Aviation industry is the place for players with not just deep pockets or commitment to stay the course, but also the ability to operate on wafer-thin margins.
There is something about aviation that keeps attracting the Tatas to it like bees to nectar (even if the moth-to-flame metaphor seems more appropriate to some given the present state of the industry). It was only in December that the erstwhile group chairman, Ratan Tata, had ruled out entry into the sector in view of the “destructive competition” and the conglomerate’s bitter experience of making a joint bid with Singapore Airlines for a 40 per cent stake in the state carrier, Indian Airlines. But on Wednesday, Tata Sons said it would take 30 per cent equity in a new domestic aviation venture, in which the Malaysian low-cost airline, AirAsia, will hold 49 per cent and also manage the operations. That makes it more of a strategic investment than a full-fledged re-entry into the aviation business by the $ 100 billion group, which has been out of it since the nationalisation of Air India in 1953 – which Ratan Tata’s predecessor, JRD Tata, had established.
Whether ‘pure’ investment or real re-entry, the latest announcement, along with the Abu Dhabi-based Etihad’s proposed 24 per cent acquisition in Jet Airways, is a vindication of the Government’s decision in September to allow foreign airlines to pick up 49 per cent stake in domestic carriers. Also, the fact that AirAsia — a budget carrier with a reputation of targeting underserved markets – is planning to launch operations just when airlines here are engaged in a fresh fare war signals renewed optimism about the Indian aviation industry’s long-term growth prospects. Some of this is, no doubt, justified. Between 2001 and 2011, the number of passengers flying domestic routes went up from just 1.3 crore to almost 6 crore. Last year may have seen a 3 per cent drop; but that’s clearly temporary. While Kingfisher Airlines’ collapse may have taken some sheen off the sector, the spate of global mergers – the American Airlines-US Airways deal being the latest – shows that airlines aren’t doing brilliantly elsewhere either. Moreover, unlike other markets, the potential to grow and expand passenger base is much larger here.
Having said that, aviation is a capital-intensive business, with every A-320 or Boeing-737 aircraft costing roughly $ 90 million. Besides, volatile fuel costs in a price-sensitive market makes smaller players particularly vulnerable. The lesson from the past few years is that this is not an industry for small-time fly-by-night operators or those in it purely for reasons of glamour. The ones who will survive in today’s environment are those in it for the long haul and with pockets deep enough to operate on thin margins. While some consolidation is inevitable, consumer resistance to fare hikes – as witnessed last year – will ensure enough competitive pressures for players to see wisdom in stimulating traffic and ‘growing’ the market. The timing of opening up domestic skies to foreign carriers, in this sense, couldn’t have been better.