A new Indian airline planned by the giant Tata Group and Singapore Airlines reaffirms the nation’s long-term potential as an aviation market, despite the sector’s current financial turbulence, analysts say.
Tata Sons, the holding company of tea-to-software conglomerate Tata Group, and SIA said this week they were setting up a full-service airline after two failed joint bids to take to Indian skies.
“This investment affirms India’s reputation as a lucrative aviation market in the long-run,” Amber Dubey, aerospace head at global consultancy KPMG said.
The US$100-billion Tata Group in 1932 pioneered air travel airline in India with Tata Airlines, later taken over by the government and rebranded Air India.
It will hold a majority 51% stake in the full-service carrier while SIA will hold 49% as they seek to exploit one of the fastest-growing aviation markets globally.
“The proposed airline has applied for Foreign Investment Promotion Board approval,” a Tata spokesman said.
However, the joint venture needs a slew of other regulatory approvals and it could be another year before it starts flying, analysts say.
Also, while India’s air passenger traffic has doubled over the last seven years, plans for the carrier comes as the sector is flying through rough weather.
All but one of the five main airlines is loss-making even though an increasing number of India’s population of 1.2 billion are flying.
India’s airlines are contending with the region’s costliest fuel, a falling currency, cut-throat fare rivalry and rundown infrastructure.
Still, SIA said it was investing in the carrier as “the Indian aviation industry is projected to experience future high growth rates”.
KPMG’s Dubey said, however, the new airline could prompt more consolidation in the Indian market, without naming carriers which could fall by the wayside.
“With growing competition, only four strong pan-India airlines may survive in two years,” he said, adding, “Others may operate in small niche markets and collaborate with the pan-India players.”
India’s two full-service carriers, Jet Airways and Air India, are seen as being hit hardest by competition from the new airline, analysts said.
Budget airlines account for 70% of passenger traffic. India’s other full-service airline, Kingfisher, controlled by liquor baron Vijay Mallya, has been idle since last year after running out of cash.
Still with India’s vastly under-penetrated air market, Sharat Dhall, who heads one of India’s biggest online travel agencies, Yatra.com, called the new airline “a welcome development… the market has tremendous potential for growth”.
Air travel penetration is just 0.04 air trips per capita a year, far behind developed countries such as the US with over two air trips per capita a year, according to government figures.
This marks the third foreign direct investment in the aviation sector since the government said last year foreign airlines could buy as much as 49% in local carriers.
The decision, overturning a 10-year ban, was part of a wider drive to draw more investment from abroad.
Earlier this year, the Tatas also announced a partnership with Malaysia’s AirAsia for a low-cost carrier in India in which it will own 30%.
That airline, to be based in the southern Indian city of Chennai, is awaiting government final clearance to take off.
Now the Tatas will be attacking India’s airline market from two sides — full-service and budget.
Analysts suggested that the Tatas dancing with two partners may cause friction with AirAsia. SIA and AirAsia are keen regional rivals.
But Tata officials ruled out conflict-of-interest between its two airline operations, telling the Times of India the Malaysian carrier “was in the loop about the new venture”.
The second foreign investment in the sector came In April when Abu Dhabi’s Etihad said it would buy a 24% stake in Jet.
In the 1990s, SIA and Tata sought to start an airline but the plan got shelved by government policy changes. In 2000, Tata and SIA partnered again to buy 40% of Air India but that proposal collapsed.
“The wheel has come full circle now” for Tata and SIA, said Dubey.