SINGAPORE — TOC reported in October that the Tata group in India was in talks with Singapore Airlines (SIA) to merge their loss-making Vistara airline with the debt-ridden Air India recently acquired by Tata.
Tata officially acquired the national carrier of India, Air India, in January this year. Tata was asked to buy the perennial debt-ridden airline last year after the Modi government decided that the Indian government could not support Air India any longer. It had been making losses for more than a decade, since 2007.
The national carrier remained operational due to the continuous bailouts by the Indian government. In fact, the Modi government revealed that Air India was incurring losses of nearly US$2.6 million every day.
According to a former executive director of the airline, Air India “suffered for its inconsistent service standards, low aircraft utilisation, dismal on-time performance, antiquated productivity norms, lack of revenue generation skills and unsatisfactory public perception”.
Tata was reported to have paid nearly US$2.4 billion and taken on additional mountains of Air India’s debt in order to acquire the failed airline. After Tata took over Air India, it had been talking to SIA wanting to merge their Tata-SIA joint venture company, the Vistara Airline, with Air India. Tata owned 51 per cent in Vistara while SIA was 49 per cent and hence, Tata has the final say in Vistara.
Vistara was set up by SIA and Tata in 2013, as SIA wanted to follow Singapore’s former PM Goh Chok Tong’s direction to catch some “Indian fever”.
Publicly, Goh once said, “I wanted to infect Singapore with ‘India fever’… not only Singapore, but many other countries and investors around the world are excited about India.”
Since the establishment of Vistara airline, SIA has invested some $900 million into the venture, based on SIA’s own annual reports.
After being in operation for 7 years, Vistara has never made a profit. It ended the financial year 2021 in March with a Rs1.612 billion (US$19.7 million) loss. In 2016, it suffered a loss of Rs400 million, with losses increasing by the year since then.
Analysts said that Vistara’s cost structure is simply too high. Its shareholders SIA and Tata actually needed to pour in an additional Rs1.2 billion to prop up Vistara last year.
SIA Invests Another $360m
On Tuesday (29 Nov 2022), it was finally reported that SIA, forced by circumstances, decided to invest another S$360 million in the merged Vistara-Air India entity since without the investment, SIA’s share in the merged entity would drop below 20 per cent and it might not even get a board seat.
With the injection of S$360 million, SIA is able to get a 25.1 per cent stake and at least a board seat in the enlarged entity. Tata will own 74.9 per cent.
However, SIA might be forced to inject another S$880 million later if the Indian carrier decides to tap both its shareholders for additional funds for restructuring and expansion.
This amount is payable only after the completion of the merger in March 2024. In October, Air India has already announced that it wants to triple its current fleet of 113 aircraft to 300 over the next five years.
With the latest additional $360 million in Air India, SIA would have invested almost $1.3 billion in its India airline venture. This could rise to as much as $2.1 billion, should it have to provide funds for the enlarged Air India.
Defending SIA’s further participation in the airline venture in India, SIA CEO Goh Choon Phong, who continues to take millions of dollars of salary when SIA was making big losses during the Covid period, said that SIA’s partner, Tata group, is one of the most established and respected names in India. “Our collaboration to set up Vistara in 2013 resulted in a market-leading full-service carrier, which has won many global accolades in a short time,” he said.
“With this merger, we have an opportunity to deepen our relationship with Tata and participate directly in an exciting new growth phase in India’s aviation market. We will work together to support Air India’s transformation programme, unlock its significant potential, and restore it to its position as a leading airline on the global stage.”
However, he avoided mentioning that SIA’s participation in the Indian airline industry has been loss-making thus far. Analysts were also doubtful if SIA could get back its returns eventually.
For example, 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. How long a time it would take is anybody’s guess. One has to take note that many of the more than 10,000 staff inside Air India are still used to their old way of thinking while making losses for more than a decade.
Still, there are others who are optimistic about SIA’s India airline venture. Straits Times’ Associate Editor Ven Sreenivasan wrote, “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’.”
In any case, if SIA does not have enough funds to inject into its India airline venture at any time, it could always launch a new rights issue to raise more funds from its shareholders.
Presently, Singapore-owned Temasek Holdings is the major shareholder of SIA.