Dancing with the elephant

Tata group, finally, completed the acquisition of our national carrier Air India. In a way, this is a homecoming for the airline after a hiatus of more than seven decades. On one hand, while this may be a time for jubilation and celebration for the group, on the other hand, there are some serious deliberations to be made. Some tough decisions will need to be taken.

Some of the core issues that stare the conglomerate in the face are:

1. Overlap: The group already has a full-service carrier in Vistara and a low-cost airline in Air Asia India. Now, Air India will be the third addition to the list. The brand positioning, routes, consumer experience all will need separation. This will not be an easy task to achieve. Remember, Vistara now flies internationally too, albeit selectively. The group has, incidentally, quashed any merger talks for now.

2. Ageing feel: It’s no secret that the ageing fleet of Air India will need a significant change and that will need massive capital spending, time and effort.

3. Low-cost dominance: Strategically, Air India shall not be the most optimal fit in a market like India which has traditionally been dominated by low-cost airlines. The competition from this segment continues to mount and the Tata’s have been saddled with another full-scale carrier. It will not be an easy task to integrate the 5.9% share and turn it around.

4. The debt: The group will inherit a debt of almost INR18,000cr (including the existing inherited debt and government cash share). Even with a low-interest rate, the annual interest outgo will be around INR1,000cr. This will be added to the already existing loss that Air India makes. Note that Vistara and Air Asia India are yet to report profit since inception.

5. Cultural integration: The culture in a GoI entity and a conglomerate like the Tata group can be very different. The integration can be challenging, especially in the case of employee’s unions which may not be the easiest to handle.

The moot point is that the event brings a lot of uncertainty and can go either way in the next few years.  It’s almost akin to making the elephant dance, visually appealing, quite challenging but difficult to accomplish.

As investors, there is a big lesson to be learnt here. Always invest as per your risk appetite, never according to the prevailing market cycle or trend. Remember, you always compete with yourself and never others. Carefully analyze the time frame of investing, risk factors involved, and the purpose of investing and then make an informed decision.

I, personally, always like to invest in “Good & Clean” companies, which are market and economy agnostic and deliver steady long term returns, and help in wealth creation.