The Tata group on Thursday regained ownership of Air India, 69 years after the airline was nationalized. The salt-to-software conglomerate promised to turn the loss-making carrier into a world-class airline.
The handover has come as a culmination of the government’s attempt to transfer the ownership of the loss-making airline to a private owner. The airline never made a profit since its merger with Indian Airlines in 2007-08 and reported a loss of Rs 7,017 crore in FY21.
The acquisition gives Tata's 100 percent ownership in Air India, its low-cost subsidiary Air India Express and a 50 percent stake in ground handling firm AIS ATS.
Following the takeover, the Tata group chairman indicated that there will be changes in the functioning of the company. “My first flight was with Air India in December 1986, and I will never forget how special it felt to be on-board or the exhilaration as we soared into the sky. Such memories are wonderful, but now is the time to look ahead. I write this letter on behalf of the Tata group, to welcome you to our family. I have learned that preserving what is best about the past, requires constant change. It is by evolving, adapting, and embracing the future that we best honor a glorious history,” Chandrasekaran said in his first message to Air India employees.
While no official announcement was made about the composition of the new board, it is learned that the airline’s current directors in charge of core operations - finance, commercial, operations, and human resources--will continue. From the Tata side, Nipun Aggarwal, senior vice president at Tata Sons; Saurabh Agrawal, CFO at Tata Sons; Suprakash Mukhopadhyay, group corporate secretary at Tata Sons; and former CFO at Tata Sons are part of the restructured board. Air India's Chairman and Managing Director, a few days ago, resigned on Thursday. So did two government nominees.
People who advised the Tata on the deal said that the group was keen on Air India for a long time. “There was an emotional connection here…. This was an opportunity to secure significant market share… The financial sweetener allowed them to take over the airline with the right kind of debt,” said MD and Country Manager, Alvarez & Marshal, a professional services firm.
Besides the emotional factor, the Tata also had a significant business logic to acquire Air India.
With Air India and Air India Express, the group now has four airlines and around 23 percent market share, becoming the second-largest operator in the domestic sector behind IndiGo. It is the largest player on international routes and the only Indian carrier on long-haul routes like Europe and USA.
Sources said that the Tata group plans to operate both in full service and low-cost segments. While Air India Express and Air Asia India will be combined to make a low-cost airline, Air India is likely to be merged with VISTAS going ahead.
“The Tata group had every understanding about the requirements of this investment and what the returns can be. In a large M&A acquisition, the serious buyer will have a deep investment thesis running through. So, it was not surprising they went all the way,” said head of corporate finance, Alvarez & Marshal.
There is a potential to improve cash flow by a billion dollars per year if the planned strategy of the Tata to improve revenue and cost can be implemented, said people aware of the development.
While the initial plan of the conglomerate is to work towards enhancing the soft side of the existing product, the Tata group has also identified other areas which have to be improved to turn around the company.
Besides passenger experiences like food and customer interaction at touchpoints, the focus will be to improve commercial operations like revenue management, ancillary revenue, and cargo operations. Simultaneously, there is an urgency to look at human resources by imbibing a culture of a private corporation, where there is an incentive to perform better.
“Air India currently doesn't have the required technology or employee training to do route analysis, pricing, and booking curves. Currently, it’s a very manual process at Air India that impacts commercial performance as airline pricing is dynamic. They will have to augment the team and software in that area,” the person said.
According to data provided in Parliament, in FY20 Air India had 11 international routes that met variable costs and 10 that did not. On the domestic network, 101 routes did not meet even variable costs, while only nine met the total cost.
Another area that the Tata have identified is to improve the revenue from cargo operations. The cargo network is likely to be realigned so that the planes fly to the right location and make it easier for customers to book and track the consignment.
Amidst the pandemic, which has impacted the global supply chain, airlines have earned more revenue from the cargo as compared to other years. Airlines like Spice Jet and IndiGo now have a separate line of management looking purely at air cargo, which has allowed them to gain market share from foreign airlines.
“Tata will have to do a fairly extensive restructuring. It’s done better by an efficient private hand than the government. The taxpayer was losing more than Rs 20 crore per day,” said DIP AM secretary.
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