Is Tata integrating airline businesses with Air India ownership in mind?

AirAsia Berhad plans to all but exit from its India joint venture with the Tata group, seven years after becoming the first foreign airline to set up a subsidiary in India amid much fanfare. 

The Malaysian aviation company, which until recently held a 49% share in low-cost carrier AirAsia India, is going to drastically pare down its shareholding in the airline, and end up with just 13%, according to a Times of India report. AirAsia Berhad would, as a result, remain only as a financial investor in the Indian airline, as the Tata group, which already owns about 75%, would increase its ownership to as much as 87%. 

The India unit would continue to use the AirAsia brand and certain other facilities like aircraft maintenance and ticketing-accounting software for some more time. Although the Malaysian company has a common website across geographies, TOI has learnt that Tata is planning to have a separate website for AirAsia India, and has tasked Tata Consultancy Services (TCS) with designing a crew-scheduling software. 

This development can be seen from two angles. One, AirAsia Berhad's urge to exit its Japan and India businesses amid a serious Covid-induced travel downturn and the resultant financial troubles. The other is: Tata may be integrating its airline businesses in India as it expects to regain Air India, which despite its massive debts and losses, is a premier brand offering a lot of advantages, and most importantly, is Tata's long-lost offspring. 

AirAsia India's Kabali-themed plane. Image courtesy: Wikimedia Commons/Saileshpat 

AirAsia discontinued all routes of its Japan unit in October and filed for bankruptcy in the Tokyo District Court in November, with about 21.7 billion yen ($208 million) in liabilities, according to a Nikkei Asia report. The airline's net loss was about 4.7 billion yen on a revenue of roughly 4 billion yen for 2019. It thus became the first airline in Japan to close down in the Covid era. 

As the Malaysian parent stopped funding, over 23,000 customers of AirAsia Japan were left high and dry, having not received refunds for their cancelled flights. AirAsia, however, assured its customers of offering credits that can be used for international flights on group airlines. 

Also read: Why is Tata so keen to buy national carrier Air India?

It may be noted here that AirAsia had earlier had a separation with its joint venture partner All Nippon Airlines (ANA) in 2013. "It looked like one sexy woman, said all the nice things. And when we got to bed, it was a horrible experience. So we had a quick divorce," AirAsia chief Tony Fernandes said in 2013 about the separation from ANA.  

After exiting AirAsia Japan, the Malaysian company re-entered the Japanese market in 2017 in partnership with Japanese e-commerce group Rakuten, health and beauty products maker Noevir Holdings, and sporting goods store operator Alpen. Thus the AirAsia Japan brand was restarted. The earlier avatar had been rebranded as Vanilla Air in 2013.

AirAsia Japan folded its wings earlier this year. Image courtesy: Wikimedia Commons/ltdccba

According to Bloomberg, in August, AirAsia posted its largest quarterly loss ever and aims to raise 2.5 billion ringgit ($600 million) by the end of 2020 to weather the Covid-19 storm. 

After closing its operations in Japan last month, AirAsia also flagged its concerns about its business in India. Its businesses in Japan and India have been “draining cash, causing the group much financial stress,” the airline's president Bo Lingam had said in a statement on November 17.

Also read: Will Subramanian Swamy stop Tata from regaining Air India?

“Cost-containment and reducing cash burns remain key priorities, evident by the recent closure of AirAsia Japan and an ongoing review of our investment in AirAsia India,” the statement had added.

The Indian aviation sector, which is considered to be one of the world’s most difficult markets, is already reeling under financial distress faced by stakeholders due to the pandemic. It has seen many prominent airlines like Jet Airways, JetKonnect, JetLite and Kingfisher Airlines folding their wings in the past decade, and has players like Spicejet, GoAir and even the national carrier Air India floundering. 

Now, let's consider the other aspect of the story. This pertains to Tata's possible strategy of consolidating its airline businesses in India.  

Tata was the pioneer of civil aviation in India, first with a freighter service and then with Tata Airlines, which subsequently changed into Air India and then went into government hands after independence. Since then, the business behemoth, which has always been fascinated by aviation, has tried to foray into the sector a couple of times, including an attempt to buy back Air India in 2000. However, it was not able to achieve a breakthrough.  

Tata had made repeated attempts to win back Air India. Image courtesy: Wikimedia Commons/Phillip Capper

Tata re-entered the Indian aviation sector holding the hands of AirAsia in 2013. AirAsia entered the Indian aviation space taking advantage of a relaxation in foreign direct investment (FDI) rules by the government and planned to own 49% in a new airline, with Tata holding 30% and Arun Bhatia's Telestra Tradeplace owing 21%. 

However, despite looking like a minority shareholder in the overall scheme of things with a 49% stake, AirAsia Berhad was in reality, a senior partner in the company. Live Mint reported in 2016, referring to documents and email exchanges, that AirAsia India was actually being run by AirAsia Berhad. This was against the Indian rules that necessitated an Indian airline to be run essentially by an Indian entity despite a foreign airlines owing 49% stake.

Also read -- Covid-hit AirAsia Berhad mulls India exit: Another airline shutdown coming?

Later, however, Bhatia exited in a huff and Tata took up 51% control, and also independent charge of AirAsia India's core operations, including commercial, finance, training functions after an amendment to a controversial brand licensing agreement. 

A leading newspaper had earlier reported that Tata Sons is reviewing the joint venture with AirAsia, and is in talks to buy out the 49% stake the Malaysian firm holds in the Indian affiliate.

Tata then formed Vistara, a joint venture with Singapore Airlines, with the first flight happening in 2015. Today's Vistara is a premium full-service carrier in which Tata holds a 51% stake. 

However, both AirAsia India and Vistara have been posting big losses. Vistara's pre-tax loss widened to Rs 1,800 crore in FY20 from Rs 831 crore in FY19  due to higher operating costs, according to a Business Standard report. This was the highest single-year loss for Vistara since beginning operations.

According to a Live Mint report, AirAsia India's revenue dropped to Rs 221.55 crore in the second quarter of the current fiscal as opposed to Rs 724.24 crore a year ago in the wake of the Covid-19 pandemic. In the September quarter, the carrier's fleet capacity also diminished by 64% from a year ago.   

A Vistara aircraft at the Mumbai airport. Image courtesy: Wikimedia Commons/Rehman Abubakr

Now, there are reports that Tata has bid to regain Air India as the government seeks to offload its entire stake in the national carrier, its low-cost subsidiary Air India Express and the ground-handling unit AISATS.

Adding a terribly cash-strapped Air India to the Tata portfolio would put immense pressure on the conglomerate. According to former Tata Sons chairman Cyrus Mistry, the group had an adjusted net loss of Rs 13,000 crore in 2019, which was the worst loss in three decades, PTI had reported. However, according to many estimates, the $113 billion conglomerate has deep pockets to continue even loss-making airlines. 

Therefore, what the Tata group may want now is to consolidate its airline businesses, especially considering that it might end up reuniting with Air India. After all, running three airlines in a country may be too burdensome even for Tata. 

Reports say that Tata is using AirAsia India as the vehicle to bid for Air India. According to TOI sources, the brand may be retained for two-three years depending on how long it takes Tata to club its airline businesses under a giant umbrella.

Tata also has to consider if it wants to run two full-fledged full-service carriers in the form of Vistara and Air India if it succeeds in owning the national carrier. If AirAsia Berhad totally exits the India venture in the future, and if Tata is able to take control of Air India, it would not be a surprise if AirAsia India, which was launched to change the rules of the game in the Indian aviation market with its cheap rates, actually gets absorbed into a bigger Tata airline entity. 

(Cover image courtesy: Wikimedia Commons/Venkat Mangudi)