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Air India’s Merger with Vistara

By Ritu Joseph (London Business School), Rhys Meredith, Kian Patel, Oliver Platts, Samuel McCrea and Velizar Zlatev (University of Bristol)

Photo: Praveen Thirumurugan (Unsplash)


Overview of the deal

Acquirer: Air India

Target: Vistara

Pro-forma value: $4.4bn

Closed date: Expected Q1 2024

Acquirer advisor: Bank of America

The proposed merger between Air India and Vistara demonstrates a clear trajectory for Tata's intention to rival leading Indian airline IndiGo which currently dominates India's domestic airline market. Tata acquired Air India from the government in 2021 for $2.2bn billion as the airline was heavily laden in debt due to the rise of competitive low-cost carriers.

Vistara, on the other hand, is a joint venture between Tata and Singapore Airlines founded in 2013, known for providing high-quality air travel and has performed well during the pandemic, unlike many of its counterparts. Singapore Airlines aims to obtain a 25.1% stake in the combined entity by injecting $250mn in Air India Group, suggesting that improving the quality of air travel is a priority. Optimizing the synergies of the merger, alongside an aggressive expansion plan and a rapidly growing market, sets the foundation for a profitable future - and presents another market for Tata to expand its wealth.

“The competitive dynamics in India are moving towards a two-pillar system around the Air India group and IndiGo. The two carriers combined are, in due course, expected to achieve a domestic market share of 75-80%. In the international market, they are expected to grow from 37.8% in 2Q23 to over 50%. This will redraw market and consumer power in the global arena back to Indian carriers, which have historically been dominated by foreign airlines." - CAPA India, an aviation consultancy and research firm

Company Details (Acquirer - Air India)

Air India Ltd (Air India) is a wholly owned subsidiary of the Tata Group and airline service company. The company offers passenger and cargo transportation services. It operates a wide range of aircraft under three categories, namely: wide body, narrow body Air India Express and Alliance Air. The company serves domestic and international destinations in Asia-Pacific, Europe, Africa, the Middle East and North America.

Founded in 1932 (Tata Airlines), headquartered in New Delhi, India

CEO: Campbell Wilson

Number of employees: ~11,000

EV: $2.2bn (as of 2021)

FY22 Revenue: $2.5bn

FY22 EBITDA: $416.7mn

Company Details (Target - Vistara)

Vistara is an Indian airline service based in Gurugram, India and was started as a 51:49 Joint Venture between Tata Sons and Singapore Airlines. The Indian Airline sector was one that allowed FDI in domestic airlines by foreign carriers of up to 49% in 2012, and a year later Tata and Singapore Airlines joined hands to plot a JV in India. Vistara is now the 6th largest domestic airline in India and offers premium services for high-end business travellers.

Founded in 2013, headquartered in Gurugram, India

CEO: Vinod Kannan

Number of employees: ~5,000

FY22 Revenue: $659mn

Projections and Assumptions

Short-term consequences

Tata acquired Air India back in 2021 to transform it into a world-class airline – offering a revamped customer proposition, safety, reliability, and on-time performance - and restore the airline’s battered reputation following years of traveller complaints over surly service, delayed take-offs and ageing seats. As well as consolidating its market position in low-cost flying, Air India will transform to offer full-service flying experiences for higher-end consumers. Vistara’s recognition for its hospitality services is a stark contrast to Air India’s traditional positioning as a low-cost carrier - an attempt to gain exposure across both market footholds.

The merged company can benefit from a larger combined airline fleet of 53 aircraft from Vistara and 113 from Air India, with potential to realise revenue synergies as Vistara’s fleet gains access to Air India’s more competitive time slots across domestic and international airports. There could also be an increase in profitability as there are realised economies of scale from streamlining operating costs such as staff, fuel, and maintenance.

The CEO of Air India, Campbell Wilson, recently appointed in June 2022, sent a strong message of plans to re-image Air India with plans for it to be fully integrated with Vistara by March 2024. Whilst it is unclear as to what management restructuring is taking place, the CEO of Vistara, Vinod Kannan, made a seemingly reassuring announcement where the future branding of Air India banked on Vistara’s management expertise and previously realised historic success.

Long-term Upsides

With its aggressive expansion plan and new CEO, Air India is ambitious to develop. The merger with Vistara will put the company in second place behind IndiGo which possesses almost half the market. The transaction is to be completed by March 2024 with Singapore Airlines investing $250mn in exchange for a 25% stake in the combined Air India Group. For Singapore Airlines, this will strengthen its relationship with Tata Sons for future cooperation and allow it to be part of the growth in the Indian market.

Air India’s recently unveiled transformation plan, named ‘Vihaan.AI’, sets out to establish the former national carrier as a flagship airliner in the next 5 years through aggressive investment in technology, sustainability and talent. The company will strive for at least 30% domestic market share while significantly growing its international routes. According to government projections, India’s civil aviation market is worth around $900mn and is expected to grow to over $4bn by 2025.

The consolidation will also make Air India the country's largest international carrier and second largest domestic carrier in terms of fleet size, commanding over 200 aircraft. Finally, using Tata’s brand name and focus, the reputation and trust in the company is, and will continue to be built stronger in the public. However, dominance over the budget airline IndiGo is unlikely without massive capital investments.

Risks and Uncertainties

This merger has several risks involved. Considering the long-term consequences of Covid-19, air travel has still not returned to its pre-pandemic level, and it is unlikely that it shall, given a seismic shift in businesses’ preference towards conducting business online. Additionally, IndiGo Airlines remains the market leader in the industry, commanding over half of the market share. Although the merger does have benefits, the overall profitability of this merger will depend on the ability of the two firms to penetrate the low-cost airline sector and win market share from incumbents such as IndiGo Airlines. "Even eating into 2% of IndiGo's market share will call for a lot of aggressive market strategies," Jitender Bhargava, former executive director of Air India, points out.

The second risk that needs to be accounted for is a cultural clash. The merger between Air India and Vistara is likely to have unintended cultural conflicts considering that the two airlines' operations and value propositions are vastly different. The ability of the staff of the two airlines to work together effectively will need to be assessed and is a major risk to the firm's growth.

Finally, India has had a long history of unsuccessful airline mergers - from Jet Airways-Air Sahara to Kingfisher Airlines-Air Deccan - due to reasons ranging from inflated deal values to soaring operational losses. However, with the combination of Tata’s AirAsia India with the Air India Express brand, the combined group will boast a 23% market share in the domestic airline market, backed by the international clout and capital of Singapore Airlines. Thus, investors view the merger as opportune and sound, although success will not come without expensive investment in new aircraft and overhaul of existing planes.

“Tata Sons 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. 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 program, unlock its significant potential, and restore it to its position as a leading airline on the global stage.” - Mr Goh Choon Phong, CEO (Singapore Airlines)


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