back under Tata's control after $2.4bn bid

Tata Sons is in a strong position to turn around the country's loss-making Air India, after it emerged as the winning bidder in the long-awaited privatisation of the country's flag carrier, according to industry analysts.

The move sees history coming full circle, as the airline was started by the group's JRD Tata in 1932 under the name Tata Airlines, before it was nationalised about 20 years later.

Tata – India's oldest and largest conglomerate with interests ranging from automobile manufacturing to steel – already has a strong presence in the country's aviation sector, with its joint ventures in the airline Vistara, which it owns along with Singapore Airlines and AirAsia India. Its industry experience will help it chart the future of Air India.

“The deal is positive because Tata can turn around the airline into a profitable entity in a few years,” said Vijay L Bhambwani, head of research, behavioural technical analysis at research firm Equitymaster.

India had struggled for decades to sell off the airline, partly due to its large debt-burden, which meant the last attempt in 2018 failed to attract a single bidder. But the government sweetened the deal by reducing the amount of debt the buyer would have to take on and allowing full ownership of the carrier.

Tata's winning bid was 180 billion rupees ($2.4bn) for a 100 per cent stake and it will take on about $2bn of Air India's debt, which stands at more than $8bn.

Tata has a strong record of successfully turning around ailing companies, with its takeover of British carmaker Jaguar Land Rover being a prime example. Tata Motors bought the troubled Jaguar and Land Rover brands from Ford in 2008 and cut costs early on as part of its turn around strategy as it invested more than $16bn in product development with new models such as the second-generation Range Rover Evoque, a new Land Rover Defender and hybrid variants.

Still, turning around the carrier will be challenging. Tata's takeover comes at a time when India's aviation sector is struggling. Even before the Covid-19 pandemic, carriers were grappling with a fiercely competitive environment and high operating costs, which led to the financial failure of Jet Airways in 2019. The pandemic has only worsened the situation.

“The ability [for Tata] to optimise costs, and streamline operations will be a formidable challenge and the key to profitability in the group’s airline operations,” says Suman Chowdhury, the chief analytical officer at Acuité Ratings & Research.

Air India has not turned a profit since 2007 when it merged with Indian Airlines. The company has a bloated workforce of some 8,000 employees, which Tata will have to keep on for at least a year, according to the conditions of the deal.

It also has about 120 planes, and before the pandemic Air India was flying to more than 100 international and domestic destinations.

Air India also has coveted landing slots, including London Heathrow, and with expectations that passenger traffic will return to strong growth in India after the pandemic, these are some of the factors that mean there is potential for the airline to eventually deliver a strong financial performance.

Tata's ownership of Air India “could positively and structurally re-set the sector”, leading to a more level playing field once the government is no longer involved, said Vivek Keerthy, the practice lead, strategy, at CAPA India, an aviation consultancy.

But adding to the competition in the market, Jet Airways could be set to resume flights in the first quarter of 2022 and a new "ultra low-cost carrier” called Akasa Air is also preparing to launch operations next year.

With so many carriers in the market, and given that Air India will be Tata's third airline, analysts see consolidation in the future.

“Tata Group’s acquisition of a 100 per cent stake in Air India is likely to result in a consolidation in the domestic civil aviation market,” says Mr Chowdhury.

Tata Sons has been working on a plan to combine Vistara, Air India, and AirAsia, The Hindu Business Line reported, citing sources.

Ratan Tata, the chairman emeritus of the group, tweeted it would “take considerable effort to rebuild Air India” but added “it will hopefully provide a very strong market opportunity to the Tata Group's presence in the aviation industry”.

The deal also bodes well for prime minister Narendra Modi's government's wider privatisation plans as it seeks to raise 1.75tn rupees in the current financial year from the sale of state-owned companies. Mr Bhambwani says that the Air India deal sends a “positive signal to global investors”.

The deal comes as the government is focused on boosting the pandemic-battered economy and creating much-needed jobs. Air India was proving to be a huge drain on taxpayers' money and it is widely believed these funds could be better utilised elsewhere.