Monday, October 11, 2021

With Air India win, Tatas may focus on cost optimisation, unlikely to get into price war

New Delhi: Tata Group's acquisition of Air India's operations is likely to change the dynamics of the aviation industry in India with all listed players like Interglobe Aviation and SpiceJet focusing on costs.

Analysts say industry's normalised operating profit (Ebitda) in the medium term is likely to improve with expected better pricing power driven by consolidation, not-so-high aggression from players, and strict focus on cost-efficiency

Typically in a capital-intensive sector like aviation, a change in a business situation is driven largely by demand, cheap crude, low competition, and exit, entry or emergence of a player after consolidation.

When a player exits the industry, it has been observed that existing players gain market share and valuation premium. The grounding of Jet Airways in 2019 is a case in point. In the early months after the grounding of the airline’s aircraft, the sector’s yield had jumped to 23% month-on-month basis in April 2019 and analysts estimated at least two times growth in earnings before tax and rentals (Ebitdar) of well-placed airlines. The entry of a new player, if backed by a strong promoter, changes the dynamics, as it mostly leads to price wars.

But the acquisition of a few airlines by an existing airline that is backed by one of the most well-managed and top-notch promoters is a different ball game, the Economic Times mentioned in a report citing analysts.

Analysts told the publication that the Tatas would probably not want to kill the competition by flooding the market with capacity or slashing ticket prices. Instead, they said, the Tata Group which now has close to 25% market share in the domestic aviation industry with the acquisition of Air India — it already operates Vistara and Air Asia as joint ventures — would focus on a sound strategy of controlling its costs and reducing its leverage to attain a certain scale of profitable operations.

Hence, they said, the likelihood is low that there will be extreme aggression in the pricing of tickets. This will not lead to a price war situation in the industry.

According to analysts, in the medium-term, players would have better bargaining power, which would increase their yields.


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