The Tata Group, an Indian multinational conglomerate, won its bid to buy state-owned Air India, bringing the flag carrier back to the company that founded it in 1932. The deal is worth 180 billion rupees ($2.4 billion).
As part of its acquisition, the Tata Sons — the holding company that owns the Tata Group — will assume $2 billion in Air India’s $8 billion debt and pay the government $400 million. When the deal closes, the conglomerate will own 100 percent of the flag carrier. Air India has not turned a profit for more than 15 years, and it is said to cost the government more than $3 million per day. In a statement announcing the deal, the ruling Bharitiya Janata Party (BJP) said the government has put more than 1 trillion rupees into Air India to keep it afloat.
Tata family scion J.R.D. Tata founded Air India in 1932 as Tata Air Mail. Shortly before India’s independence from Great Britain in 1947, the company rebranded the airline as Air India. The government of Jawaharlal Nehru, India’s first prime minister, took control of the airline in 1953 as part of its nationalization of key domestic industries.
“Welcome back, Air India!,” Ratan Tata, chairman emeritus of the Tata Group, wrote on Twitter, adding, “J.R.D. Tata would have been overjoyed if he was in our midst today.”
“It will be our endeavor to build a world-class airline,” current Tata Group Chairman Natarajan Chandrasekaran tweeted. But, as Ratan Tata added, “admittedly, it will take considerable effort to rebuild Air India.”
And therein lies the rub. Prime Minister Narendra Modi’s government has been trying to privatize Air India for several years, first as a partial sale before deciding to fully privatize the loss-making carrier. Rumored bidders over the years have included Singapore Airlines, Etihad Airways, several domestic rivals, as well as the Tata Group. But even as the government loosened the restriction on the acquisition and lowered the amount of debt any suitor would have to assume, most walked away. Until today.
The problem for Air India is that over the decades of its government ownership, it has become a bloated state-run enterprise, with all political factions accusing each other of adding to its bloat and handing out sinecures. The carrier’s labor relations have been toxic with employees fighting off any attempt to downsize, and the issue became a political football.
The Modi government is “cleaning the mess by successive Congress governments, which were too incompetent to solve any problems themselves,” the BJP said. The Congress party ruled India for decades after independence under the governments of Nehru, his daughter Indira Gandhi, and her son Rajiv Gandhi. India began liberalizing its economy in the 1990s, under the policies of then-Finance Minister Manmohan Singh, who later became a Congress Party prime minister in the early 2000s. Modi’s BJP government has been in power since 2014 after defeating Singh’s government in the elections.
Given all these problems, why would the successful Tata Group, which makes everything from tea to cars (including the Jaguar-Land Rover group), want Air India? The company said in its statement that the acquisition will add to its stable of carriers. The group already has a hand in two airlines: Vistara, a joint venture with Singapore Airlines, and AirAsia India, a joint venture with discounter AirAsia.
With privatization, the company can downsize the carrier without the threat of political interference. Details are scant as are any reactions from the company’s employee groups. Air India currently has about 8,000 employees.
The carrier’s 128-aircraft fleet is relatively young. Air India has roughly 30 older Airbus A320-family aircraft as well as 27 A320neos and 20 A321s, according to its latest fleet data. It has 27 Boeing 787-800s, 15 777-300ERs, three 777-200LRs, and owns four 747-400s.
But the real prize for the Tata Group is Air India’s international operating rights, slots, and route network. These were negotiated and acquired over the decades since the 1940s, when India still was the “Viceroy’s Territory,” as reflected still in the country’s “VT” ICAO tail numbers. No Indian carrier can match its network breadth, and since the demise of Jet Airways in 2019, no Indian carrier even comes close. SpiceJet and Indigo operate near-international routes mainly to Southeast Asia and the Middle East. Vistara has international ambitions — before the pandemic it operated flights to London, Paris, and Frankfurt — and has announced plans to fly to New York after getting U.S. permission to do so.
By contrast, before the pandemic, Air India operated flights within Asia, and to North America, Africa, Europe, and Australia. The carrier had 70 international routes and said it made two-thirds of its revenues from that network.
And perhaps the most lucrative asset for the Tata Group: Air India’s relatively large portfolio of slots at London Heathrow International Airport. It currently operates 10 nonstop routes to the slot-restricted airport. To put that in perspective, JetBlue Airways this year fought a long battle to eke out a single slot at Heathrow.
“On an emotional note, Air India under the leadership of J.R.D. Tata had at one time gained the reputation of being one of the most prestigious airlines in the world,” Ratan Tata said, referring to his forebear. “Tatas will have the opportunity of regaining the image and reputation it enjoyed in previous years.”
Avianca’s CEO Predicts Only Half of Business Travel Will Return
Avianca‘s new CEO Adrian Neuhauser in April took over a carrier that was a year into its Chapter 11 bankruptcy restructuring in the U.S., and which all but shut down early in the pandemic. It faced increasing competitive pressures from low-cost carriers in its home Colombian and Central American markets.
Six months later, and travelers are returning. Avianca plans to fly 65 percent of its 2019 capacity this winter. A bankruptcy exit is in its sights before the end of the year, and Neuhauser has a vision for a very different travel market once the Covid-19 pandemic is in the past.
Business travel, long the bread-and-butter of legacy carriers like Avianca, is gone in a significant way, Neuhauser said at the IATA Annual General Meeting in Boston on September 5. He disagreed with the optimistic outlooks of the likes of Lufthansa Group CEO Carsten Spohr and United Airlines CEO Scott Kirby, and shook his head before declining to comment on Emirates President Tim Clark’s prognosis of a full business recovery by the end of 2022.
“The threshold for a meeting to be in person has gone up,” he said. “We don’t think it’s a [down] 20 percent issue or 30 percent issue, we think it’s a 50, 60 percent issue of business travel going away. That impacts the entire design of our network, it impacts the entire design of our cabin — our commercial strategy.”
That severe — but possibly realistic — outlook shaped the reorganization plan that Avianca submitted to the court in August. Under that plan, the airline will add seats to its Airbus A320 family narrowbodies — A320s will go to 176 seats from 150 seats today — add more point-to-point routes from secondary bases like Medellin, Colombia, and San José, Costa Rica, and implement a long-planned commercial partnership on U.S.-Latin America routes with United.
Avianca still wants to be attractive to business travelers, even if it only sees half as many as it did before the pandemic, says Neuhauser. To that end it is keeping what he described as “differentiators” that set it apart from discount competitors like Volaris and Viva Air Colombia. One such differentiator is the passenger density on its aircraft, which Neuhauser said will be about 10 fewer seats on an A320 than budget carriers with a yet-to-be-named premium product up front. Avianca’s frequent flyer program, LifeMiles, also sets it apart from competitors while also being a “profit center” for the airline.
“We don’t want to lose our historical customers — we want to keep a differentiated product to address them but on the other hand we have to acknowledge that our competitors has a much lighter product,” said Neuhauser. “We try and find that balance.”
Nonstop flights from secondary cities, like Cali and Medellin to Buenos Aires, and San José to Los Angeles, are another type of differentiator. The new international routes — more than 22 have been announced since August — primarily target visiting friends and relatives (VFR) and leisure travelers, the primary flyer segments that Neuhauser said he sees growing out of the crisis. But they also allow Avianca to be more efficient, particularly when it main hub at Bogotá’s El Dorado Airport is congested and faces frequent weather issues.
“To the extent that we can make our Bogotá flying more point-to-point, we reduce the dependency of every [other point] and give [passengers] better service,” he said. “But it also means that the planes are in the air more, and planes are not generating revenue when they’re not in the air.”
Avianca is one of three major Latin American carriers restructuring under the U.S. Chapter 11 process. Aeromexico and Latam Airlines Group are also moving through the process. The former submitted its reorganization plan to the court on October 1 with a focus on growing its Mexico City hub and leveraging its relationships with Delta Air Lines and other SkyTeam Alliance partners. Latam has until October 15 to submit its plan.
With all the talk of Avianca differentiating itself from discount competitors, the reports of a potential merger with Chile’s Sky Airline — one of South America’s ultra low-cost carriers that Neuhauser wants to set Avianca apart from — is an interesting development. Asked about the reports, and he declined to comment but he did speak positively about consolidation in general terms.
“Do we believe in consolidation as a good thing for the industry across the region? We do,” said Neuhauser.
Avianca is not the only legacy Latin American carrier embroiled in merger talk. Azul has made public overtures for Latam‘s Brazilian operation. Latam has since ended its codeshare with Azul and said its business is not for sale, and doubled down on growing its Brazilian operation in the recovery. And Gol will acquire Brazilian regional carrier Map Transportes Aéreos in a combo that would boost its presence at São Paulo’s sought-after Congonhas Airport as well as in smaller destinations around Brazil.
The Avianca-Sky proposal is complicated. Reports indicate that the combo would be led by private equity firms Caoba Capital and Elliot Investment Management that are reportedly set to close a significant investment in Sky in October. Several Caoba executives either sit on the Avianca board or at those of its creditors, while Elliot holds an undisclosed share of the carrier’s $723 million debtor-in-possession Tranche B financing. The Tranche B debt will convert to equity in Avianca under the airline’s proposed new capital structure when it exits bankruptcy. That equity holding and other connections would, according to reports, be the basis for a merger with Sky.
Other Tranche B debt holders include United — Avianca’s commercial and potential future joint venture partner — Kingsland Holdings led by Roberto Kriete who was instrumental in Avianca Holdings formation as well as a co-founder of Volaris, and the hedge fund Citadel Advisors.
In a U.S. Securities and Exchange Commission filing on September 4, Avianca said it had “no knowledge” of any potential transactions considered by its Tranche B debt holders. This included any combination proposal with Sky.
The bankruptcy court is expected to rule on Avianca’s restructuring plan during a hearing on October 26.
Meanwhile, Emirates’ Clark Predicts Full Business Recovery Next Year
Emirates President Tim Clark and other global airline CEOs expect a full business travel recovery, a bullish outlook that has replaced the bearish views many held just months ago.
“I believe business travel will come bouncing back by the end of next year,” Clark said last week in one of the most optimistic international business travel recovery outlooks to date. He added that Emirates anticipates “very strong” business demand in 2023 and 2024 as well.
Clark’s comments at the IATA Annual General Meeting in Boston carry extra weight as Emirates relies nearly entirely on international travelers, a market that most other executives have said will come back slower than domestic demand due to border restrictions. He did not elaborate on whether certain international business markets would return before others.
Lufthansa Group CEO Carsten Spohr and United Airlines CEO Scott Kirby agreed with Clark’s forecast, especially when looking two- to three-years out.
Lucrative business travelers were largely missing from the early stages of the Covid-19 recovery. Holidaygoers and visiting friends and relatives travelers have filled planes around the world as vaccination rates have risen and restrictions eased. The return of corporate road warriors is the next necessary step for much of the airline industry to return to financial health. And, at least in the U.S., that was on pace to occur in September until the Delta variant put the brakes on returns to the office and many potential trips.
Kirby said he expects the U.S. business travel recovery to resume in earnest in January — after the year-end holiday season. This will include both domestic trips as well as ones to Europe, where borders are set to reopen in both directions to vaccinated travelers in November. Kirby reiterated his view that United will see its “best” summer period ever on the transatlantic during Summer 2022.
Few airline executives Airline Weekly spoke with at the event expressed doubt about the future of business travel. Not everyone was as bullish as Clark that it will be back next year, with many citing differences between domestic and international markets, but there was universal agreement that the segment will return. Lacking at the event was an executive like outgoing Southwest Airlines CEO Gary Kelly who has said that he does not see business travel recovering for at least a decade if ever.
Latam Airlines Group CEO Roberto Alvo — who is “confident” that business travel will recover — described two concurrent trends. Virtual meeting technology will replace some business trips for good, he said, but the rise of remote work will mean more trips as workers travel to offices for occasional meetings. While these trends may not be equal at first, the eventual result will be a return of the corporate segment for the airline.
“People like to travel, people like to meet with each other — and even if you say people were flying every other week and [now] they’re reviewing it, there’s a whole new generation waiting to travel and make a career,” KLM CEO Pieter Elbers said.
Energy Shock Ahead?
The world is heading toward an energy crisis this winter, as Europe struggles to meet soaring demand for natural gas and China grapples with rolling blackouts that have idled factories.
Oil prices reached their highest prices in three years last week, topping $82 per barrel for Brent crude. This marks an almost 60 percent increase since the start of the year. Investment bank Goldman Sachs forecasts oil prices to reach $90 per barrel by the end of the year, and $100 per barrel prices aren’t out of the question. The U.S. Energy Department is contemplating releasing oil from the Strategic Petroleum Reserve and reinstating the ban on crude oil exports, lifted in 2015, to alleviate prices, particularly for gasoline and diesel.
The Organization of Petroleum Exporting Countries last week agreed to raise production by 400,000 barrels per day and signaled that it is opposed to raising production further.
But the news may not be as bad as all that for airlines. Jet fuel demand still remains well below 2019 levels. U.S. Bureau of Transportation Statistics data show. In the U.S., airlines have burned through 8.6 billion gallons of jet fuel, which is almost 25 percent above 2020. But that year was down 44 percent from 2019.
The U.S. Department of Energy predicts there will be surplus of jet fuel this year, as demand has not kept up with supply. Inventory appeared to tighten this summer, the department said, but has stabilized after the Delta variant took a bite out of demand. Airlines so far aren’t’ worried about a spike in jet fuel prices this year, but the picture could change if and when demand returns. Holiday air travel demand is expected to be strong, but the balance of the fourth quarter could be 30-35 percent down from 2019.
IATA Pins Emissions Hopes on SAFs
IATA is pinning its hopes on reaching its goal of 2050 for net zero carbon emissions on sustainable aviation fuels (SAF), the group said during its Annual General Meeting (AGM) in Boston last week. Although SAFs are the most realistic way to achieve the industry’s goals, the problem of supply remains vexing.
Between now and 2050, the number of passengers is expected to go from 2 billion to 10 billion annually. “Sustainable aviation fuel is our biggest chance and our biggest challenge, but it’s known technology,” said Sebastian Milosz, IATA senior vice president of environment and sustainability. The industry has access to about 100 million liters of SAF now, but will need 450 billion liters by 2050, a 10,000 percent increase.
The appeal of SAFs is, of course, that they’re essentially a plug-in answer to the problem, usable by the in-service fleet and engines and fuel distribution systems. New technologies, like electric or hydrogen propulsion, likely will not be mature by 2050, especially for widebody aircraft. And given an aircraft’s lifecycle, it’s highly possible that aircraft going into service today still will be in service, although at the tail end of their useful lives.
Now, one ton of SAF is three- to four-times more expensive than a ton of standard jet fuel. IATA expects this cost to come down as more SAF is produced and as oil companies begin to focus their efforts on alternative fuels and as new feedstocks become available. More than 30 countries have policies to increase production of SAF, up from none just a few years ago, and IATA expects most to implement policies in the near-term, Milosz said.
In addition to SAF, IATA said it can reach its goals through new propulsion systems and offsetting and carbon capture programs. Operations and infrastructure — including the much-delayed Single European Sky, for instance — also will play a key role, IATA said.
‘Clear Nonsense,’ Walsh Says of Some Pandemic Testing Requirements
A final note from the IATA Annual General Meeting. The group predicts domestic air travel will be up to 73 percent of 2019 levels by the end of this year. International? Not as great. International traffic will be just 22 percent of 2019.
IATA blames weak international demand in part on a confusing set of restrictions around the world, which makes traveling less appealing and more difficult. As an example, IATA noted that of the 50 largest markets in the world, 24 require PCR Covid-19 tests; 16 permit antigen tests; and within that group, the details conflict. “It’s a total mess,” IATA Deputy Director Conrad Clifford said.
“Antigen testing is a good method, rather than a complex PCR test,” IATA Director General Willie Walsh said. Of countries that require PCR tests, Walsh said, “It’s clear nonsense.”
IATA is pushing for simpler rules, more uptake of digital travel and health passports, and fewer restrictions for vaccinated travelers. “Where people are fully vaccinated, they should be allowed to travel without restrictions and without testing,” Walsh said.
In Other News
- While its neighbor to the south wrestles with vaccine mandates for airline workers, Canada is going even further. From October 30, not only will all airline (and all transportation) employees need to be vaccinated, but all passengers traveling through Canadian airports will need to show proof of Covid-19 vaccines. Between October 30 and November 30, unvaccinated passengers can show proof of a negative PCR test taken within 72 hours of departure. But after November 30, that option disappears, and proof of full vaccination will be required. Passengers will be fined C$5,000 ($4,000) for each violation, and operators could face fines of C$25,000.
- Qantas and Emirates won approvals from the Australian and UAE governments to extend their commercial partnership until March 2023. The deal includes reciprocal loyalty program benefits and codeshares on 55 Australian destinations on Qantas’ network, and 50 European, North African, and Middle Eastern destinations on Emirates’ network.
- Lufthansa Group shareholders picked up 98.4 percent of the 598 million new shares sold under the group’s €2.1 billion ($2.4 billion) capital increase. The remaining 9.8 million new shares will be sold to institutional investors “soon.” Lufthansa launched the capital raise in September with plans to use the proceeds to repay its outstanding German state-aid by the end of the year.