ANALYSIS: SIA takes a punt on fragile Indian market

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Singapore Airlines’ chief executive Goh Choon Phong is taking a big risk with his airline’s plans to launch a new joint venture carrier in India, but there is some optimism that it may just work.

The New Delhi-based full service carrier will be 49% owned by SIA, with Indian conglomerate – and India AirAsia shareholder – Tata Sons holding the other 51%.

Tata’s power and influence will be crucial to getting the new airline off the ground. India’s government has been frequently criticised for acting to protect state-owned carrier Air India (AI). With the new carrier poised to challenge AI in the full-service market, vested interests could push Delhi to make the regulatory process difficult.

SIA has long-held ambitions of playing a greater role in India. In the mid-1990s, as the domestic market was liberalised, the airline engaged with Tata on a plan to launch a carrier, which was later dropped. It also worked with Tata in the early 2000s as part of a consortium that unsuccessfully bid to take a 40% stake in Air India.

SIA was also one of the first carriers to welcome the Indian government’s decision last year to allow foreign carriers to take up to a 49% stake in domestic carriers. As such, it was seen by many as only a matter of time before it staked its claim for a piece of the potentially large market.

From the outset, the new carrier will help to improve SIA’s dominant position on the market between India and Singapore. Flightglobal’s Flightmaps Analytics shows that together with regional unit SilkAir, SIA operates 100 services a week to 11 destinations in India, giving them a combined 51.6% share of the available seats on the market. Adding in affiliated low-cost carrier Tigerair, that gives the SIA group a whopping 70.1% share of seats.

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Source: Flightmaps Analytics

With a domestic carrier, SIA will be able to bypass some of the cities access restrictions that the Indian government imposes on foreign carriers. It will also likely make it easier for the carrier to access tier II and III markets that could grow faster than major cities like New Delhi and Mumbai.

Nevertheless, this Indian domestic foray will carry several risks for SIA. Chiefly, there are high levels of taxation on jet fuel, spare parts and maintenance that have been a challenge for other carriers. It will also contend with New Delhi’s bureaucracy and archaic regulations that some say have held back the industry.

It also comes as Etihad Airways eagerly awaits formal clearance allowing it to take a 24% stake in Jet Airways, the only full-service carrier apart from Air India.

Curiously, SIA’s partner Tata is also awaiting approvals for its other airline joint venture – India AirAsia – to get off the ground later this year. Tata owns a 30% stake in the low-cost carrier, but so far insists that it can manage both joint ventures productively.

Amber Dubey, aviation partner with KPMG in India, told Flightlgobal Pro sister publication Airline Business recently that the arrival of more foreign-backed carriers will upset the fragile dynamics of the Indian market in the short term.

“The arrival of foreign carriers in the domestic sector will lead to cut-throat competition, innovative products and sporadic price-wars,” he says. “ We may see some consolidation by December 2014 since given the current situation, India cannot have more than four pan-India airlines.”

Ashoo Mishra, an analyst with India Ratings & Research notes that with Etihad in its corner, Jet Airways will make life difficult for the proposed new carrier.

“Jet-Etihad are also planning a huge expansion. This would lead to a completely different dynamic for the airline industry in India and would be a challenge for the new Tata-Singapore Airlines joint venture.”

Despite those short-term challenges, Dubey believes that the longer-term fundamentals of the market are good.

“The long term outlook of the Indian aviation sector is high and the valuations are attractive at the moment,” he says. “It is a good time for someone looking at a long term punt on India.”