Who dares wins in SIA-Air India deal

Associate Editor, The Straits Times

So the worst-kept secret in aviation was finally revealed on Wednesday.

Singapore Airlines (SIA) announced that it is getting a 25.1 per cent stake in Air India following the national carrier's merger with Vistara.

SIA essentially gets a 19.4 per cent stake in Air India for giving up its 49 per cent stake in Vistara, and gets another 5.7 per cent in the Indian airline for an additional investment of $360 million. Hence the total stakeholding of 25.1 per cent.

India's Tata Group, which holds 51 per cent of Vistara, will end up with 74.9 per cent of the enlarged Indian carrier.

However, SIA's capital injection into the new Air India group could rise by another Rs50.2 billion ($843.5 million) if Air India decides to tap both its shareholders for additional funds for restructuring and expansion.

But this amount is payable only after completion of the merger in March 2024, and subject to whether the Indian carrier taps other sources of funds as well.

The exact amount of additional investment by each partner will be calibrated to maintain their 25.1 per cent:74.9 per cent respective stakeholdings.

SIA and Tata together initially invested about $100 million to start the Vistara venture in 2013. But, over the years, the Singapore carrier has put in a further $900 million or so in the Vistara project.

As widely reported, the deal gives SIA a firm foothold in the world's third-largest aviation market, which analysts also reckon has the potential to be the fastest growing.

Besides giving it a direct stake in a leading Indian carrier, SIA itself would also be in a position to establish a second hub in India.

While the potential gains for SIA are huge, the risks are not insignificant.

Government-owned Air India has been running on empty for a long time: The carrier lost the equivalent of $1.7 billion in the year to March 30, 2019, before Covid-19.

And earnings have nosedived further since.

Analysts fear that the financially weak airline will require increasing amounts of capital and resources to turn around and could become a drag on SIA's earnings over the next two or three years.

Investment houses like Credit Suisse believe it could take some time before SIA's stake in the enlarged Air India generates a sustainable positive return on investment.

Morgan Stanley reckons SIA's pro-forma earnings for the first half of 2022 would have been about 15 per cent lower if the proposed merger had been done on April 1, when its current financial year kicked off.

The Tatas, who founded the carrier more than seven decades ago only to see it nationalised by the Indian government, bought it back early this year with ambitious plans to revive and rejuvenate the "Maharaja" airline.

In the process, they are believed to have taken on some US$2 billion (S$2.7 billion) of Air India's debt.

A lot now rides on the success of the ambitious Air India transformation plan.

Known as Vihaan.AI, the plan targets industry leadership for Air India.

The objective of the plan is to grow the carrier's domestic market share from 23 per cent now to 30 per cent, while also rapidly expanding its international routes.

For a start, the combined entity will be almost five times bigger than Vistara, which, despite being ranked India's best airline, was starting to struggle to gain additional domestic and international slots.

To achieve its aims, Vihaan.AI envisages huge investment in talent, technology and upgraded customer service propositions.

It would also involve growing the enlarged Air India's fleet size (the combined Vistara-Air India entity will have 218 planes).

These are big asks and require significant resources. But they are not beyond reach.

The Tata Group is a formidable entity with deep pockets.

SIA's own internal resources include $17.5 billion in cash and bank balances, and $2.2 billion in committed lines of credit.

Meanwhile, Air India chief executive Campbell Wilson is a seasoned former SIA veteran credited with successfully getting low-cost carrier Scoot off the ground.

He knows what he is up against, and also knows that the resources at his disposal are huge.

Besides the financial backing of the Tata Group and SIA, he will also have direct access to operational expertise from SIA.

He will also start off with a robust network of 52 domestic and 38 international routes operating in an underserved Indian aviation market with a huge and fast-growing customer base of business and leisure travellers.

Critics often point to some of SIA's failed partnerships, especially the ill-fated tie-up with Mr Richard Branson's Virgin Group.

But SIA's partners in India are not an airline.

They are the Tata Group, a respected conglomerate which is widely regarded as the gold standard in Indian corporate governance and integrity. They also have a long-standing and close relationship with SIA.

Yes, the risks exist.

But so do the opportunities.

As the calling card of an elite military unit goes, "Who Dares Wins".



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