Vistara’s first-ever profit a bullish sign for Tata and Indian aviation industry
4 min read . Updated: 24 Jan 2023, 04:49 PM IST
Premium- Vistara’s profits, if they sustain over the coming quarters, will strengthen the group’s ability to raise funds for the expansion of the airline business
Exactly eight years after Vistara took to the skies, the Tata group airline has posted its first-ever quarterly profit. For context, India’s market leader, Indigo, turned profitable three years after it started operations in 2006, which underscores the struggle it has been for the airline sector over the last five years as an economic slowdown was followed by the pandemic beginning in 2020.
The turnaround at Vistara, just six months after it posted a 35% rise in losses for the year ended March 2022, is not without significance for the Tata group as well as the airline industry in India.
For the Tata group, the profits, no matter how slim, are an important landmark since they have come when, along with its joint venture partner Singapore Airlines, it is kicking off a complex merger between Air India and Vistara. Besides the obvious feel-good of having cracked one part of the giant jigsaw puzzle, there are also concrete financial benefits that will accrue. The group plans to invest ₹20,000 crore in the merged entity over the next two years to modernize its fleet by inducting new aircraft. Simultaneous commitments of billions of dollars in other equally capital-intensive businesses like semiconductors and green energy ensure that internal accruals will not be enough. Vistara’s profits, therefore, if they sustain over the coming quarters, will strengthen the group’s ability to raise funds for the expansion of the airline business since lenders as well as those likely to bring in equity, will now have a stronger balance sheet to look at than Air India’s loss-ridden one.
Going forward, the Vistara/Air India combine will have a near-monopoly of the full-service airline market in the country which will give it pricing power even as all other competitors, including market leader IndiGo, are concentrated in the low-cost segment. While the latter hogs the market and is also the fastest growing segment, the absence of any meaningful competition will leave the Tata airline to mine the premium segment. The current bugbear of the industry, high jet fuel prices, impacts all airlines equally, but a premium airline’s ability to pass on a part of the costs to its customers is much higher since they are less likely to be overtly price sensitive.
Till they imploded, Kingfisher and Jet Airways, both full-service airlines, had built a strong customer base of those looking for a differentiated flying experience. Both airlines went belly up because they lost control over costs and ignored the bottom line.
Vistara’s first-ever profitable quarter shows that the airline’s management is acutely aware of the need to manage costs and that even when passenger traffic in India is just about back to pre-pandemic levels, it has found the right formula. Vitally, its domestic network, which it has been expanding rapidly, is now viable in itself. With more lucrative flights to key international destinations like Paris, Frankfurt, London, Dubai, and Bangkok, its path to continuing profits looks secure.
Not everything is hunky dory at Tata’s airline headquarters, though. The problem of turning around Air India still looms large. Recent incidents aboard two of its international flights point to the magnitude of the task ahead. Indeed, Vistara’s profits might actually prompt a whisper or two of whether it might have gained far more from continuing as an independent company. In the merged entity, its profits will be under severe threat from Air India’s losses, a whopping ₹9,556.5 crore in 2021-2022.
For now, though, Vistara crossed a billion dollars in revenue while clocking a net profit in the October-December quarter is a moment to celebrate India’s airline pioneer.
But Vistara’s profits matter for another, equally important reason. They lend substance to the growing importance of the market for premium products and services in the country. The prevailing narrative has been of India as a value-for-money market with customers averse to paying for high-end brands. That perception may now be changing. Ola Källenius, chief executive and chairman of Mercedes-Benz, recently said that India was the fastest-growing global market for the luxury car maker in 2022.
Vistara’s success, too, shows that there is a market at the top end, one made up of customers looking for best-in-class experience. While IndiGo lords over Indian skies with its low-cost model, Vistara has the opportunity to secure its position in the smaller but more profitable premium segment. After all, Delta, Emirates, United Airlines and IAG, among the world’s most profitable airlines, are all full-service carriers.
Finally, the airline turning in profits shows that the travel sector, a key economic indicator, is recovering, and that augurs well for the GDP recovery, as Mint SnapView wrote recently.