TATA SIA Airlines: Silver lining in a dark cloud?

sia logoTWO big names joining hands – Indian conglomerate TATA and internationally renowned Singapore Airlines (SIA) – can’t go wrong. So it must seem.

Besides, both organizations are not new to the aviation business. The Air India that we know today started as Tata Airlines in 1932. It was renamed in 1946 and nationalized by the government in 1953. As for SIA, one of the world’s most successful airlines, it would be superfluous to say more. What is more interesting is how together, they have been trying to join force in the past 15 years but in vain for an Indian partnership, thwarted by political opposition – first, to start an Indian airline and then, in 2000, to buy a 40-per-cent stake in Air India.

tataNow that the political hurdle has been cleared, the new joint venture marks Tata’s re-entry in the Indian aviation scene and SIA’s increased presence for a bigger slice of the potentially large and growing Indian market. TATA SIA Airlines (TSA), 51-per-cent owned by the Tata Group and the remaining 49 per cent by SIA, plans to commence operations in September this year with 87 weekly domestic flights. Based in Delhi, the carrier’s ambition is to extend its operations beyond India.

Against the background of a typically perplexing and oscillating Indian aviation landscape, it is tempting to try and envision where TSA is heading for all the promise that the magic of their names brings. Experts will not deny the huge potential of the Indian market, the attraction largely based on a fast growing middle-class population which is expected to reach 550 million people by 2025. So, willy-nilly any airline – whatever the heritage or pedigree – should do reasonably well if it is able to keep its books in balance since the pie is large enough. Yet the history of Indian carriers entering and exiting the arena is far from indicative of the cornucopia waiting to be tapped.

The most noted failed promise is probably that of Kingfisher Airlines, which has shut down its operations since October 2012 when its flight certificate was suspended and its allocated flight entitlements for both domestic and international operations were withdrawn by the Indian authorities. Other airlines such as Jet Airways continue to the subject of possible takeovers by foreign carriers following the government’s relaxation on foreign ownership, but much as the potential of the growing market lures, prospective foreign investors are treading cautiously. Anything can change – without much of a warning – in the world’s largest democracy. Jet Airways which announced in April last year that it was ready to sell a 24-per-cent stake to Etihad Airways is still waiting for the deal to be signed.

But that’s the challenge of the Indian market as new entrants (and to no small degree veterans alike) grapple with pinning down the “right” formula for success. For SIA, the joint venture with Tata will open new windows of opportunities. SIA CEO Goh Choon Phong said: “It allows us to participate directly in this huge growth market. India is obviously one of the two huge engines of growth in Asia. It allows us, therefore, also to diversify our traffic base and not just be only dependent solely on Singapore base. And also because of the locations of both SIA in Singapore and this new venture in India, we see good commercial synergies in the future when this airline is set up.”

Clearly, SIA needs new channels and bases for growth considering the limitations of its home port’s hinterland, particularly as the competition shifts geographically with airlines carrying traffic through alternative ports and with more direct flights being mounted between destination ports. The strategy is not an SIA prerogative. Qantas, for one, is making Asia – more specifically China, the other engine of growth identified by SIA’s Goh – a priority in its transformation as a way to returning its international operations to profitability through partnerships with Chinese carriers and through establishing Jetstar bases in Singapore, Vietnam, Japan and Hong Kong. But the reputation that SIA has earned across the globe should stand it in good stead, and one would have expected anywhere.

Yet it is not a given, if the investment history of SIA is anything to go by. Its erstwhile undertakings in Virgin Atlantic and Air New Zealand were let go at losses. The performance of Tiger Airways of which SIA owns 40 per cent is far from being sterling as the Tigerair brand suffers from poor service and the competition, its Australian operations from a breach of safety that led to its suspension at one time, and the Group’s investments in loss-making carriers – namely Tigerair Philippines which has since been sold at a loss to Cebu Pacific Airways, and Tigerair Mandala Airlines (Indonesia) which it has said it is ready to let go. Will TSA go the way of SIA’s past and associated investments? Is this finally the silver lining in a historically investment dark cloud?

Courtesy Bloomberg

Courtesy Bloomberg

A regrettable observation of the latter years SIA is how the Singapore carrier seems to have taken steps back from making things happen. TSA is the chance for that spark. By all accounts, it should succeed over time. If there is one thing that will stand Tata and SIA above some of the other investors, it is their deep pockets. Tata could not have picked a better partner, which is popular among Indian travellers who continue to favour an airline such as SIA over the local counterparts, even if it means making a long transit stop at Singapore especially on routes to Australia, the United States and other parts of Asia. With SIA’s wholly-owned SilkAir and Tigerair (which has signed an interline agreement with SpiceJet) also operating to various Indian ports, it looks like an extensive complementary network that TSA is fitting into, although its focus is domestic.

SIA’s Goh did warn that “by no means do we think that this is going to be a walk in the park.” He was being realistic, if not cautious. The domestic competition is highly intense marked by cut-throat pricing. TSA will face that challenge, and both Tata and SIA would recall how resistance by rivals had in part scuttled their previous attempts to jointly enter the Indian market. Clearing the hurdle at the entry level will decide whether TSA will move on to the next level to achieve its long term ambition of operating internationally. The current regulation requires a carrier to operate for five years and only with a fleet of 20 aircraft before it is permitted to mount services beyond India. TSA is hopeful that the rule will be scrapped soon, as it plans to make the application before its fifth year.

Analysts are generally upbeat about the future of the Tata-SIA joint venture, with some believing it would outgrow SIA. So has SIA unwittingly found itself a competitor that will grow at its expense? This was quite unlike SIA’s first foray into the equity arena when it bought a 49-per-cent stake in Virgin Atlantic in 2000, following unsuccessful petitions to gain access across the Atlantic from London Heathrow; the Virgin stake could provide an indirect access to the US east coast but it turned out to be very much a passive undertaking which was lacklustre in almost every aspect operationally and financially. TSA is something closer to home. Yet it is an opportunity that SIA cannot afford to lose to some other party stepping in as Tata’s partner, in which case the opportunity cost may far outweigh the uncertain prospect of a future competitive concern. Unlike its participation in the Virgin stake, SIA’s familiarity with the Asian outlook may land it a more active board role. The question hangs on how much SIA is able to influence the destiny of TSA.

airasiaThere are no reasons why two giants cannot co-exist so long as they continue to find space for each other in the same room. As an aside, we note how AirAsia, an arch-rival of SIA although a budget carrier, has also entered into a joint venture with Tata and a third partner to establish domestic carrier AirAsia India, which has been granted an Air Operator Permit recently. AirAsia holds 49 per cent with the remaining 51 per cent split between Tata (30 per cent) and third partner Telstar Tradeplace (21 per cent). There was talk of a conflict of interest when the joint venture between Tata and SIA was announced. However, such arrangements are becoming increasingly commonplace in global aviation as we note how promiscuous and transitory airline relationships have become. Interestingly, AirAsia had earlier terminated a short-lived partnership with All Nippon Airways in a domestic budget carrier in Japan following differences in management, and AirAsia chief Tony Fernandes had said he would never again go into bed with another airline, hence his choice of partners for the Indian joint venture even though Tata was the founding father of Air India. It might have been more, perhaps, an issue of who’s the boss?

Tata’s bigamy only testifies to its ardour to fly again. The bedroom battles will provide fodder for drama in the continuing Indian saga. For now, given the frequent shifts in the Indian aviation landscape, TSA looks like a good bet for SIA.

This article was first published in Aspire Aviation.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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