Air India's turnaround strategy begins to take off following privatisation

The strategy to turn Air India around after privatisation is taking off, analysts say. With a challenging and competitive operating environment in the Indian aviation sector and the legacy issues the carrier faces, it will not be an easy task and will require substantial investment. But aviation experts say there are promising signs that the airline is setting out on a growth path. “With the change of ownership to the Tata group , and further changes in the next 12 to 18 months, we will see the right business model emerging,” says Vivek Keerthy, Vice President, Capa India, an aviation consultancy. “We will see an increased focus on the product, reliability, on-time performance and strategic changes in the entire commercial and operational areas.” Tata Group formally took over Air India in January after the government's long-awaited privatisation of the debt-laden and loss-making airline in a 180 billion rupee deal ($2.2bn) for 100 per cent ownership. The transaction covered three entities — Air India, budget carrier Air India Express and AI Sats, a provider of ground and cargo-handling services. Tata, India's oldest and largest conglomerate with interests ranging from car manufacturing to steel, has a long history in the aviation sector. Air India was started by the group's founder JRD Tata in 1932 under the name Tata Airlines before it was nationalised about 20 years later. The group owns the airline Vistara in a joint venture with Singapore Airlines and budget carrier Air Asia India in a separate partnership. “The key challenge for the Tata Group would be [the] transformation of the organisation and its people, as well as integrating various airlines and brands under the most optimum corporate structure amid a hostile competitive environment and looming economic uncertainties,” Mr Keerthy says. All this will require significant investment, with Bloomberg News on Friday reporting that Air India is in discussions to raise at least $1bn in investment from private equity and sovereign wealth funds in the next few months, which could value the carrier at about $5bn. Air India has not turned a profit since 2007, when it merged with Indian Airlines. Following the change of ownership, however, a clearer view of the strategy to transform the carrier, which was bleeding taxpayers' money under government ownership, is coming into view. The airline in May announced the appointment of New Zealander Campbell Wilson as chief executive and managing director, its first foreign boss. He came from a background of a career with Singapore Airlines and was the chief executive of Singaporean low-cost carrier Scoot. Tata “took time in appointing a chief executive, but ever since the CEO has come, they have made very positive developments and announcements,” says Jitender Bhargava, a former executive director of Air India and author of the book The Descent of Air India . Air India has made a flurry of announcements in recent weeks related to its revival. On September 15, it unveiled its transformation plan called “Vihaan. AI”, a term which in Sanskrit signifies the dawn of a new era, the airline said. Under this plan, the carrier said that “over the next five years, Air India will strive to increase its market share to at least 30 per cent in the domestic market while significantly growing the international routes from the present market share”. It plans to focus “on dramatically growing both its network and fleet, developing a completely revamped customer proposition, improving reliability and on-time performance … and technology”, and that ultimately “the plan is aimed at putting Air India on a path to sustained growth, profitability and market leadership”, Air India said. As part of this growth plan and capitalising on its lucrative landing slots, Air India on Friday revealed that it would add 20 flights every week to Birmingham, London and San Francisco, to be phased in by the end of this year. This will increase the carrier's flights from India to the US to 40 from 34 a week, while it will add nine more flights to London, and five to Birmingham, in an effort to expand its international presence. This includes the airline reinstating a thrice-weekly service from the India IT hub, Bengaluru, to San Francisco. “As Air India reinvents itself under the Vihaan. AI transformation programme, adding frequency and improving connectivity from major Indian cities to more international destinations is a significant focus,” Mr Wilson said. He noted that this “comes just 10 months after Air India’s acquisition by the Tata Group. It is a clear signal of our intent, and an early step towards a much bigger aspiration”. The expansion of Air India's network will strengthen its position to allow it to better compete with its rivals, Mr Bhargava says. “There is no other Indian carrier operating to those destinations. So, the only competition is with the Gulf carriers and the western carriers.” Air India has been expanding its fleet to help in the growth of its network. Last month, it unveiled plans to lease 30 new Boeing and Airbus aircraft over the next 15 months, increasing the airline’s fleet by more than 25 per cent. Air India is looking at ordering up to 300 narrowbody planes, in what would be one of the largest orders yet for an airline, Bloomberg reported earlier this year. Fleet expansion and revamping the airline — from its aircraft cabin to brand image — will require substantial investment, but it is much-needed, experts say. “The first element for Tata is to reduce the quantum of losses [of Air India],” Mr Bhargava says. “Profitability cannot be achieved overnight. This is a phase when they will be focused on making investments.” Mr Keerthy says that profitability will be a two to three-year target for Air India. Air India is well-placed “to tap the significant potential in the international market” given its lack of competition from Indian carriers. “With the peak travel season around the corner, Air India appears ready for significant growth,” he says. Analysts noted that high fuel costs and a weakening rupee are headwinds for the airline, but there is also an environment of high airfares currently, which can help offset these expenses. “Rupee depreciation will adversely impact profitability given about 70 per cent of costs are dollar-denominated,” says Ashutosh Somani, an analyst at JM Financial, based in Mumbai. But when it comes to the domestic market in India, there are deeper challenges, with several carriers, including budget airlines, fighting for market share. “On the domestic front, the competition is likely to intensify, especially in the form of market leader IndiGo as well as new entrants such as Akasa Air and a rejuvenated Jet Airways aiming to corner a share of the domestic market over the next couple of years,” Mr Keerthy says. To better compete, there is mounting speculation about Tata merging its airlines – Air India, Air India Express, Vistara and Air Asia India. The Competition Commission of India in June gave the green light for Air India to acquire AirAsia India. A potential merger of Air India and Vistara “has a lot of merits considering economies of scale, market power and brand clarity … however, it may be too early to predict a possible structure due to several complexities involved including aspirations of other shareholders,” Mr Keerthy says. Staffing is another challenge for Air India as it expands, including finding pilots and crew, industry insiders say. Air India has a workforce of about 8,000 employees, which Tata has to keep on for at least a year following its takeover under the terms of the deal. But overall, there is optimism in the industry that the airline is on the right course. “Having the professional management at the helm, with the vision being very clear, we are looking for better days for Air India,” Mr Bhargava says.

Air India's turnaround strategy begins to take off following privatisation

Indian conglomerate Tata Group formally took over the loss-making airline in January