The most recent and most glorious chapters in the history of the 150-year old Tata group, are dotted with mega-acquisitions. Ratan N. Tata, better known as RNT, in his 21-year tenure as the group’s supremo, chose the inorganic route to scale businesses and give the group a global footprint. From Tetley Tea to Jaguar Land Rover, under RNT, the Tata group never shied away from an acquisition and there was always a sense that the next big deal was just around the corner.
But mergers and acquisitions are never as easy as they seem. Experts say only a third of all acquisitions end up being successful. The same is true of the big acquisitions made by the Tata group. While Jaguar Land Rover proved to be a big success, the acquisition of the erstwhile steelmaker Corus and various iconic hotels across the world by Indian Hotels Company Ltd have ended up being a drag on the balance sheet.
In the years since RNT’s retirement, the group’s drive for ambitious acquisitions appeared to have dissipated. Cyrus P. Mistry, who was ousted unceremoniously in 2016 as the group’s chairman, wanted to reorganise the group by getting rid of the costly and non-performing acquisitions of his predecessor. Mistry’s replacement and former Tata Consultancy Services chief Natarajan Chandrasekaran may not like to admit it but he hasn’t entirely given up on his predecessor’s plans to divest the underperforming acquisitions as can be seen from the merger of Tata Steel Europe (erstwhile Corus) with competitor Thyssenkrupp AG and the sale of its consumer mobile business to Bharti Airtel.
Instead of acquisitions, Chandrasekaran, better known as Chandra, looked within the group for consolidation. In an interview to Fortune magazine, soon after he took charge in 2017, Chandra said he plans to remake the group's portfolio so that it only includes large businesses that lead their industry. “Tata is already a $100 billion group. To get to the next level we need scale. We can’t do it with multiple small companies,” he had said.
No surprise then that till a few weeks ago, the Tata group’s name was rarely linked with any major acquisition. That was until India’s oldest private airline, Jet Airways, hit an air pocket that left the carrier’s founder Naresh Goyal hunting for investors.
A few years ago, this deal would have appeared to be the stuff of fantasy. After all, it was Goyal’s influence in New Delhi that prevented the group from re-entering the civil aviation space in the mid-90s and early 2000s. Yet, being the hard-nosed businessman that he is, Goyal has a penchant for forgetting the past when he needs it the most. Back in 2012, after opposing foreign direct investment in the airline business for years, Goyal threw his weight behind the reform and within months walked away with an investment from Abu Dhabi’s Etihad Airways.
Today, Jet Airways offers the Tata group a tempting proposition to become the second largest player in Indian aviation. Put together, Jet Airways and the two airlines where Tatas have a stake, Vistara and AirAsia India, have a combined domestic market share of 24.7%. The combined entity will also have 159 aircraft, both wide-bodied and narrow-bodied, with an average of nearly 21,830 monthly departures in the domestic market. And maybe most importantly, the acquisition of Jet Airways will mean the Tata group acquires the Indian carrier with the largest international market share among the airlines operating flights from India.
Those numbers are certainly compelling for the Tata group’s aviation ambitions which have hit a ceiling as the country’s aviation infrastructure fails to keep pace.
Back in August, when Fortune India met the management of Vistara, a full-service carrier and the joint venture of the Tata group and Singapore Airlines, it emerged that infrastructure has become the biggest hurdle for the airline’s ambitious growth plans.
Airports are simply unable to give new slots for airlines to expand and expansion plans of most of the airports will take another few years to complete. “It is not a Delhi or Mumbai problem anymore. Most of the airports across India are out of slots, at least for the times that you want them for. Up to maybe three years ago, we could still get some slots. But now it is very rare when you get a new slot,” Sanjiv Kapoor, the chief strategy and commercial officer at Vistara, told Fortune India before the preliminary discussion between the Tata group for acquiring Jet Airways begun.
According to analysts, an acquisition may be the only way to ensure Vistara keeps growing. “It is a business necessity,” says Gagan Dixit, an analyst with Elara Capital. “In India, the major airports, especially Delhi and Mumbai, have slot constraints. Vistara can’t grow if they don’t have access to Delhi and Mumbai. Jet Airways has a hub in Mumbai, so it is a natural way to grow which would otherwise be impossible,” he says.
Dhiraj Mathur, leader, aerospace and defence at PwC India, says that acquiring Jet Airways will be a huge leap for the Tata group’s aviation business. “To do this organically will take them 10-15 years. It is a quantum jump from being at the bottom of the pile to being number two,” he says.
Being No. 2 not only fits in with Chandra’s vision but is also almost a necessity if the group wants to be relevant in the aviation business in India. IndiGo, which has a 39.7% market share in the domestic market, is simply squeezing out the competition by deploying more capacity and engaging in a debilitating price war.
It is surprising to hear that an airline with more than twice the market share of its closest competitor complain of the competitiveness in the industry with regard to fares. But that is exactly what Rahul Bhatia, co-founder and interim CEO of Interglobe Aviation, the company that runs IndiGo, tried to portray in October after announcing the airline’s first quarterly net loss since its listing.
“You must understand that at IndiGo, we are not leading the charge in terms of low fares. We have never had that policy,” Bhatia said adamantly after being cornered by analysts on how exactly could IndiGo be bullied on low fares by its competitors.
The numbers belie Bhatia’s innocence when it comes to fare wars in the aviation industry. IndiGo’s revenue per available seat kilometre (RASK) fell nearly 13% to ₹3.23 in the second quarter of fiscal 2018-19 from ₹3.70 in the first quarter. During the second quarter, even year-on-year the fall in RASK was 8.1%. In comparison, Jet Airways which is being sought after by the Tata group actually managed to improve its RASK sequentially in the second quarter of 2018-19 to ₹4.16, which was also only 0.3% lower than the same quarter last year.
Bhatia’s airline will add 30% more capacity this financial year despite the numbers in a clear move to squeeze the other airlines dry at a time when costs are increasing. Vistara itself is in quite a precarious situation. Despite being a three-class offering full-service airline, the airline’s RASK resembles a low-cost carrier. In 2017-18, one of the best years for Indian aviation, despite reducing its annual net loss by 17% to ₹431 crore, its RASK grew less than 10% to ₹3.64. Having a RASK like Vistara’s is unsustainable for a full-service carrier. Even Air India’s RASK was a little more than ₹4 in 2017-18, according to officials in the know.
For Vistara, to survive this onslaught planned by IndiGo, it has to either raise fares and the management knows how difficult it is to navigate a price war. “Demand and supply is very elastic in India and there is only so much you can do with fares because you are in a brutally competitive market,” says Kapoor of Vistara. Being only domestic so far is not helping. Though the airline has stated its plans and intentions to fly abroad, it is still awaiting clearances from the government. An inquiry by the Central Bureau of Investigation into lobbying to ease the regulations for starting international by the Tata group is not expediting the process. “The fact that Vistara was set up as a three-class airline was because we always had an integrated domestic and international network in mind. Right now we are obviously disadvantaged by the fact that we are only domestic,” he added.
With the muscle power of Jet Airways’ capacity and its stature as an international carrier, the Tata group can make sure Vistara is well placed to take on IndiGo in the domestic market as well as fulfil its ambitions for an international network. But not matter how the acquisition of Jet Airways is structured, any deal will be complex.
Apart from Vistara, there is also the little matter of AirAsia India. The joint venture between the Tata group and Malaysia’s AirAsia appears to be the oddball. Where AirAsia India fits in if the Tatas do acquire Jet Airways remains unclear. There are media reports that the Tatas are planning to buy out AirAsia’s stake in the venture. Any such move would only make the acquisition of Jet Airways more complex.
On the one hand the Tata group has Vistara and AirAsia India, on the other is Jet Airways and its low cost offerings Jet Konnect and Jet Lite. That is five brands, four airlines, three different operating systems and two loyalty programmes which have three large international airlines as stakeholders. The Economic Times recently reported that the deal will first see an all stock merger of Vistara and Jet Airways where the Tata group, Naresh Goyal, Singapore Airlines and Etihad Airways will each own a stake followed by the exit of Etihad and Naresh Goyal in the next step. That is the financial complexity of the merger.
“The post-merger integration will be a challenge from an operational perspective, from a personnel perspective, logistics perspective, ground handling, ticketing, reservations, all of those issues. Then there will be financial issues... But that would happen in any merger,” says Mathur of PwC India.
Post merger integration has never been easy in the Indian market. With 15,293 people in 2016-17, Jet Airways was the largest employer among Indian airlines. Most of those employees have a close connection with the Jet Airways brand. The Tatas would have to decide whether to do away with the Jet Airways brand built over 25 years, or overlook the work done by its own team at Vistara. But crucially, integrating pilots and engineers and making sure everyone’s seniority is taken care of will be a gargantuan challenge. Pilots at Jet Airways can be as tricky to deal with as the ones in Air India with a large amount of unionisation. “We are monitoring the developments closely. Obviously we have a deep connection with the Jet Airways brand are proud to fly 9W planes [9W is the call sign for Jet Airways’ aircraft]. We have to ensure that our seniority and rank is not undermined if a merger happens,” said a senior Jet Airways’ pilot on condition of anonymity.
According to Gagan Dixit of Elara Capital, the other big integration issue to deal with will be the different types of aircraft in the fleet. Jet Airways’ has 225 Boeing 737 MAX on order while Vistara operates the Airbus A320neo. “Reduce cost by bringing operational efficiency, rework on network planning, re-negotiation with lessors will also be some of the challenges that the Tata group will face with the acquisition,” says Dixit.
Compelling as it may be, the acquisition of Jet Airways will be a very tricky one for the Tata group to manage. During RNT’s tenure it would have been safe to bet on the Tatas taking a risk and going ahead with the merger. But times are different today. Perhaps that is why the board of Tata Sons sought to play down the hype around the deal and said after its latest board meeting that discussions are only preliminary in nature and no proposal has been put forward. Does Chandra have the will to push through such a complex deal which in all likelihood will keep bleeding money for some years to come? Or will Chandra take the more cautious line of believing in organic growth and remain a bit part player in an industry dominated by IndiGo? An opportunity like Jet Airways may not even prop up later. Whether or not a deal takes place, this episode could well define Chandra’s legacy as the chairman of the Tata Sons.
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