It has finally happened! Air India has been handed over to the Tatas. Is there a more worthy contender to take responsibility of Air India? While the turnaround will take time, the Tatas can bring to the table the much needed ‘war chest’, access to leadership and the Indian ‘ethos’ as a nation builder. As the Tatas and the government, in some way jointly, embark on this momentous journey a few pointers clearly come to the fore.

Given that Air India will no longer be the protected ‘national carrier’, its competitiveness needs to be in the league of IndiGo in the domestic market and that of Singapore Airlines, Emirates and the Etihad in international routes. While the domestic segment will demand a strong cost driven business model, competing in the international route entails successfully managing a ‘three-class’ configuration and clearly delivering undiluted value to the sub ‘sub segments’, again with a strong focus on cost optimisation

The ‘nuts and the bolts’ of the airline business hence boils down to ‘cost’, wherever and however you play. Cost per available seat mile (ASM) will be the focus in parallel with achieving ‘above industry’ metrics relating to on-time departures, load factor, average aircraft usage per day, airport turnaround time, aircraft age and other vitals, but at the same time providing superior flying experience to the passengers.

On paper, airline mergers do create scale economies and cost competitiveness. This however comes along with a lot of ‘ifs and buts’. Reducing diversity in the aircraft type, duplication of people, office space and routes and centralising procurement of aircraft, fuel and insurance play a key role. The global and Indian experiences show that achieving such synergies is an extremely daunting task.

The strength of Air India in one sense is its people. It has been the source for some of the best pilots and aircraft engineers in this part of the world; be it Emirates, Etihad, Qatar Airways, IndiGo or Jet Airways, their backbone of talent has always been from Air India. However, people integration will be the fundamental challenge in this case.

While IndiGo and SpiceJet have built their culture and people ‘brick by brick’, the Tatas are assembling together four different cultures and many aircraft types — from Air India, Air India Express, Vistara and AirAsia.

Resistance to change

Beyond cultural integration, bottlenecks are bound to arise in establishing a unified seniority, rank and compensation structure. The past has shown that resistance is generally so high that pilots refuse to fly the aircraft of other airlines that come into the fold as part of the merger, hence beating the very purpose of the merger.

The industry, employees and trade unions view this deal as a frontrunner for future government privatisations. The Tata management and the unions need to build enormous trust with a long-term perspective. This means the employees being ready to go through the required ‘pain’ to regain competitiveness. This can happen only through a credible leadership that can manage this behemoth.

Managing such complexities, in the midst of externalities, geo-political developments, future pandemics and volatility in traffic and fuel price that take a larger time to settle, is crucial.

For example, although Jet Airways was so well run for decades, it was unable to weather the external storm. How this acquisition will impact competition in this market and the response from the Competition Commission will also be interesting to see.

From a Tata group perspective, the reality is that some of its major group companies are not competitive enough in their respective industries; Tata Motors and Tata Steel, in specific. There have been a number of lessons for the Tata group over the last two decades; some of which have come at a high cost to the shareholders. These learnings need to flow into the Air India acquisition.

Tata Motors is now attempting to regain its lost glory. The phenomenal success of Tata Ace in the ‘1.0 tonne’ commercial vehicle category in 2005, has somewhat been overshadowed by the failure of Tata Nano which was as a result of an emotion-driven assessment of project viability, poor capability building and flawed execution.

The JLR acquisition and the volatility it brought in terms of topline and profits and the lack of synergies with Tata Motor’s Indian passenger car business was weighed on the company’s financials.

Although turnaround signs are seen with ‘new generation’ models like Nexon, Altroz and Harrier and a solid strategy for the zero-emission cars, Tata Motors is still lagging in competitiveness with a negative return on equity as of 2020 in comparison to Maruti Suzuki and the Mahindras which are clocking close to ‘double digit’ returns.

Again, Tata Steel’s highly leveraged buyout of Corus and the global economic downturn that followed had a deep setback on the financials of Tata Steel.

While risk-taking needs to be commended, ‘few’ emotional decisions seem to have had a profound impact on the group’s financials; something to watch for as Air India, again very emotional to the Tatas, is being turned around.

Many lessons

From the government’s perspective, there are many lessons to be learnt. The valuation of Air India has steeply declined over the last two decades.

When companies are not competitively run, with every passing day the they get more misaligned with the customers, markets, technology and skill sets, and the erosion in their value grows.

This is an important learning as the government has various other public sector jewels in its kitty, like the ‘navaratnas’, ‘mini navaratnas’, and the public sector banks; time is of the essence and focussed stakeholder-centric management and leadership is key.

The Air India case clearly tells us that the turnaround efforts are much more expensive than early privatisation to the ‘right’ suitors. Even in the aviation space, the government is still holding back Alliance Air and various aircraft maintenance repair and operations (MRO) businesses. A clear strategy on these will also add value.

The writer is Distinguished Professor Strategy & Accounting, Great Lakes Institute of Management