Friday, November 1, 2013, 07:17
Asia Weekly: Shake-up ahead for Indian skies

Tata-SIA joint venture may help revive the country’s ailing aviation sector

In a country where most airlines are scrambling to survive, the entry of yet another new carrier in an overcrowded market may come as a surprise.

But the decision of Singapore Airlines (SIA) to start a full-service airline to operate out of India, in a joint venture with Tata Sons — the holding company of Indian conglomerate Tata Group — is expected to have a positive impact on the Indian aviation sector and could give the country a globally competitive airline.

Tata-SIA could possibly also help India emerge as a global hub, a feat that the country has not managed in its 100 years of civil aviation history.

“If they play this well, Tata-SIA could well be the flagship airline of India over the next 5-7 years, replacing the ailing Air India,” says Amber Dubey, partner and head-aviation at KPMG.

Craig Jenks, president of the New York-based consulting firm Airline/Aircraft Projects Inc, echoes this.

“India so far only had global survivors and a few global losers … the Tata-SIA venture promises to offer India an airline that could eventually be a global leader.

“And I expect that one day it would also replace Air India as a flagship carrier,” he says.

Announced in mid-September, the joint venture will be 51 percent-owned by Tata Sons and 49 percent-owned by SIA, starting with an investment of $100 million. The airline will be based in Delhi, operating under the full-service model.

The venture received clearance from the authorities in late October and marks the fruition of the duo’s two-decade-long pursuit to start an airline in India. SIA and Tata sought to start an airline in 1990 but the plan was shelved by government policy changes.

In 2000, Tata and SIA partnered again to buy 40 percent of Air India — the ailing flag carrier — but that proposal collapsed as well.

The new carrier plans to be airborne by June 2014, said Prasad Menon, chairman of the new venture.

“The aspect people are most excited about is that there is an opportunity now to have a well-respected India-based airline …with an extensive global network connecting India on a non-stop basis to cities all around the world,” says Binit Somaia, the Sydney-based director for India and the Middle East at the Centre for Aviation (CAPA).

According to CAPA, the most intractable problem confronting India’s aviation industry is its depleted flag carrier, Air India. Battered by inadequate investment, persistent meddling, leadership changes, network muddles and gross over-staffing, the airline is today a shadow of what it could have been.

Worse still, Air India casts this dark shadow across the entirety of India’s airline industry. No government in the past two decades has had the courage either to capitalize the airline sufficiently to allow it to be competitive, or to put it out of its misery.

Subsidized to the tune of nearly a billion dollars a year, Air India in its present form is treading water, diverting funds from much needed public works and infrastructure.

“My deduction from the recent events is, the Indian government realizes that it cannot support Air India anymore,” says Jenks from Airline/Aircraft Projects Inc.

“This is why the government is making a better bet to get a very strong foreign player to start an airline with a strong local partner for establishing a globally competitive airline.”

That apart, the combination of two very large globally reputed industry leaders could be a game changer for the Indian aviation industry, believes Dubey of KPMG.

“The joint venture reaffirms the long-term potential of the Indian civil aviation and tourism industries, both of which seem beset today with problems like excessive taxation, poor infrastructure and cumbersome procedures. All these are likely to change as policymaking in India matures. The presence of Tata Sons and Singapore Airlines will speed that up,” says Dubey.

To some extent that has already started to happen.

While clearing this venture, the authorities waived the ‘5/20 rule’ that prevents Indian carriers from flying internationally until they complete 5 years of operations and have a fleet of 20 aircraft.

However, the biggest impact of Tata-SIA will be felt in the international routes to and from India. Nearly 70 percent of international traffic from India is westbound, toward the Middle East, Africa, the European Union and the Americas. SIA previously had limited play in this.

Tata-SIA can now compete for a share of this traffic using the Indian portion of the bilateral quotas. The resultant competition will increase offerings, improve services and bring down fares.

“This is actually very good news for inbound and outbound tourism from India. Foreign tourist arrivals in India in 2012 for instance, were an abysmal 6.3 million as compared to China’s (58 million), Malaysia’s (25 million), and Singapore’s (12 million). This is bound to change now,” Dubey says.

The industry is also expecting rationalization of the excessive taxation imposed on aviation turbine fuel (ATF) and in the maintenance, repair and overhaul (MRO) operations sector.

These two cost components are most expensive in India, with ATF accounting for nearly 55 percent of the operating cost of Indian carriers as against 30-35 percent globally. The recent devaluation of the Indian rupee made it even worse.

That apart, a plethora of federal and state taxes on MRO makes it cheaper for Indian carriers to send out their empty planes at high costs to competing MRO locations like Sri Lanka, Malaysia and Singapore.

Small wonder then that Nicholas Ionides, vice president of public affairs at SIA, feels that “the airline will help to stimulate market demand and provide economic benefits to India, while also providing a new growth opportunity for the SIA Group”.

That may be true. With India scoring at just 0.07 in terms of the number of domestic seats per capita compared to 1.04 in Malaysia, 0.34 in China, and even 0.41 in Indonesia, “to catch up with other emerging markets, India has the potential to double, triple and even quadruple in terms of per capita trips”, says Somaia from CAPA.

Yet, India may not be an easy market to navigate.

“(India’s) biggest risk is government policy, which can be unpredictable. Another constraint is the existing infrastructure — even the newly built airports are bursting their seams and SIA may struggle to provide a consistently high standard of service on the ground,” says Shashank Nigam, CEO of SimpliFlying, a Singapore-based aviation marketing strategy firm.

Nigam adds that the airline will have to build a loyal customer base domestically, with hubs in major metros like Delhi, and will also have to ensure that domestic flights enable seamless transfers to international flights to Singapore and beyond.

According to CAPA, the domestic Indian market is now a 100 percent low-fares market, where the difference between low-cost and full-service fares is negligible, and there is also very little to distinguish between the products.

As a new entrant, even if the Tata-SIA venture can engineer a lower cost base than Air India and Jet Airways (the other full-service operator in India) Tata-SIA will need to carefully consider its market proposition on domestic routes.

“Jet Airways currently owns the largest segment of the premium market in India, and they will not easily let go of them,” adds Nigam.

It appears unrealistic then that Tata-SIA can pursue a full-service model, says Somaia.

“Instead (Tata-SIA) may need to consider a hybrid two-class product which is efficient and appropriate for the relatively short domestic sectors.”

The Singapore airline is, though, undaunted.

“The Indian market has been seeing growth in all market segments, and we see great potential for further growth in the full-service segment,” says Ionides from SIA.


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