By Radhika Dhawan

Barring last-minute hitches the Rs 35,963.64-crore Tata Group should finally find its slot in the Indian skies. Three years after the group first submitted a proposal to set up an airline, which was turned down for offering a 40 per cent stake to the $6.52-billion Singapore International Airlines (SIA), the Foreign Investment Promotion Board (FIPB) has finally cleared a modified proposal without the controversial equity clause.

Although the Cabinet Committee on Foreign Investment (CCFI) is yet to signal its approval--and the final clearance will have to wait till a new government takes over in March, 1998--Tata Airlines' Rs 1,475-crore project seems set to take off. For, the Tatas have consciously modified the old proposal to adhere to the present aviation policy which was penned by Minister for Civil Aviation, C.M. Ibrahim, on April 2, 1997.

Eliminated from the new proposal is the controversial 40 per cent equity participation by SIA. Instead, the Tatas have stated that foreign institutional investors (FIIs) will pick up a similar stake in their venture. Although the Tata Group hasn't mentioned it in its proposal--and Ibrahim had said, in November, 1997, that even foreign technical tie-ups would not be allowed--SIA is likely to provide technical expertise.

Tata Airlines was forced to modify its proposal since the joint venture with SIA led to a political backlash, and Ibrahim personally intervened to stall the project. The result: the aviation policy was changed, to bar either "direct or indirect" equity holding by foreign carriers in domestic airlines.

The crucial modification has left few grounds for non-clearance of the project by the CCFI. The only opposition comes from existing airline operators trying to stall a potentially-formidable rival and political parties trying to gain pre-election mileage from the FIPB clearance. Besides, the Tatas also need to obtain a No-Objection Certificate from the Aircraft Acquisition Committee of the Ministry of Civil Aviation to buy the aircraft, and later get their routes and schedules cleared by the Directorate General of Civil Aviation.

Judging by the level of opposition, these clearances could be a matter of time. Two constituents of the caretaker 14-party United Front Government--the Samajwadi Party and the Communist Party of India (CPI)--and the Bharatiya Janata Party (BJP) have gone on record saying that the proposal should not be cleared before the Elections 98. Political objection to the project also stems from the proposed 40 per cent equity investment by the FIIs. The CPI feels that the FII route will probably lead to a backdoor entry by SIA.

Questions A.B. Bardhan, 70, the CPI general secretary, in a letter written last month to Prime Minister Inder Kumar Gujral: "What prevents the 40 per cent foreign equity from being grabbed by the SIA indirectly through Singaporean banks and financial institutions?" Indeed, SIA does have a Channel Islands-based subsidiary, Auspice, which handles the parent's offshore portfolio investments. The funds with Auspice are managed by seven external managers, who are authorised to invest in quoted bonds and securities in global capital markets. However, the Tatas have repeatedly said that SIA will not--either directly or indirectly--own any stake in the venture. The misgivings will also clear up once the Tatas disclose the names of the FIIs that are interested in investing in their project to the CCFI. Says a Mumbai-based senior-manager in the Tata Group: "We will give the names of four FIIs, of which three will probably pick up stakes in our project."

But the group will also have to deal with the opposition to the project on the grounds that, due to the recession in India and the currency crisis in Asia, air passenger growth rates will be negative in 1997-98. It is estimated that while nearly 11 million passengers travelled by domestic flights in 1996-97, the figure will definitely be under the 10-million mark this year.

Says Saroj Dutta, 62, CEO, Jet Airways, one of the prominent opponents of the Tatas' project: "The market is stagnating and becoming tough." Adds U.K. Bose, 41, the CEO of Sahara Airlines, which has a 8 per cent share of domestic passenger traffic at present: "I doubt whether there is space for more than two or three operators (including Indian Airlines). In fact, the industry is looking at some serious consolidation." With two airlines, ModiLuft and NEPC Skyline, temporarily grounded, and East West Airlines ailing with liabilities of over Rs 150 crore, the Indian skies look uninviting. However, all the three airlines are working out a revival plan.

But the argument wears thin if one views the current downturn in passenger traffic as a short-term trend. According to a document circulated by the Tata Group, India will need an additional 47 125-seater aircraft by 2001 since annual domestic passenger traffic will more than double to 24.32 million. In fact, with between 10 and 15 per cent of the existing aircraft ripe for replacement, the total need for new planes will be higher. In this scenario, Tata Airlines initially plans to fly only seven aircraft--which will go up to 18 by 2000--to 12 destinations.

What further debunks the excess capacity theory is the fact that other airlines are keen to increase their fleet size. For instance, Jet Airways, which operates 14 aircraft at present, is adding another 10 over the next three years. Similarly, Sahara Airlines has announced plans to invest $82 million (Rs 328 crore) to double its fleet strength to eight by 2000. Obviously, these operators--who don't want a new, bigger player to enter the fray--want to fill the vacuum created by the closure of the two private operators--ModiLuft and NEPC Skyline--which, along with East West Airlines, owned, or leased, 15 aircraft.

However, even if there is room for a new player, the short, but bitter, history of Indian private operators indicates that the drop-out rate is quite high. Explains John Wilson, 42, manager, Speedwing Consultancy, a division of the œ8.36-billion British Airways that is preparing a revival plan for ModiLuft: "It is a capital-intensive business, and operating margins are thin worldwide." Adds Dinesh Keskar, 43, president, Boeing India: "The cost pressures in this business are very high, and it is not for the faint-hearted."

With high fuel costs--the domestic rate at Rs 15,000 per kilo-litre is three times the international prices--and high manpower costs--salaries of pilots have trebled in India over the past five years--Tata Airlines will miss the financial backing of SIA. Explains Boeing's Keskar: "An equity investment might have allowed the Tatas to access various services at cheaper prices from its foreign collaborator." For instance, private airlines have to consistently source maintenance engineers from abroad due to a shortage in India. If SIA had a financial stake in Tata Airlines, such costs could have been reduced.

A tie-up with SIA could have also allowed the airline to access other facilities and services provided by SIA's subsidiaries. For instance, Singapore Airport Terminal Services provides catering, check-in, and security services at Singapore's Changi airport; Silkair offers connecting flights across Asia; and SIA Engineering provides inspection services.

But the key to Tata Airlines' success will lie in optimal fleet utilisation and maximisation of the load factor (the number of paid passengers per flight). Says Wilson: "You need to fly each aircraft at least seven to eight hours a day, and flying them for 10 hours is preferable." Which, according to Dutta, is the prime reason for Jet Airways' excellent performance. The Tata Group, of course, believes that the airline will work. Its financial projections indicate that the proposed venture should generate revenues of Rs 5,736 crore in five years, and earn net profits of over Rs 700 crore in the same period.

The Tatas are no strangers to the airline business. In fact, it was J.R.D Tata who started Air India (called Tata Airlines till 1945) way back in 1932. Two decades after JRD was unceremoniously removed from the board of Air India by the Morarji Desai Administration, another new government will decide whether the group can reclaim its place on India's civil aviation map.

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