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What lies ahead for the Tatas as they set out to build a new Air India

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Air India and Air India Express returned to the Tatas nearly 90 years after the airline was founded by JRD Tata in 1932. Now that it has returned home, the journey wouldn't be all that smooth, but near term outlook looks good, says Ellara Capital.

What lies ahead for the Tatas as they set out to build a new Air India

Tata Sons has won the bid for Air India and its subsidiary, Air India Express, for a whopping Rs 18,000 crore and the news has spread cheer in the industry, but it’s going to be a huge challenge to rebuild the airline.

Rising Aviation Turbine Fuel (ATF) prices and stiff competition from other airlines as well as the Indian Railways in the post-pandemic phase are going to make the revival of the loss-making airline difficult, says a report by Elara Capital.

It believes the airline could achieve break-even by the third quarter, given that the third wave of coronavirus outbreak doesn't materialise. “If the third wave of COVID-19 does not materialise or is less severe, airlines may achieve PAT (profit after tax) break-even in Q3 of fiscal 2022. This may be underpinned by the removal of the airfare cap beyond 15 days, especially during the seasonal peak demand quarter of the year.
In the medium-term, however, concerns of competition are expected to intensify as Jet Airways receives and Indian Railways ramp up operations, it said.

Air India and Air India Express returned to the Tatas nearly 90 years after the airline was founded by JRD Tata in 1932. The Tatas now have a 100 percent stake in Air India and Air India Express and a 51 percent stake in AI SATS.

Of the Rs 18,000 crore enterprise value, the Tatas will shell out Rs 15,300 crore for debt servicing and Rs 2,700 crore will be kept as cash consideration. There were seven bids for AI in the preliminary stage, of which five expressions of interest were disqualified.

Only two bidders -- Tata Group and a consortium led by SpiceJet CMD Ajay Singh -- qualified for the financial bidding stage. The Ajay Singh-led consortium submitted an enterprise value of Rs 15,100 crore, of which Rs 12, 835 crore was for debt servicing and Rs 2,265 crore was to be given in cash.

The report said there was a huge possibility of revival for Air India post-privatisation as the Tatas will be more agile against the competition on technology, resource allocation, airfares, and decision making on route selection and aircraft order.

As per the airlines’ capacity deployment data of winter 2019, there was 39-41 percent capacity for each Indigo, SpiceJet and GoAir on the same routes where AI operated its fleet.

Other Tata Group airlines deployed much higher capacity against AI – AirAsia deployed 73 percent and Vistara 88 percent of its capacity on AI routes. It is likely Air India may trim its exposure against other Tata Group airlines to avoid unnecessary competition and focus on routes of Indigo, SpiceJet and GoAir.

“Control over non-fuel costs, strong growth in air cargo operations and lease rentals re-negotiation may act as silver linings going forward,” the report said.

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