In one of the biggest mergers in India’s aviation sector, the Tata Group on Tuesday announced the consolidation of Vistara with Air India by March 2024. As part of the merger transaction, Singapore Airlines (SIA), which currently holds 49 per cent in Vistara, will invest ₹2,059 crore to get 25.1 per cent in the merged Air India.

“With this consolidation, Air India with a combined fleet of 218 aircraft shall become India’s largest international carrier and No 2 domestic airline,” a Tata Group statement said.

Air India (including Air India Express and AirAsia India) and Vistara have a total of 218 wide- and narrow-body aircraft, serving 38 international and 52 domestic destinations. Post the integration, Air India will be the only Indian airline group to operate both full-service and low-cost services.

Capital injection

SIA and Tatas have also agreed to participate in additional capital injections, if required, to fund the growth and operations of the merged Air India over the next two years. SIA said its share of any additional capital injection could be up to $615 million, payable only after the completion of the merger. “The merger transaction was going on for approximately six months, and a team of over 30 people including the top management of all the parties involved and BofA, as the advisor to the Tata Group, went through the deal with a fine-tooth comb,” said an industry source.

The Tata Group has said it is looking at achieving a 30 per cent market share; IndiGo has for long enjoyed over 50 per cent market share.

According to Vinamra Longani, Head of Operations, Sarin & Co, it is better to merge two loss-making full-service airlines to create a world-class Air India. The law firm specialises in aircraft leasing and finance.

Tata’s strategy

Sanjay Ashar, Senior Partner, Crawford Bayley and Company, pointed out that “If the merger of AI and Vistara will have an appreciable adverse effect, the CCI may not grant approval or give approval with conditions. One needs to check what is the combined share of AI and Vistara.”

The Tata Group, according to him, seems to have a clear two-pronged strategy with a low-cost and a full service carrier. While Air India Express will take on the likes of IndiGo, Air India would offer an elevated product/ experience at a slight premium.

Industry watchers said that other airlines like IndiGo should watch out because they had grown when no other airline was. “Now, Air India will compete again, so IndiGo will have a large challenge ahead of itself,” industry watcher Jitendra Bhargava explained.

TWo-pillar system

However, CAPA pointed out that the competitive dynamics of India are moving towards a two-pillar system around the Air India Group and IndiGo. The two carriers combined in due course are expected to achieve a domestic market share of 75-80 per cent. In the international market, they are seen growing from 37.8 per cent in 2QFY2023 to 50 per cent+. This will redraw market and consumer power in the international arena to Indian carriers; this segment has historically been dominated by foreign carriers.

“IndiGo should pay heed and so should Emirates and Qatar Airways. The combined fleet strength of AI and the network will make it a very viable alternative to IndiGo,” Longani said.

In terms of internal competition on overlapping routes for SIA and Air India, experts said the only routes that will overlap will be between India and Singapore. However, people in the know have also said that Australia, which is an important route for SIA to India, will be a route that Air India will look at.