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Tata's takeover of Air India faces turbulence as foes lash out

Burden of investment falls on family's shoulders after privatization

Tata Sons' less-than-stellar record in the airline industry does not bode well for Air India, which has seen better days.   © EPA/Jiji

MUMBAI -- Tata Sons' acquisition of troubled national carrier Air India for 180 billion rupees ($2.4 billion) last week is not only expected to face a political storm but could be a daunting task for the group, which has a checkered history in turning around companies.

Sale of the airline, which lost 97 billion rupees in the pandemic-hit fiscal year ended March, is already taking flak from India's opposition parties. Thomas Isaac, former finance minister of the southern state of Kerala, said Narendra Modi's government sold Air India for "peanuts." Subramanian Swamy, a parliament member from the ruling Bharatiya Janata Party and former cabinet minister, said he would try to block the deal in court.

Opponents are unhappy that cash flow-generating assets have been sold to Tata Sons while 460 billion rupees of Air India's debt will still be parked with a government-owned entity backed by real estate assets that may not cover the debt.

Yet analysts are not certain Tata got the best of the deal. Since 2009, Indian taxpayers have poured 1.1 trillion rupees into bailing out the airline, government officials said in the news conference to announce that Tata Sons subsidiary Talace Pvt won the bid for the airline. The sale plugs the financial drain for the government but shifts the burden of future investment onto Tata.

Statements by Tata Sons Chairman Natarajan Chandrasekaran and group patriarch Ratan Tata were long on nostalgia and short on detail about the strategy behind the deal.

Tata Sons Chairman Natarajan Chandrasekaran, left, and Ratan Tata, chairman of Tata Group, attend a corporate event in Mumbai in January 2020.    © AFP/Jiji

J.R.D. Tata founded the airline in 1932, only for it to be nationalized in 1953. "'On an emotional note, Air India under the leadership of J.R.D. Tata had at one time gained the reputation of being one of the most prestigious airlines in the world," Ratan Tata said, adding it now has "the opportunity of regaining the image and reputation it enjoyed in earlier years."

With the addition of Air India, the Tata Group will have a 25% share of the domestic airline market by capacity, making it the second-largest operator after Indigo.

The group also controls full-service airline Vistara through 51% of a joint venture with Singapore Airlines, and low-cost carrier AirAsia India, in which Tata Sons holds an 83% stake. The Air India deal brings with it a second low-cost carrier called Air India Express, which is likely to be merged with AirAsia India.

Vipula Sharma, head of infrastructure ratings at India-based Brickwork Ratings, said the Air India acquisition brings a long "to do" list for Tata.

''The group's managerial and financial fortitude will be tested in integrating the employees along with route and fleet optimization, given that several national and international routes were started for political reasons," she said. "The fleet has not seen any investment due to the company's poor cash flow in the last decade."

Tata's takeover comes as global aviation is still reeling from the pandemic. The industry is expected to report net losses of $52 billion in 2021, as per International Air Transport Association, an industry body. While a rebound in travel is underway, airlines now face rising cost pressures, including higher fuel prices, according to IATA.

"Airlines is an ultracompetitive industry with limited potential to make a difference in terms of market cap for a group as large as Tata," said Nirmalya Kumar, a professor at Singapore Management University. "The total cash losses from 'Tata' airlines will be a billion-plus dollars annually for the foreseeable future."

Intense price competition means Vistara has the cost structure of a full-service carrier and fares that, for the most part, are no higher than that of low-cost carrier Indigo, according to Kumar, who was previously a member of Tata Sons' Group Executive Council. The bankruptcy of rival Jet Airways in 2019 momentarily lessened competition, but Jet plans to resume operations next year.

"Tata has not demonstrated any competence in managing the two airlines they own over the past seven to eight years -- both always loss-making -- to convince any objective observer that they can make a difference," Kumar said.

The Tata Group also has few success stories from acquisitions in other industries to draw upon. It is still losing money on Corus Steel in Europe and luxury carmaker Jaguar Land Rover. Tata Tea did make a profit on its stake in beverage company Energy Brands, known for its Glaceau drinks, but that was by selling it on quickly to Coca-Cola in 2007. The history of poor acquisitions caused a rift between Chandrasekaran's predecessor Cyrus Mistry and the Tata family.

Tata has a checkered acquisition history, turning a profit on beverage maker Energy Brands but still losing money on Jaguar Land Rover. (Source photos by Reuters and Getty Images) 

With last week's deal, Tata gains access to Air India's fleet of 117 wide-body and narrow-body aircraft and Air India Express' older fleet of 24 narrow-body Airbus 320 aircraft. It will dominate domestic business travel, since Indigo does not offer business class as yet. And the deal brings international routes and landing and parking slots all over the world, plus a 50% stake in Air India SATS, an in-flight caterer.

But one of the early bidders for Air India lost interest after receiving negative feedback from assessors on the life of the aircraft fleet. "We decided to invest in a new airline rather than invest in Air India where the risks were higher," said the person representing the entity, who refused to be identified due to a nondisclosure agreement.

"There are several challenges before the Tatas, like changing the work culture of a [government] company to that of a private sector company," said Jitender Bhargava, former executive director of Air India, who authored a book about the company, ''The Descent of Air India."

But he said there are also benefits of the airline's return to the private sector.

Top management in India's state-owned airline spent almost half its time dealing with queries and demands from Ministry of Civil Aviation officials and members of parliamentary committees, Bhargava said. Since 2003, Air India CEOs were government officials who had no experience in running an airline, even as financial performance deteriorated. Aircraft acquisition contracts were decided by the politicians in New Delhi rather than in the airlines' Mumbai headquarters.

"I agree that Air India is not as good an airline as it ought to be, but it is not as bad as an airline as it is often made out to be," Bhargava said. "The Tatas have a formidable task in hand."

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