Opinion
Mint Explainer: In Vistara's rise, a tale of changing India
Summary
- The airline has won market share and turned a profit. Retiring it after the Air India merger may hurt
Airlines worldwide are poised for a smart recovery in 2023 with an expected surge in air traffic. Indian carriers are looking up as well, as indicated by the December quarter numbers from IndiGo and Vistara. Still, the remarkable rise of full-service airline Vistara over the past year or so stands out: It became India’s No.2 carrier by market share in July, and made a profit in Q3. Full-service carriers such as Jet Airways, Kingfisher and Air India have struggled in India's price-sensitive market. Vistara’s success may be an early indicator of India’s growing, prosperous and confident middle class moving up the value chain. It gives the Tatas plenty to think about. Does it make sense to retire a rising brand like Vistara, and subsume it into a fading brand like Air India through a merger?
The turnaround in Indian aviation
The fortunes of Indian airlines turned around rapidly as the economy reopened after covid. Indigo has delivered stunning Q3 numbers, with profits soaring ten-fold. However, what's more striking is the performance of Vistara, the young airline owned by the Tatas and Singapore Airlines which has turned a profit in Q3 (The airline has not disclosed the exact figure).
For years, India has been a graveyard for full-service airlines, as seen in in the collapse of Kingfisher Airlines and Jet Airways, and the struggles of Air India over the decades. It’s the low-cost carriers which have been able to sustain profitable operations, as Indigo and SpiceJet have shown. But Vistara’s rise doesn’t appear to be a flash in the pan. It has been growing its market share in recent years, culminating in the profits of the last quarter. Also, remember India has been seen as a price-sensitive market for years. Vistara has broken that mould in aviation.
What explains Vistara’s rise
As a proxy, consider the evolution of the Indian Railways, particularly over the past few decades. Not so long ago, in the 1990s, travelling in air-conditioned coaches was considered a luxury by India’s middle class. And then came the game changer: AC three-tier coaches, which promised AC travel at affordable prices, which married the comforts of AC travel with the economy of the humble sleeper class. It demonstrated how price-sensitive the Indian market was.
This story played out in the Indian skies as well. India’s fast-growing middle class embraced low-cost airlines (perhaps the equivalent of AC three-tier trains) that promised relatively affordable air travel.
The steady growth of Vistara seems to suggest two things. India’s fast-growing middle class - which may already be the size of the US population – has begun climbing up the value chain. It is a consequence of the economic boom and the steady rise in standards of living after 1991. This may mean a bigger market for full-service airlines in India in the future. And, it aligns India with the global aviation trends. Such airlines account for about 65% of the total global airline seat capacity. It may be the coming of age of the Indian aviation market.
Should the Tatas retire the Vistara brand?
The coming merger of Air India and Vistara appears to be fairly well thought-out. Singapore Airlines, which will hold 25% in the new airline, had pointed out the merger “…would mean an entity that is four to five times larger in scale compared to Vistara, which has access to valuable slots and air traffic rights at key domestic and international airports …".
The Tata Group has an ambitious plan for Air India over the next five years, from refurbishing the interiors of its entire fleet to adding more aircraft, and is taking short-term loans from public sector banks. The group says the airline has made “quite remarkable progress" since it took over.
However, if Tatas choose to retire the Vistara brand after the merger with Air India, will it hurt the Tatas? The Tatas have to retain the Air India brand for five years. Should the Tatas have deferred the merger – expected by March 2024 – by a few years to protect the Vistara brand given its fast-growing footprint?
Vistara seems to have resonated with India’s upwardly mobile middle class, providing quality, value-for-money services in the Indian skies. Air India, on the other hand, has been bleeding for years and has been a fading brand. Vistara is the No. 2 airline in India and ended 2022 with a 9.2% market share. Air India, in contrast, posted its lowest-ever market share of 8.7% in 2022 (on an annualized basis).
In fact, well-known UK-based consultancy Skytrax ranked Vistara among the world’s top 20 airlines in 2022. Indigo came in at the 45th position, while Air India was not even in the top 100. Vistara appears to be morphing into a global brand. Leveraging its growing brand equity, built assiduously over the years since 2015, may have paid rich dividends for the group.
