Tata Sons
have tied the knot with
Singapore Airlines
(SIA) once again to form a full-service domestic airline based in New Delhi. The move comes 18 years after their last joint effort was scuttled by the government of the day.
The Tatas have already entered the low-cost carrier space in February this year after tying up with Tony Fernandes’ Air Asia. However, Tata Sons had made it clear that the airline would be run by Air Asia, which has 49% stake with the Bhatia family controlling 21%.
ALSO READ: Tatas and Aviation: 5 interesting factsHowever, in the new venture (the groups are yet to announce a brand name), the Tatas will be the driving force with a 51% stake, with SIA taking 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 Air Asia joint venture was only one-third at $30 million.
The three-member board of the Tata-SIA venture will consist of two Tata nominees -- Prasad Menon, director in Tata Industries, as chairman and Mukand Rajan, member of the group executive council of Tata Sons. Mak Swee Wah executive vice president, commercial of SIA, will represent the foreign carrier. The airline have made Delhi their operational hub because of the huge capacity constraints in the Mumbai airport and better infrastructure facilities at the Delhi airport.
Analysts are however apprehensive about the impact this new venture will have on the Air Asia JV. Sources in Tata group, however, said such fears were unfounded as the Malaysian company was aware of the negotiations from the beginning and have had no objections for the Tatas to go ahead with such a deal.
But a senior executive of a competing airline said in a country where full-service carriers were competing with LCCs on tariffs and sometimes pricing the fares even lower than the latter, there may be a conflict of business interest.
Sources in the know countered that by saying the two JVs would actually complement each other. For instance, Air Asia is launching its Indian operations with Airbus A-320 and SIA has a variety of Airbus aircraft. common fleet with common spares and maintenance support could be one key area of synergy between the two JVs. The sources also said that there could be synergies in many other areas from ground handling, route planning, etc.
Explaining the role that Tatas will 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.
Rajan said based on CAPA data for 2012, the number of domestic airline seats per capita was very low in India, at just 0.07. This compares with 3.35 for Australia, 2.49 for the US, 1.38 for Canada and 1.05 for Japan.
While Menon said civil aviation in India offered sustainable growth potential, 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 airlines venture. This is the first time that they have met me about the proposal." he said.”
Civil aviation sources said the current rules were silent on whether one entity can own two separate airline companies. But a civil aviation ministry official said this was not a problem as this was allowed. Air India also has Air India Express which is a low-cost subsidiary"
The Tatas have a long history in aviation, apart from the Air India connection. In 1991, the then Prime Minister P V Narasimha Rao had asked JRD 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 the Singapore PM who insisted that the Tatas should be the partner, following which an official from the Prime Minister’s Office called up 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% stake. However, strong opposition from domestic private airlines saw the project go through many phases, with the government initially asking Tatas to bring down SIA’s share first to 50% and then to 40%. Later, succumbing to stiff opposition, the government decided not to allow any foreign investment in airlines.
In 2001, the Tata group made another abortive attempt to pick up a 40% 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 the Centre for Asia Pacific Aviation, 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 announcement in the last one year and one or two more are likely in the near term,” he said. However, there were regulatory and policy uncertainty and still no clarity on the issue of new airline licenses, Kaul said.
“Overall, government policies have always raised entry risks for serious players, CAPA adds. It also says that the announcement could play out negatively on Air Asia’s regulatory approval.
For SIA, the deal makes sense. The tieup with the Tata group comes a few months after SIA sold its 49% stake in Richard Branson's Virgin Atlantic Airlines for $360 million. Analysts said that 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 focussed on Asian and Australian markets for growth.
Another driver for the airline's investment in India is competition. Although SIA commands 15-20% capacity share on the India-South East Asia market which is the highest amongst airlines operating from India, it faces challenge from the AirAsia group and Indian low-cost airlines such as IndiGo. This competition will only intensify in the coming years as both IndiGo and AirAsia have committed huge orders for Airbus A320 planes.
Singapore Airlines vice president (public affairs) Nicholas Ionides said the new airline was like to operate international flights from India depending upon government approvals. The Indian JV airline could also benefit from Singapore Airlines' expertise in running a cargo and engineering services company (MRO). Apart from revenue benefits, it could also aid in cost savings. Lonides said it was premature to discuss the issue and refused to comment.
