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Tata’s Air India acquisition and SriLankan Airlines: A death blow or opportunity?

  • It’s not an impact, rather competition that would benefit customers: SriLankan
  • Competition to Dubai and Changi if Tata builds India as transit hub

By Imesh Ranasinghe

Tata, the Indian industrial giant, bought India’s national carrier, Air India, for $ 2.4 billion two weeks ago. The move is considered a moment of rebirth for Air India, which is about $ 8 billion in debt and was making $ 2.6 million in losses per day. This was the second attempt by the Narendra Modi Government to sell it.

Air India carried more than 18 million domestic passengers in 2019, and yet suffered from overly bureaucratic management and political interference as privately owned low-cost carriers gained market share. It has been incurring losses since its 2007 merger with state-owned domestic carrier Indian Airlines.

The Tata Group, headed by Ratan Tata, is a sprawling collection of nearly 100 companies that includes the country’s largest automaker, the largest private steel company, and a leading outsourcing firm. The companies employ more than 350,000 people around the world. In June 2008, Tata also bought Jaguar and Land Rover for $ 2.3 billion from Ford.

It also runs a budget airline, Air Asia India, in co-operation with Malaysian carrier AirAsia, and full-service carrier Vistara with Singapore Airlines. Now, with the addition of Air India, Tata would have a market share of around 27% in the airline industry in India.

India’s largest airline, IndiGo, which has 58% of the market share, expects Tata to be “formidable competition” with the purchase of Air India from the Indian Government.

Along with this, concerns have also arisen on whether Air India managed by Tata will take on SriLankan Airlines’ traffic from the Indian market.

India and Sri Lanka have an Open Skies Agreement, enabling SriLankan Airlines to operate an unlimited number of flights to six Indian airports. SriLankan Airlines is also the largest foreign carrier in India and was operating over 100 flights per week to 14 destinations in India before the pandemic.

Sri Lanka saw the highest tourist arrivals growth post-Covid in September, amounting to 13,547 tourist arrivals, with a majority of 8,528 arrivals from India.

“We all are waiting for Indian traffic because it’s very critical for us. If you ask for my perspective, we are counting on India. Eventually, we are going to come out of this and people are just waiting to start travelling,” SriLankan Airlines Chairman Ashok Pathirage said in an interview with Indian media in June 2021.

SriLankan welcomes competition

Speaking to The Sunday Morning on the possible impact of Air India’s recent takeover, an official from SriLankan Airlines, who wished to remain anonymous, said that the international airline business is competitive and that SriLankan Airlines is always with that competitive mindset.

He said, now that Air India has got new strength, both airlines could go in line together, adding: “It is not an impact; rather a competition, and it is all around. When there’s competition, the main benefit goes to the customer. So we welcome Air India.”

An official in the airline industry told us that Air India might opt for a Middle Eastern transit or a transit in Singapore, but added that discussions on transits were held between states and not airlines.

Furthermore, the industry official said that establishing a transit point is a massive investment, and therefore creating a base for the relevant airline in terms of maintenance, ground handling, and counter operations should be done by a foreign airline.

He said that SriLankan Airlines was given enough access to India and added that sometimes, on average, during the pre-pandemic period, there were about 100 flights per week to India.

“So, this is reciprocal; even if Air India and other Indian airlines come to Sri Lanka 100 times, there is no problem for us. We should be competitive and friendly, because we have an Open Skies policy. Even if it affects SriLankan Airlines, it is good for the country because there will be more Indians coming in,” the industry official explained.

However, he said SriLankan Airlines must be competitive enough to sell at the same prices or provide better service to promote it.

Air India General Sales Agent in Colombo Thanuja Lankatilaka said that the new management was yet to speak to its agents around the world on the future of the company.

Tata might want transit hub in India

Griffith University, Queensland, Australia Research Assistant and Attorney-at-Law Dr. Shanuka Senarath said that Tata, with Air India in their pocket, might try to create a transit hub in India connecting the East and the West to give good competition to Singapore’s Changi Airport and Dubai, since they would be fighting for the same market.

He said a transit hub is a situation where several airlines pass over that certain place to reach different destinations, irrespective of the identity of the airline. He added even though Sri Lanka has a favourable geographical location to create a transit hub, the country could not capitalise on it.

As a result, Dr. Senarath said, a few airlines will be coming for transit in Colombo while SriLankan Airlines mainly operates as a domestic base airline flying passengers who come in and leave the country.

Moreover, he said the benefit of having a transit hub is that passengers who come to the hub spend a significant portion of their expenditure at the hub before they reach their destination.

Oligopolistic airline industry

Speaking further on the airline industry, Dr. Senarath said it is an oligopolistic market where a few strong companies work.

“You can’t have an airline just because you want to have an airline; for that, you need to have a significant amount of capital. This prevents people and businesses from entering into the airline business. So, only a few who are strong remain in the industry,” he explained.

He pointed out that competition is what matters in an oligopolistic market and as long as the competition is there, the prices are competitive as well.

He said Air India, which was originally founded by Tata in the 1930s, was doing well till the late 1990s and early 2000s after its nationalisation in the 1950s, but when the Indian Government opened up the market for private airlines, the monopolistic power of Air India had to adjust to an oligopoly.

As a result, Air India started to incur losses, as they could not sustain amidst the private airlines that were offering low prices. As such, Indian Prime Minister Modi was looking to sell the airline for the past four years, he stressed.

However, he said that with Air India coming back under Tata, the company will receive about 4,400 domestic slots and 1,800 international slots, including 900 slots outside India through Air India. This would be in addition to the slots it has with its two other airlines, Vistara and AirAsia, which the company already operates as a joint venture.

“This will give significant market power to Tata, and with private sector management and the massive scale they are going to operate in, they can easily come up with lower operational costs, through which they can offer tickets at very competitive prices,” he said.

Dr. Senarath said this is a common business trick applied by the Indian businesses, where they offer competitive lower prices to capture the global market.

Moreover, since Tata is a conglomerate, he highlighted that all the services to Air India could be provided by Tata’s subsidiary companies, which again will help them lower operational cost.

“If that happens, SriLankan Airlines and other airlines on a similar scale would not be able to compete at all with Air India in the South Asian region,” he said.

The Indian newspaper Business Standard reported that the acquisition of Air India will help a host of Tata Group companies sell their products, from software to consultancy services.

It said the group was also identifying opportunities for Tata Capital, its fast-growing financial services business, and for Indian Hotels, the operators of Taj Hotels, which will be able to cross-sell products to Air India’s customers and the airline’s crew.

Several Tata Group companies were supplying products to the two airlines currently operated by the Tata Group.

As such, Dr. Senarath noted that if Tata decided to have a transit hub in India and offered lower prices for travel to India via the airports to which SriLankan Airlines was already flying, it would have a greater impact on the national carrier.

However, The Economic Times reported that Tata would probably not want to kill the competition by flooding the market with capacity or slashing ticket prices.

Instead, they predicted the Tata Group would focus on a sound strategy of controlling its costs and reducing its leverage to attain a certain scale of profitable operations.

Budget airline and Tata the real winners

LIRNEasia Chairman Prof. Rohan Samarajiva said that Tata might keep Vistara Airline as a high-end service and make Air India a budget airline, which will make it follow a completely different business model from what it follows now.

He said that if it happens, however, SriLankan Airlines will be affected, as Tata will get hold of the Air India route network.

Moreover, he said that Tata paying $ 2.4 billion to buy the debt-ridden Air India was a small amount compared to the size of the group and considering the asset value of the airline, especially its fleet and slots at Heathrow Airport. “It was almost like they got it for free,” he added.

The new owner will be taking on a fleet of 121 Air India aircraft and 25 planes from its subsidiary Air India Express, which operates low-cost flights to more than 30 destinations in India, the Middle East, and Southeast Asia.

Prof. Samarajiva said the only problem Tata would have to face was that of the employees of the airline.

However, Indian media reports stated that there would be no retrenchment in the first year and Air India employees will be given a voluntary retirement scheme (VRS) in the second year. Gratuity and Employees’ Provident Fund benefits would be provided to all employees.