SIA to Take Air India Stake Through Vistara Deal

Edward Russell

December 5th, 2022

Air India and Vistara are to merge under a deal between Tata Sons and Singapore Airlines that also secures the latter’s foothold in the rapidly growing aviation market. The combination, which has been speculated about for months, will solidify Air India’s position as India’s second largest airline with, for now, 218 aircraft. The carrier would be second to only IndiGo in the domestic market, and the leader internationally. But, importantly for Air India’s business — and other airlines in the market — it would begin the rationalization of the highly fragmented Indian market.

“The enlarged [Air India] will … be able to achieve scale synergies, seamless connectivity on domestic and international routes, as well as optimization of its route network and resource utilization, enabling it to offer more choices and better connectivity for consumers, while creating a champion that can compete effectively internationally,” Singapore Airlines said of the deal in a Singapore Stock Exchange filing last week.

Singapore Airlines, which owns 49 percent of Vistara, will make a $250 million investment and receive a 25 percent stake in the expanded Air India as part of the deal.

Airlines in consolidated markets, like in the U.S., are consistently more profitable than peers in more fragmented markets. This financial performance can lead to more capacity growth, as well as passenger experience improvements. The pandemic has proven a catalyst for consolidation in markets from Latin America to Europe and South Korea.

Many have expected consolidation to come to India since the Tata Group took over Air India earlier this year. Tata already owned stakes in AirAsia India and Vistara, making both airlines prime targets for integration into the larger Air India franchise, which also includes Air India Express. Malaysia’s Capital A, which jointly owned AirAsia India with Tata, sold its stake in the budget airline to the Indian conglomerate at the beginning of November. And Singapore Airlines said in October that it was in talks with Tata over a potential Air India deal.

In addition, Tata has hired Singapore Airlines veteran Campbell Wilson to lead Air India. He was most recently CEO of the Singaporean carrier’s budget arm, Scoot, after more than two decades at Singapore Airlines itself.

The new Air India, including budget airlines AirAsia India and Air India Express (expected to be combined in 2023) and now Vistara, had a 23.5 percent share of Indian domestic passengers during the nine months ending in September, according to Indian civil aviation authority DGAC. They had a 23 percent share of international passengers in the second quarter. IndiGo, the country’s largest airline, had a 56 percent domestic and 15 percent international share during the respective periods.

IndiGo executives have, so far, brushed off any concerns over the resurgent Air India. “Whether it’s older airlines or newer airlines, they are all run by very professional veterans of the industry. So far we see no irrational behavior by anyone,” then CEO Ronojoy Dutta said in August. Dutta stepped down as CEO in September and was replaced by former KLM chief Pieter Elbers.

One challenge for Air India will be to maintain Vistara’s high service quality while combining the two airlines. The latter is viewed as offering better service than the former, which for decades struggled under state ownership.

In recent months, Air India has announced deals for additional aircraft and expanded international flight offerings. Earlier in November, the airline unveiled a new daily flight between Mumbai and New York JFK, and plans to resume flights between Delhi and Copenhagen, Milan, and Vienna in early 2023.

The Air India and Vistara merger is expected to close by March 2024 pending regulatory approval.

Edward Russell

Cathay Pacific’s Comeback

Though it only publishes financial results after the second and fourth quarters, Cathay Pacific held a call with investors on November 25, providing an update on current market conditions. Finally, Hong Kong’s airline market is showing signs of recovery, triggered by relaxation of quarantine rules on airline crews and foreign visitors earlier this fall.

Traffic connecting through the city, which held up relatively well during the crisis, is now growing as Cathay adds back flights and destinations. Hong Kong residents are starting to travel for leisure again, sparking a jump in demand to Bangkok, Singapore, and Seoul in early October. After October 11, when Japan removed quarantine restrictions on visitors, demand to cities like Tokyo quickly increased as well.

Mainland China, a crucial market for Cathay, is still producing outbound travel to Hong Kong and beyond. But inbound demand to the mainland is constrained by rules from Beijing prohibiting inbound international connections via Hong Kong. Flight capacity to the mainland, furthermore, is severely constrained — Cathay is still permitted to operate just one flight a week to Shanghai. At this time in 2019, according to Diio by Cirium, the airline plus Cathay Dragon, which was merged into Cathay proper during the pandemic, was running as many as 51 flights a day to the mainland.

With outbound Hong Kong leisure demand normalizing fastest, Cathay’s low-cost subsidiary HK Express is seeing a quick recovery — it expects to be back to pre-Covid capacity levels by March. Cathay’s mainline passenger operation, by contrast, was operating at just 21 percent of pre-Covid capacity in October (it was 4 percent in the first half of this year). The goal is to reach 70 percent by the end of 2023 and 100 percent a year later. As for cargo, a critical source of profits during the crisis, conditions remain strong, though not as super-strong as they were during the holiday shipping peak a year ago. Cathay is now operating about 60 percent of pre-crisis cargo capacity.

Overall, Cathay assured investors that its liquidity levels are healthy — no concerns about running low on cash, in other words. It did need a major government bailout to survive the pandemic, but that’s hardly unusual among major global airlines. It likewise assured investors that it has adequate staffing to rebuild its flight network. It hopes to start generating positive cash flow from its operations in the second half of 2023. Likely weighing on 2023 earnings, however, will be Cathay’s 18 percent ownership stake in Air China, which means 18 percent ownership of the latter’s heavy losses. Economic challenges will be formidable as well, with China’s economy not nearly the growth dynamo it once was. On the other hand, tumbling oil prices are a blessing of the highest order.

“I think overall,” said chief commercial officer Ronald Lam, “we are definitely seeing bright light at the end of the tunnel. Hong Kong is coming back, and Cathay Group is coming back.”

Jay Shabat

Singapore Airlines, Thai Airways to Partner

Singapore Airlines plans a partnership with its long-troubled neighbor Thai Airways, in a strategic move that comes just days after it revealed plans to take a 25 percent stake in an upsized Air India.

The two airlines, both members of the Star Alliance, plan an extensive codeshare agreement under the pact. The tactic improves the marketability of each other’s flights in global distribution systems. This will begin with flights connecting Singapore and Bangkok and, by the end of the first quarter of 2023, it will expand to select routes between Singapore and North America and South Africa. Routes to India, Europe, and Australasia will likely follow.

The cooperation is unlikely to end there. The carriers also pledged to explore “wide-ranging commercial collaboration,” mentioning areas like loyalty, customer experience, airport lounge access, and airport ground services. There was no mention, however, of exchanging any ownership stakes. Both airlines are controlled by their respective governments, though Singapore Airlines is partially publicly traded. Thai Airways had publicly traded shares as well until filing for bankruptcy during the pandemic. It does not foresee re-listing again until 2025 at the earliest.

Singapore Airlines has long sought partnerships and allies to hedge its heavy exposure to its namesake market. As longtime CEO Goh Choon Phong explained during a discussion of the company’s latest earnings in November: “The reason why we have looked at a multi-hub strategy is because Singapore is a really small market, with five to six million people. We do not have a hinterland of domestic network that many other big countries have, so there are growth limitations based on the Singapore market. We are mitigating some of that, through all kinds of partnerships.”

The approach has not always met with success. Singapore Airlines infamously overpaid for a 49 percent stake in Virgin Atlantic not long before the September 11, 2001, attacks; the stake was eventually sold to Delta Air Lines. Investments in Australia and New Zealand, first with Ansett and later with Virgin Australia, ended badly — both carriers would end up in bankruptcy. A joint low-cost longhaul venture in Thailand, NokScoot, was another failure. Earlier attempts to buy a stake in Air India, as well as a plan to invest in China Eastern Airlines, would have resulted in heavy losses had they happened. Just prior to the pandemic, Singapore Airlines flirted with the possibility of buying a stake in the Korean low-cost carrier Jeju Air.

Singapore Airlines has joint ventures with Lufthansa, SAS, and Air New Zealand, and unveiled plans for one with Japan’s largest airline, All Nippon Airways, in early 2020.

The Singaporean carrier is clearly keen on cooperating with rivals. The latest announcement regarding Thai Airways follows earlier partnership announcements with Malaysia Airlines and Indonesia’s Garuda in Southeast Asia. Last fall, Singapore Airlines expanded its codeshare with United Airlines in the U.S., a market where the carrier is growing aggressively using new ultra-long-range planes. And just last month, it reaffirmed its collaboration with Virgin Australia, now restructured and under new ownership post-bankruptcy. Then came its recent plan to merge its affiliate Visatra with Air India.

Pressure was building at Singapore Airlines, long one of the industry’s profit champions before producing a steady string of mediocre profits during the 2010s. Prior to the 2008-09 global financial crisis, it was a “battleship in a sea of shipwrecks,” as Airline Weekly once called it. But Asia’s airlines would improve, and competition would intensify, from low-cost carriers, Gulf carriers, and others. The pandemic naturally proved difficult in the extreme, not least because of Singapore Airlines’ heavy dependence on intercontinental premium traffic, during a time when the only area of salvation was domestic leisure flying. A large and quickly administered injection of government support, however, forestalled the need for a bankruptcy restructuring of the sort undertaken by Thai Airways. Robust cargo revenues also helped Singapore navigate the Covid crisis.

Now that the crisis is largely past, Singapore Airlines is earning some of its best profit margins ever. During the July-to-September quarter, its 15 percent operating margin ranked highly among all airlines tracked by Airline Weekly (see By The Numbers). This was also fifth best among airlines that operate widebody planes. Cargo continues to be a key contributor in 2022. But more importantly, longhaul premium traffic is back, in some ways stronger than ever — longhaul yields are extremely high. In stark contrast to the heightened competition Singapore Airlines faced throughout the 2010s, competitive capacity is now in retreat.

An example of that: Thai Airways, including its Thai Smile budget operation. Its capacity, according to Diio by Cirium, is down a massive 48 percent this quarter, versus the fourth quarter of 2019. (Singapore Airlines capacity, including Scoot, are down just 17 percent). Thai Airways now needs to reinvent itself as a much smaller carrier. And cooperating with Singapore Airlines provides it a way to retain some of the market reach it has lost by exiting so many markets.

Thai Airways was itself a rock-solid profit generator once, with a decades-long streak of making money hauling tourists to Thailand’s cities and beaches. But low-cost competition from AirAsia, Lion Air, and VietJet made the 2010s a decade of financial misery for the flag carrier, culminating in its bankruptcy filing in 2020. It has since cut roughly half of its workforce while renegotiating aircraft leases and simplifying a notoriously complex fleet. Something seems to be working. Like Singapore Airlines, Thai did well last quarter, earning a 12 percent operating margin.

Jay Shabat

In Other News

  • AirAsia, now under the corporate umbrella known as Capital A, is finally starting to awaken from its pandemic nightmare. Travel and tourism within Southeast Asia, or ASEAN, most importantly, are reviving steadily following the lifting of international border restrictions in most of the airline’s key markets. China, though, remains largely closed. In the third quarter, it was operating just two-thirds of its pre-Covid domestic capacity, and just one-third of its international capacity. By November though, it was back to flying 125 planes, which should reach 140 by year end, and 205 by the second quarter of next year. Nearly all furloughed staff have been recalled. Still, Diio shows scheduled seats for AirAsia’s core Malaysian operation this month is still down 40 percent from the same month in 2019. Seats at Thai AirAsia are down 24 percent. Its Indonesian joint venture is down close to 50 percent. The Philippines joint venture is down 32 percent. AirAsia Japan closed during the pandemic while the group’s 16 percent ownership stake in AirAsia India has been sold to Air India. The group now plans to integrate AirAsia X, until now a separately traded company specializing in widebody longhaul flights, into AirAsia. Also within the group is a maintenance division that’s seeking more third-party customers. It has a logistics arm and mobile app business as well.

    Did AirAsia’s core airline operations make money in the third quarter? The company’s notorious convoluted accounting makes it difficult to tell. Groupwide operating margin, removing what appear to be special items, was positive 2 percent. The company remains distressed though, enough so to be under special watch by Malaysia’s stock market. As a so-called “Practice Note 17” company, it is required to submit a proposal describing how it plans to restructure and revive. Management claims that “a recession will actually be a positive for us in the low-cost aviation space as people trade down to shorter flights and cheaper flights.” Perhaps. More certain are the benefits it will enjoy from falling oil prices. ASEAN currencies, meanwhile, having lost a lot of value versus the U.S. dollar this year, have recently started to reverse course and appreciate — that’s good news for AirAsia and other airlines purchasing their fuel and aircraft in dollars. It says, by the way, that it faces no manpower shortages.
  • SAS is making progress on its restructuring program, SAS Forward. The airline has reached deals with 80-90 percent of its aircraft lessors amounting to 1 billion Swedish kroner ($95 million) in annual savings; SAS targets 1.8 billion Swedish kroner in aircraft and maintenance savings. Lessors were the creditor group that SAS highlighted as a sticking point in its cost savings efforts prior to filing for U.S. Chapter 11 bankruptcy in July. But while restructuring progress was made, its pre-tax loss for the fiscal year ending in October widened by 1.3 billion Swedish kroner to 7.8 billion Swedish kroner. Chief Financial Officer Erno Hilden described it as a “heavy” loss during an earnings call last week, citing both higher fuel prices — up 215 percent year-over-year — and a 2.9 billion Swedish kroner hit from the strong U.S. dollar. The pre-tax losses are expected to continue with a 4-5 billion Swedish kroner loss forecast for the 2023 fiscal year. Otherwise, the trend SAS sees is good: Revenues are rising quickly, as are yields. Unit costs are also up but, as CEO Anko Van der Werff said, the gap is closing between unit revenues and costs. And, as far as winter and the uncertain economic outlook go, SAS has yet to see any “signs of increasingly strained macroeconomic impacts on our booking levels,” Van der Werff said. SAS aims to exit Chapter 11 in the second half of 2023.  
  • As expected, Avianca and Viva Air have appealed the rejection to their proposed merger by Colombian regulators. The airlines are offering to divest a number of slots at Bogotá’s congested El Dorado airport, maintaining Viva’s brand and business model, cap fares on three routes where the airlines are the only operators, codeshare with Satena on certain regional routes, and maintain Viva’s interline agreements as concessions to Aerocivil. Viva CEO Felix Antelo spoke of the necessity of the merger for the airline’s future in an interview with Airline Weekly in October, and said “staying independent in aviation in the 2020s is not an option.”
  • Speaking of dealing with regulators, Allegiant Air and Viva Aerobus have requested that the U.S. Department of Transportation tentatively approve their proposed joint venture. While acknowledging that they cannot implement their U.S.-Mexico pact until the FAA upgrades Mexico’s safety rating to Category 1, the airlines told the DOT that tentative approval would allow them to move forward with, for example, needed backoffice investments to implement the pact. Allegiant, for example, must upgrade its reservations and other systems to support international flying. In addition, the airlines noted that antitrust approval from the Mexican regulator, COFECE, expires on April 11, 2023; though COFECE could extend that by six months. “Continued delay will cause harm to United States consumers,” Allegiant and Viva Aerobus argued. Allegiant promised to begin its own flights to Mexico in the second or third quarters of 2024 if the DOT tentatively approves the partnership by April.
  • Norwegian startup Flyr has a new CEO. Chief Financial Officer Brede Huser took over after former CEO Tonje Wikstrøm Frislid left the company at the end of November. Board chairman Erik Braathen said Huser’s had the “necessary execution power” needed to “strengthen Flyr’s financial situation.” The airline has struggled to gain traction in its home market in the face of a resurgent Norwegian Air, and even as partially state-owned SAS restructures under U.S. Chapter 11 bankruptcy protection.

Edward Russell & Jay Shabat

Edward Russell

December 5th, 2022