Obituaries have often been written about AirAsia India, but the carrier has managed to surprise its critics. The path ahead for the airline, however, may be particularly bumpy.

Last October, Civil Aviation Minister Hardeep Singh Puri told the media that the airline was shutting down. A month later, AirAsia’s CEO, Tony Fernandes, said his company was reviewing its investment in its cash-starved affiliate. By November, the airline seemed to have regained some ground. According to reports, its 51 per cent partner, Tata Sons, infused around ₹300 crore into the venture through a mix of equity and debt. It was clear by then that Tata Sons was all set to rescue the airline and would, at some point in time, end up picking its other JV partner, AirAsia Berhad’s stake as well

On December 29, 2020, AirAsia Berhad announced it would be selling a 32.67 per cent stake (490 million shares) in AirAsia India (AAI) to Tata Sons for $37.7million (₹280 crore) with a provision to sell its remaining 16.3 per cent stake for $18.8 million (₹136.29 crore), which implied an equity valuation of ₹850 crore for the Bengaluru-headquartered airline.

It was around this time reports emerged that Tata Sons were a strong contender for the purchase of Air India. It was becoming clear that Tata Sons, a 51 per cent equity holder in Vistara, sought to play a major role in the Indian airline sector.

While one does not know how exactly Tata Sons will restructure its airline business if it wins the bid, AAI in many ways finds itself in the same spot it was before AirAsia Berhad decided to partially withdraw from the joint venture. A questionnaire sent to AAI on its plans remained unanswered.

Path to profitability

If Tata Sons decides to let AAI remain an independent entity, the group will have to carry out several steps to put the airline on the path to profitability.

First, Tata Sons will have to rebrand the airline completely so that the separation from the former parent, AirAsia Berhad, is complete in all respects. There are indications that such an exercise is already being rolled out. “With Tatas now holding a majority stake coupled with indications such as a separate website for AirAsia India, core IT systems moving to India and the India inventory being listed as a third party on the global AirAsia website, a rebranding is all but certain,” Satyendra Pandey, Managing Partner, Airavat Transport & Technology Ventures, told BusinessLine .

Next, contracts with lessors need to be renegotiated. For any airline, it is not only the kind of aircraft being flown but also how they are configured and financed. For AAI, the aircraft pricing and construct of contracts were earlier aligned towards the parent in Malaysia and their strategic plans. With the majority stake now with the Tatas, these very contracts have to be re-examined to ensure they provide a foundation to compete intensely in the India market. On this front the airline has its work cut out.

The third factor — and this may determine the durability of AAI — is the amount of funds that Tata Sons will have to invest in the airline which has never posted profits except for a quarter or two. Based on estimated debt from the last available balance sheet of June 2020 and the equity value of ₹860 crore on the basis of the stake sale of AAI to Tata, the enterprise value of AAI comes to ₹1,850 crore.

Considering AAI’s 7 per cent market share, the valuation is low compared to that of listed peers, which indicates the underlying stress in the sector. However, the size of operations of AAI is smaller with a less attractive slot portfolio, ICICI Securities recently pointed out in a note to investors.

According to Pandey, the Tatas are known to be patient with capital but the market continues to operate with wafer-thin margins with yields being artificially propped up by government-mandated price floors. “The price floors will be lifted at some point and thus planning has to be comprehensive and mitigate the inevitable price-discounting practices.”

Even though the airline may not need funds in the near-term, if it were to scale up its fleet size to about 55 from the current 33 to remain a viable player, it will need between ₹1,200 crore and ₹1,400 crore in the current environment. The next few months will decide whether the $113-billion Tata Sons will be able to successfully combine ambition with scale.