NEW DELHI: The merger of Vistara with Air India marks the beginning of a consolidation phase in the Indian aviation sector where nearly half a dozen small and big airlines have ceased operations in the past decade in a market which is price sensitive and excessively regulated.
According to some aviation experts, the merger indicates that the sector is heading towards a duopoly and is very positive for the overall ecosystem. “Indigo and consolidated Air India will account for more than 80% of the market share indicating that Indian aviation is headed towards a duopoly,” said Anil R, Research Analyst at Geojit Financial Services. Aviation consultancy firm CAPA India also said that competitive dynamics in India are moving towards a two-pillar system around the Air India Group and IndiGo.
“The two carriers combined are in due course expected to achieve a domestic market share of 75-80% and in the international market they are expected to grow from 37.8% in the second quarter of the current fiscal to over 50%,” CAPA stated. Singapore Airlines (SIA) and Tata Sons this Tuesday announced the Air India-Vistara merger wherein SIA would own a 25.1% stake in the enlarged Air India group. SIA and Tata aim to complete the merger by March 2024. Post this, brand Vistara will cease to exist. However, not every expert is jubilant that the merger would lift the country’s aviation sector.
‘Vistara a Failure Brand, Merger Was to Save Image’
Mark Martin, CEO of Martin Consulting, said that the sole intention of this exercise is to hide the failure that is Vistara. “The merger does not appear to be a great story and I don’t think it would lead to creation of a very strong player. This was a desperate move by SIA to save its reputation,” stated Martin.Vistara, a 49:51 JV airline between SIA and Tata, has never made profits since starting operations in January 2015. Not only Vistara, but Tata Group’s other joint venture (JV) airline AirAsia India (now fully owned by the Tatas and now merged with Air India) has also ever reported profit.
“So, what business sense does it make to dump Vistara into Air India which is already battered and bruised?” questioned Martin. While the Tata Group is known to turn around big businesses such as Tata Steel and Tata Motors, turning around Air India would be a different challenge altogether.“Unlike other businesses, success of an airline is dependent on many external factors such as jet fuel prices and foreign exchange rate. Both the factors at present are very hostile for airlines…I don’t expect the Tatas to become a force to reckon with (like IndiGo) anytime soon,” said a senior analyst of a rating agency requesting anonymity.
Martin also raised concern that Air India is now an employee-heavy group and soon there can be lay-offs. “Excepts for pilots and limited cabin crew members, it does not make sense to have two or say three persons for a similar role…So a lay-off cannot be ruled out,” he said.
IndiGo to Remain Strong
Anil R of Geojit said that given its 280-aircraft fleet and strong network, they believe Indigo will maintain its market leadership position in the short to medium term. “The intensity of competition will undoubtedly increase due to rapid expansion plans of the industry, impacting the position of Indigo. However, we don’t expect a drastic fall in share…We like Indigo because of its market leadership, ability to leverage its network, cost-effective fleet, healthy cash position, and on-time performance,” the analyst noted. In October, IndiGo had a market share of 56.7% in the domestic market, more than twice of four AI airlines whose combined share stood at nearly 26%. Air India’s combined fleet strength now stands at 218 aircraft as against IndiGo’s 280 plus aircraft.
Anil added that small players can have a challenging period if there is a pricing war in the industry. Cash starved budget carriers -- SpiceJet and GoFirst -- are going through a challenging period and have seen a decline in market share. “Currently, we do not see a possibility for price war due to ample growth opportunity and high ATF cost. In the medium to long-term such an issue will depend on the strength of the industry growth, moderation in ATF cost and capex plans,” said Anil.
‘Merger doesn’t appear to be a great story’
Mark Martin, CEO of Martin Consulting, said the sole intention of the merger is to hide the failure that is Vistara. “The merger does not appear to be a great story and I don’t think it would lead to creation of a very strong player. This was a desperate move by SIA to save its reputation,” stated Martin