Airlines around the world are gearing up for a smart recovery in 2023 with an expected surge in air traffic. Indian carriers are also on the upswing, as indicated by the December quarter numbers of Indigo and Vistara. Nevertheless, full-service airline Vistara has seen remarkable growth over the past year: It became India’s No. 2 carrier by market share in July, and turned a profit in the third quarter. Full-service carriers such as Jet Airways, Kingfisher and Air India are struggling in India’s price-sensitive market. Vistara’s success could be an early indicator of India’s growing, prosperous and confident middle class moving up the value chain. This gives Tata a lot to think about. Does it make sense to retire a rising brand like Vistara and merge with a dying brand like Air India?
Changes in Indian Aviation
With the reopening of the economy after Covid, the fortunes of Indian airlines turned around rapidly. Indigo has performed brilliantly in the third quarter and its profit has increased tenfold. However, more striking is the performance of Tata and Singapore Airlines-owned young airline Vistara, which turned a profit in Q3 (the airline did not disclose the exact figure).
India has been a graveyard for full-service airlines over the years, as evidenced by the decline of Kingfisher Airlines and Jet Airways and Air India’s struggles over the decades. As Indigo and SpiceJet have shown, it is the low-cost carriers that have been able to sustain profitable operations. But Vistara’s rise doesn’t appear to be a flash in the pan. It has been increasing its market share in recent years, which culminated in last quarter’s profit. Also remember that India has been seen as a price-sensitive market over the years. Vistara has broken that mold in aviation.
What explains the rise of Vistara
As a proxy, consider the development of the Indian Railways, especially over the past few decades. Not long ago, in the 1990s, traveling in air-conditioned coaches was considered a luxury by India’s middle class. And then came the game changer: the AC three-tier coach, which promised AC travel at affordable prices, which married the comfort of AC travel with the economy of the humble sleeper class. This showed how price sensitive the Indian market was.
This story also played in Indian skies. India’s booming middle class embraced low-cost airlines (perhaps the equivalent of AC three-tier trains) promising relatively cheap air travel.
Vistara’s steady growth indicates two things. India’s booming middle class – which may already be the size of the US population – has started climbing up the value chain. This is a result of the economic boom after 1991 and the steady rise in the standard of living. This could mean a huge market for full-service airlines in India in the future. And, it aligns India with global aviation trends. Such airlines account for about 65% of the total global airline seat capacity. This could be the dawn of an era for the Indian aviation market.
Should Tata retire the Vistara brand?
The upcoming merger of Air India and Vistara appears to be well thought out. Singapore Airlines, which will own a 25% stake in the new airline, pointed out the merger “… would mean an entity that is four to five times larger than Vistara, with significant domestically valuable slots”. And there are air traffic rights. 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 taking short-term loans from public sector banks. The group says the airline has made “considerable progress” since taking over.
However, if Tata chooses to retire the Vistara brand after the merger with Air India, will it hurt Tata? Tata has to maintain the Air India brand for five years. Should the Tatas have postponed the merger, expected till March 2024, by a few years, given the rapidly growing presence of the Vistara brand?
Vistara seems to have resonated with India’s rising mobile middle class, providing quality, value-for-money services in the Indian skies. On the other hand, Air India has been doing poorly over the years and is a fading brand. Vistara is the No. 2 airline in India and ended 2022 with 9.2% market share. In contrast, Air India recorded its lowest ever market share of 8.7% in 2022 (on an annualized basis).
In fact, UK-based consultancy Skytrax has ranked Vistara among the top 20 airlines in the world in 2022. Indigo dropped to 45th position, while Air India was not even in the top 100. , Leveraging on its growing brand equity, diligently built over the years since 2015, may have paid rich dividends for the group.
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