By Vishal Bhatt / Delhi
It seems no one had an inkling about Tata Sons’ proposal to begin a second airline from scratch in India, in partnership with long-trusted Singapore Airlines. No, not even Civil Aviation Minister Ajit Singh, who sources say was told of Tatas’ intentions just this afternoon. Senior officials in the ministry of civil aviation also feigned ignorance about the proposal, which comes just months after the Tatas partnered Malaysian low cost carrier AirAsia and Telestra Tradeplace to launch a low cost airline from scratch in India.
The secrecy with which Tata Sons and SIA managed to prepare a proposal and submit it to the Foreign Investment Promotion Board could point to the efficiency and certainty with which the newly constituted board of the Tata-SIA airline functions. Or it could be a pointer to the two partners being wise on hindsight. When the Tatas first came forward with their plan to partner AirAsia for a low cost airline in February this year, there was intense opposition from existing airlines as well as from bureaucrats in various Government departments who quibbled over dotting the is and crossing the ts.
Questions were raised over the FDI policy, which allowed foreign airlines to invest in Indian ones last September, which was seen facilitating foreign investment in existing airlines, not in setting up new ones from scratch. In fact, BJP MP Subramanian Swamy’s petition opposing the AirAsia-Tata-Telestra proposal for a budget airline is right now under consideration of the Delhi High Court.
So secrecy was obviously essential when Tatas moved a proposal for setting up a second airline. Why SIA? There is the long history of the Tatas and SIA wanting to launch aviation business in India. In the nineties, the Tatas tried to enter aviation by starting an airline in collaboration with Singapore International Airlines (SIA).
Again, when he wanted to participate in the strategic disinvestment of Air India, Ratan Tata wanted to collaborate with SIA. But both times, he was thwarted by vested interests in Indian aviation industry. The proposal made to the FIPB today speaks of a 51:49 joint venture between Tata Sons and SIA. The proposed investment is $100 million and the new airline will have three board members to begin with: Tata nominees Prasad Menon and Mukund Rajan and SIA nominee Mak Swee Wah.
Menon will be the airline’s chairman and the board will eventually be expanded with Tatas having more representation than SIA. In an e-mailed statement, Rajan said “Based on CAPA data for 2012, the number of domestic airline seats per capita is very low in India, at just 0.07. This compares with 3.35 for Australia, 2.49 for the USA, 1.38 for Canada and 1.05 for Japan.”
The Tatas obviously see a market for a full service carrier in India. Rajan also said greater competition in civil aviation in India will foster benefits for the passenger in terms of greater choice in fares and services. “With the right world-class partner, in Singapore Airlines, we are confident we can participate in the undoubted growth potential of the sector, and create significant value.” He said Tata Sons will fully participate in the management and operations of the airline.
This explains a lot of whys and wherefores for the new proposed airline joint venture but still, a few questions remain: 1) Why come forward with the proposal for second airline when there are enough naysayers for the LCC proposal and it is still not off the ground? 2) Though there is no bar on one promoter owning two or more airlines as per current guidelines in India, will competitors not cry unfair competition and drag this proposal to anti-competition bodies? 3) The airline industry is bleeding in India and has already seen the demise of full service airline Kingfisher; the second one, Jet Airways, is still to get life savings funds by selling out minority equity and full control to Etihad Airways while Air India continues in losses.
Why begin a full service airline with such market conditions? A Tata Sons’ spokesperson said the Tatas want to be in the airline business for the long term and they see huge untapped potential in the market. CAPA’s Kapil Kaul and KPMG’s Amber Dubey welcomed the announcement of a new full service airline by the Tatas. Dubey said “This will open up competition in the westbound routes from India.
Nearly 70% of global traffic from India is westbound – to Middles East, EU and Americas. With this JV, SIA gets a play in the growing international travel from India. SIA can also operate direct flights to Far East and Australia from India or route them through Singapore”. Kaul welcomed the saying India needs strong , well capitalized airlines with proven credentials.
But threw in a word of caution: “This announcement could play out negatively on Air Asia’s regulatory approval as TATA have 30% stake in the JV with Chairman from TATA Sons. More clarity is required from TATAs on their proposed airline investments.” Well, the Tatas will be keeping their fingers crossed.
