Full circle, after 7 decades: Tatas win back Air India
The divestment of Air India to the Tata Group is the culmination of a story that has come full circle after nearly seven decades.
Tata Airlines was formed in April 1932 under the leadership of Jehangir Ratanji Dadabhoy (fondly called JRD) Tata, India’s first civil aviation pilot, Tata Group Chairman from 1938 to 1991, and the only industrialist to receive the Bharat Ratna. The story of Indian commercial civil aviation began on October 15, 1932, when JRD took off on his first official Tata Airlines flight from Karachi’s Drigh Road aerodrome and landed ahead of schedule at what was then Bombay’s Juhu airstrip (actually the wetlands of Juhu beach) .
Over the next five years, Tata Airlines’ profits rose from ₹66,000 to ₹600,000, with 99.4% punctuality. The Indian princes loved the idea of airplanes linking their states with the outside world and Tatas’ business did very well ferrying the maharajas in special chartered planes. In 1938, Bobby Kooka, among the first employees at the company, designed the iconic Maharaja as the brand identity of Tata Airlines and a symbol of hospitality. It continues to remain the carrier’s identity 83 years later.
During the tumultuous post-Partition period, Tata Airlines had flown refugees from Pakistan to India and vice versa, a gesture acknowledged by Prime Minister Jawaharlal Nehru. In October 1947, Tata Sons proposed the establishment of a new company for international air service – Air India International. The proposal was accepted within three weeks by the newly-formed Government of India. Air India International’s first overseas flight from Bombay to London landed on-time (after stops at Cairo and Geneva) in June 1948. JRD was welcomed at the London Airport to a battery of floodlights and cameras, which had gathered to welcome the first Asian airline connecting the East to the West. Over the years, Air India International developed an admirable reputation for its high-class on-board service. It had made an icon of its airhostesses in their exotic silk saris.
However, clouds of nationalization were hovering over the civil aviation sector since independence. JRD opposed it on several platforms, and at a luncheon meeting with Nehru in November 1952, he even expressed his anguish at what he thought was a planned conspiracy to suppress private civil aviation, particularly Tatas’ air services. Nehru reassured him that there were no such intentions. All along, JRD’s contention was that the new government had no experience in running an airline company, and nationalization would mean bureaucracy and lethargy, decline in employee morale, and fall in passenger services. The government didn’t yield to JRD’s pleas and in 1953, Tata Airlines along with seven other domestic airlines were nationalized and rebranded as Indian Airlines while Air India International (the only international carrier in India) was nationalized and rebranded as Air India. The government invited JRD to lead both corporations. He accepted and became chairman of Air India and a director on the board of Indian Airlines.
Over the next 25 years he helped maintain high standards of service and micro-managed the carrier’s operational aspects. He wandered about on flights making notes of tiny details that needed to be fixed. If he saw a dirty airline counter, he would shame everyone by requesting a duster and wiping it himself. On one occasion, he rolled up his sleeves and helped the crew clean a dirty aircraft toilet. In later years, JRD even admitted that during the vital years of his chairmanship at Tata Sons, he was effectually dedicating nearly 50% of his time to Air India, an entity that provided no financial rewards to him or the Tata Group. Yet, through his personal example, he wanted to communicate that Public Sector Undertakings (PSUs) could be profitable by maintaining world-class standards. In 1970s, when Singapore Airlines (SIA) began attracting global tourists, it chose to collaborate with Air India to learn its world-class service standards.
In February 1978, the Morarji Desai-led government dropped JRD from the chairmanship of Air India and the directorship of Indian Airlines. The decision deeply impacted the man who had served the company for 45 years without a penny in remuneration. In 1980, when Indira Gandhi came back to power, she re-appointed JRD on the board of both airlines, though not as chairman. JRD continued to serve on the boards till 1986, the year in which Ratan Tata was appointed as the chairman of Air India.
In 1990, Prime Minister VP Singh’s government asked the Tatas if they would be interested in starting a new domestic airline. An opportunity of this kind had come their way after nearly four decades and the Tatas started putting together a proposal. But before things could take shape, the government fell. In 1994, under Prime Minister Narasimha Rao’s Open Skies Policy, the Air Corporation Act — the 1953 law under which air transport services were nationalized— was abolished.
The sector was now open to private players and the Tatas decided to enter the fray. While JRD had passed away the previous year, Ratan Tata, the new group chairman and an avid aviator too, led the charge. However, the following few years saw multiple coalition governments. Diverse political and vested interests prevented the Tatas from entering the civil aviation sector. In contrast, most of the newer breed of airlines were founded by small-time entrepreneurs – Jet and East West by travel agency owners, Damania by a poultry farmer, NEPC by a maker of windmills, and Sahara by a chit-fund owner. Lack of management expertise in a specialized industry and mandatory flights to non-economical social routes severely affected their financials. Consequently, most of them were grounded or acquired. It was only in 2014, after revised foreign investment norms permitted foreign carriers to invest up to 49% in air transport services that Tata Sons started Air Asia India, a low-cost airline, in partnership with Malaysia-based Air Asia Berhad. Six months later, they started Vistara, a full-service airline, in partnership with SIA.
In the 1990s, Air India’s market share steadily declined, and losses mounted. Passenger complaints, political interventions in day-to-day operations, impracticable policies, and bureaucratic delays had a deleterious impact on the national carrier. Between 1995 and 1997, it reported consolidated losses of ₹671 crores. In 2001, under the Atal Bihari Vajpayee-led government a decision on divesting 40% stake in Air India was taken.
The national carrier was an attractive investment proposition because of its lucrative slots at key airports, flying rights to global destinations, its fleet size and market share. A feasibility study conducted by Tatas and SIA revealed that robust-middle level managers at Air India would be an asset in turning around the enterprise. SIA and Tata Sons offered to take 20% stake each in Air India. When their joint proposal emerged as sole bidders, it was almost a done deal. Yet, attacks by rival airline lobbyists and opposition from unions marred the atmosphere. Discomforted by these developments, SIA withdrew its participation, and Tatas’ entry into the airline sector was stonewalled yet again.
In the last year of the Vajpayee-led government, Air Deccan, India’s first low-cost carrier (LCC) was launched. The idea became tremendously popular in India. For a 100-crore population, India was operating just 500 commercial flights every day; with a third of that population, the United States operated 40,000 commercial flights daily. The next few years saw several new LCCs enter the market including Indigo, SpiceJet, and GoAir. Between 2003 and 2010, the market share of LCCs increased from 1 to 70%, and Indian Airlines slipped from the first to the fourth position.
A steady decline
To arrest this decline, the Union Cabinet under Prime Minister Manmohan Singh decided to merge Air India and Indian Airlines. A government report highlighted two reasons for the national carriers’ sub-optimal performance. One was the ageing fleet of aircrafts and the other was the stand-alone operation of the domestic and international services.
Despite opposition from both state-run airlines, a new company (Air India Ltd.) was formed in 2007 to manage the combined entity. The merger process took four years for completion and had disastrous effects on the profitability of the new entity. Between 2007 and 2009, combined losses increased from ₹770 crores to ₹7,200 crores and borrowings rose from ₹6,550 crores to ₹15,241 crores. The merged company had over 30,000 employees i.e., 256 per plane, twice the global standard. Air India ended up spending almost one-fifth of its revenue on employee pay and benefits while other private airlines spent about one-tenth. Attempts to streamline employee base and cost-cutting led to repeated stirs and hunger strikes by its unions. Even before the merger, the Civil Aviation Ministry had decided to purchase 111 new narrow and wide-body aircrafts for a whopping ₹67,000 crores through debt. As a result, between October 2012 and March 2013, the merged entity suffered an average loss of ₹400 crores every single month.
Since 1996, India was consistently adjudged the world’s fastest growing domestic travel market with a year-on-year growth of 26.6%. By 2019, the Indian aviation sector had grown to become the fourth largest in the world with over 13-crore passengers flying every year with 13 Indian carriers and 500 aircrafts. It replaced Japan to become the largest domestic aviation market globally and was poised to reach the third spot in world aviation by 2026. Steady rise in income levels, stability in global oil prices, development of new greenfield airports, entry of new full-service carriers and LCCs, capacity addition by airline operators, reduction of taxes on Aviation Turbine Fuel prices (ATF), and new policies such as the UDAN scheme were key drivers of this phenomenal growth.
By the time Prime Minister Narendra Modi-led Government first put-up Air India for sale in 2018, the airline had succeeded in accumulating losses of ₹50,000 crores and a debt of ₹55,000 crores. Besides the huge debt, some of the key problems plaguing the airline included routing and network issues, lack of decisive leadership, managerial complications, and internal incompatibility between the merged airlines. However, there were no takers for the once iconic brand. In the pandemic years, the civil aviation sector was the worst hit, and the government prioritized the privatization of the ‘Maharaja’ with more attractive conditions in 2020-21.
Today, when India’s national carrier returns to its founding institution, one wonders, how different the face of Indian civil aviation would have been if JRD Tata’s plea 68 years ago, to not nationalize the sector, had been heeded.
Shashank Shah is the author of the national bestselling book, The Tata Group: From Torchbearers to Trailblazers.
Note for social media: His twitter handle is @DrShashankjshah