In many ways it is a reversal of history. It was JRD Tata who pioneered the concept of Air India, which despite the brilliance of Bobby Kooka ended up in an awful financial mess. Tatas came back into the airlines business via a stake in budget airline, Air Asia. Later, the Tatas also floated Vistaara Airlines, a full service provider in alliance with SIA. Over the last few weeks, there have been talks of the government requesting the Tatas to bail out Jet Airways. While the Tatas have started the diligence it is not clear if they will be interested in the deal. Here is why Tatas need to tread carefully on the Jet deal.
What happened to Etihad
A few years back, Etihad took a stake in Jet Airways with a view to getting a toehold in the Indian aviation market. However, things have only deteriorated at Jet and Etihad has reached a stage wherein it may have to sell out to the largest regional player in the gulf, Emirates Airlines. What happened to Etihad has larger lessons for the Tatas and it only means that the market share of Jet alone may not be enough. Air Asia and Vistaara have a combined market share of 8% while Jet Airways has around 15%. So the combination will give the Tatas some firepower. The problem is Jet has a huge debt burden and its performance will remain unviable unless Jet manages to build up the all important spread between the CASK and the RASK, which looks elusive.
Jet and the full service riddle
If you look at the aviation market, Indigo leads with a 43% market share while Spice Jet and Go Air have a share of close to 23% together. If you add up Air Asia then over 70% of the Indian market is dominated by the budget airlines. Indian aviation market is growing at 18% annually and a chunk of this incremental growth is coming from the budget segment. Jet has typically had a full service model and that has always been vulnerable to the dual forces of price completion and higher ATF prices. Globally, there are two models that have worked in the aviation industry. The full service model has worked where there has been cartelization. Globally, it is the no-frill model that has worked better. To that extent, Jet could be a white elephant for the Tata group.
What can Tatas bet on?
But Tatas may still want to bet on Jet subject to appropriate haircuts taken by banks, lessors and the airports. What the Tatas can bet on is that the deal gives them a much bigger market share of the domestic and the international market where it can truly leverage on the association with Singapore Airlines. US styled cartels may be much harder in a price sensitive market like India but Tatas can surely look to expand their domestic and global franchise. But for that the price has to right! ©