Monday, December 05, 2022

Why Air India and Vistara merger could unsettle smaller Indian rivals

The planned merger of Air India and Vistara will create a stronger airline that will be better positioned to compete in the international market, analysts have said.

However, the union will also add to the pressure on domestic carriers that are grappling with severe headwinds.

Over the next few years, Air India is likely to emerge as a global network carrier in terms of size, scale and standards of service, according to Capa India, an aviation consultancy.

“This merger will bring corporate strength to the sector, which will have a positive impact on the entire ecosystem,” Capa says.

On Tuesday, Tata Group, which completed its purchase of Air India earlier this year in a $2.2 billion deal, announced plans to merge the former national carrier with Vistara.

Vistara is an Indian airline owned by Tata in a joint venture with Singapore Airlines.

Tata will hold nearly 75 per cent of the entity, while Singapore Airlines will own the remaining stake. Singapore Airlines is to invest $252 million in Air India under the deal.

The move comes as India’s aviation industry tries to recover from the impact of Covid-19 pandemic on airlines worldwide, while at the same time trying to manage high expenses, including fuel costs — made even more expensive due to a sharp depreciation in the Indian rupee against the US dollar.

Adding to the tough market environment, competition is mounting with the launch of Akasa Air — backed by the late India billionaire stock investor Rakesh Jhunjhunwala — in August this year.

The new entrant describes itself as an ultra-low cost carrier.

Jet Airways — once India’s biggest private airline, which went out of business in April 2019 — under the new ownership, is also planning to return to the skies. Its launch, however, has been delayed.

Last month, the airline’s chief executive Sanjiv Kapoor confirmed on Twitter that one third of its staff had been affected by cost-cutting measures, including a temporary pay reduction. However, he stressed that no employees had been laid off.

India's domestic aviation sector is dominated by leader IndiGo, while other airlines include AirAsia India — which is also co-owned by the Tata group — and SpiceJet.

The growing competition is concerning, analysts say.

“If we take a look at the domestic airlines, almost everyone is in the red,” says Anurag Singh, managing director of Primus Partners, an Indian advisory company based in New Delhi.

Airlines with lower market share are the most vulnerable, he says.

“Not all of them will survive now,” Mr Singh says. “Whether they will merge or whether they die ... is something that we will [have to wait and] see.”

In the airline industry, economies of scale enjoyed by bigger carriers are critical, according to Mr Singh.

05/12/22 Rebecca Bundhun/National

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