Tata Group’s bold move: Can it reimagine India’s aviation landscape?

By: Avinash Ghalke and Rohit Prabhudesai

From November 12th, Air India and Vistara merger will officially go through on the ground, as all flights and routes will be operated under former’s brand name. The merger of AirAsia and Air India Express has already gone through earlier and operationalised on the ground, which now means the Tata Group will have two airlines in its arsenal going ahead – Air India Express and Air India.

The two decisions are certainly bold, classic strategic ones in that they have wide-scale implications for the organisation and are difficult to reverse, should things go south. Merger of two loss-making entities, like in the case of Air India and Vistara, is especially concerning in this regard – for instance, Sears, a retail giant, merged with Kmart, another competitor in the segment in 2005, as both were struggling individually. However, rather than a turnaround, the issues were compounded further, as Sears filed for bankruptcy later.

However, unlike the Sears-Kmart merger, the Tata Group gets one thing right, the most fundamental and crucial one – the strategy perspective is in place. To understand what this strategy perspective means, it’s important to understand the context of the airline industry. Two types of airlines broadly fly in any given setting – low-cost carriers (LCC) and full-service airlines (FSA). LCCs aim to cater to price-conscious customers and attempt to woo their target segment by keeping their costs lowest against the fellow competitors on each route they fly, which then enables them to offer the lowest fares for those routes. FSAs, on the other hand, intend to provide relatively better experience to the flyer – through loyalty points, greater luggage allowance, as well as free meals and beverages. LCCs then, will have lower-than-average cost per seat flown, referred to as Cost per Available Seat Kilometre (CASK), while also having a lower-than-average revenue per seat flown, referred to as Revenue per Available Seat Kilometre (RASK). This is obvious as the cost to provide the service is lower than the industry average, and consequently, the revenue earned will also be lower than the industry average. On the other hand, the business model of an FSA works on higher-than-average CASK and RASK. Trying to achieve the best of both worlds (lower-than-average CASK and higher-than-average RASK) – can be catastrophic, as Kingfisher Airlines learnt in India and Monarch Airlines and Air Australia did overseas.

While most airlines in India gravitate towards the LCC segment, the lowest cost on a route can be achieved by only one airline. Thus, one sees only one airline emerging as winner while the rest often end up struggling. Case in point, AirAsia learnt it the hard way in its competition with Indigo, which has consistently posted the lowest CASK year-on-year since 2014, AirAsia’s entry year. On the LCC front, if Indigo could be matched toe-to-toe in terms of costs – whether on domestic or international routes – its dominance could be challenged, a realisation that has been the key driver behind the consolidation of its Air India Express and AirAsia, the Tata Group’s LCC vehicles in domestic and foreign markets.

Before the merger, AirAsia was a partially-owned subsidiary that served 19 domestic destinations. On the other hand, Air India Express was added to the Tata fold due to the Air India acquisition in 2019. Air India Express had become the Indigo of the Middle Eastern and Southeast Asian routes, keeping its CASK lowest and thereby achieving consistent profitability since Financial Year (FY) 2013-14.  The decision to merge both and fly under the Air India Express banner would allow the Tata Group to keep a simple value proposition to the LCC segment flyer – if you want lowest priced fares on routes you intend to fly – whether domestic or international – fly with Air India Express. Of course, the value proposition would require commensurate reduction in costs to do it successfully and sustainably – well below that of Indigo’s – an arduous task made slightly easy by the latter’s recent decision also to offer business class services and loyalty points, which would effectively end up raising its CASK.

In the FSA segment, Air India had often stepped onto a collision path with Vistara, given the similarity of the value proposition. With the merger now, it allows simplicity of operations and allows for brand and operational focus, a desperate requirement given the finicky nature of FSA flyers.

Overall, Tata Group’s strategic consolidation of its airlines positions it to potentially dominate both the LCC and FSA segments of the Indian aviation market. With Air India Express catering to the price-sensitive flyer and Air India positioned as a full-service carrier, the group has created a clear and focused value proposition for travellers. Streamlining operations and reducing redundancy across brands allows for greater operational efficiency, while also giving Tata Group the opportunity to lead both market segments.

However, while the strategy looks solid on paper, execution will be the ultimate deciding factor. In the highly competitive LCC space, keeping CASK at industry-leading lows is critical for offering unbeatable prices and challenging Indigo’s dominance. On the FSA front, providing a superior customer experience and fostering brand loyalty will be key to gaining traction in a market where service expectations are high.

The stakes are high in aviation, a sector that offers little room for error. If Tata Group successfully implements this strategy, it could emerge as a dominant force in Indian skies. But failure to manage the delicate balance between cost-efficiency and service quality could leave it in a precarious position, much like other airlines that have faltered before. In the unforgiving world of aviation, even minor missteps can lead to financial turbulence, and the road back from losses is often too steep to climb. For Tata, the challenge now lies in executing with precision and ensuring that these bold moves translate into lasting success.

About the authors:

Prof. Avinash Ghalke is an Associate Professor of Finance and Economics at SPJIMR, Mumbai, while Prof Rohit Prabhudesai is an Associate Professor of Strategy at the Goa Institute of Management.