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Vistara’s potential Air India buy will be a win-win

Ashwini Phadnis New Delhi | Updated on March 03, 2020

Buying Air India will also add sentimental value to Vistara, as the former was founded by JRD Tata   -  K Bhagya Prakash

While both parties could benefit in multiple ways, Air India’s Star Alliance membership will be the icing on the cake

Vistara Chairman Bhaskar Bhat’s statement on Monday that Vistara is evaluating bidding for Air India could be the best thing that could happen to the State-owned airline.

Air India was started by JRD Tata, and if Vistara were to bid and emerge the winner, it will be beneficial for a number of reasons.

Vistara is a joint venture between Tata Sons and Singapore Airlines. So Vistara winning the bid will see Air India return to Tata Sons. For Singapore Airlines also, it will be the culmination of its failed attempts to acquire Air India. Singapore Airlines had earlier tied up with the Tatas to acquire Air India when the Vajpayee government was looking to divest the airline.

There are several aspects that make Air India a good investment option for Tata Sons. Air travel is largely a Visiting Friends and Relatives (VFR) market which sees Indians travel in large numbers to the US, the UK and Canada.

Air India has presence in all these markets. It had a head-start in launching non-stop operations between India and San Francisco with American carrier United commencing these operations several years later. With the suspension of services by Jet Airways, which was the only other Indian carrier operating to the US, the pendulum has again begun swinging in favour of the American carrier on this route. The India-US market is estimated to be around $7 billion annually.

Three-class structure

Vistara, which inducted the first Boeing 787-9 aircraft to its fleet this week, could have a ready-made market waiting to be catered to, thereby providing a huge business opportunity for its foreign operations. The new Boeing 787-9 aircraft has a three-class configuration, offering business, premium economy, and economy seating. It will be the only Indian carrier offering premium economy and could, in that sense, take the fight right back to the American carriers operating on the India US route that offer premium economy seating.

The acquisition should also bring in more benefits. The government is selling not only Air India but also Air India Express which reported a profit. The acquisition should help a private entity like Vistara see a manifold increase in the profitability of Air India Express. Acquiring a stake in Air India will also help Vistara acquire a larger piece of the Indian market — Vistara currently has a domestic market share of around 6.5 per cent, while Air India’s share is around 12 per cent. The acquisition will give Vistara access to not only the huge domestic market that AI connects but also slots at international airports, including London and John F Kennedy (New York).

There are other positives for Vistara acquiring a stake in Air India. Air India is part of the Star Alliance, a global alliance of over 25 global airlines. This too will be a big plus for the five-year old Vistara, which launched international operations in August last year.

This will also benefit Air India, because if it is acquired by an airline from West Asia or one which is part of any other alliance, it could run the risk of seeing its Star Alliance membership being questioned. Star Alliance could seek default termination as the West Asian carrier or carrier of another airline alliance could by default get entry to the Star Alliance group.

Star Alliance membership will allow the new owner of Air India to get enhanced access to the global network of airlines which are part of the Alliance such as Singapore Airlines, Qantas, Lufthansa, Air Canada, United, ANA and Turkish.

Likely to be a stormy affair

However, Vistara’s attempt to bid for Air India is unlikely to be smooth. BJP MP Subramanian Swamy tweeted: “It is ridiculous for Vistara to bid for Air India. Vistara is an illegal airline and there is an ongoing case in the Delhi High Court on a PIL filed by me. In that, its partner, TATA, is under CBI and ED probe. I hope MoCA (Ministry of Civil Aviation) does not foolishly allow them to participate.”

Besides dealing with such issues, Vistara, or any other airline that eventually buys Air India will also have to spend a huge amount of money to participate and place a winning financial bid, and the winner will have to spend several thousands of crores in ensuring an upgrade of the airline’s existing fleet.

In addition, the new owner will also have to take on Air India’s debt which currently stands at over ₹ 20,000 crore.

Published on March 04, 2020

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