Tata Sons to raise $4 billion to capitalize Air India

Now that Tata Sons has taken over Air India, the next big step is to capitalize the company. Towards that end, Tata Sons plans to raise $4 billion which it will infuse as fresh capital into Air India. These funds would be largely used to refinance costly debt. Tata Sons is the holding company of the Tata group companies. It may be recollected that Tata Sons had acquired Air India last year from the government at an enterprise valuation of $2.3 billion. The government had gone out of the way to sweeten the deal to the extent possible.

The fund raising will happen through a mix of debt and equity. In fact, Tata Sons may also look at the possibility of raising funds through hybrid finance. The funds are desperately needed to refinance the expensive debt of the Air India group and to also fund its revamp plans. In terms of process flow, the next step will be to hire investment advisers to formally run through the entire fund raising process. Apparently, it is reported that informal discussions are already underway with select foreign lenders and some private equity funds.

According to knowledgeable persons in the investment banking segment, debt refinancing portion will be the easier part of the game. After all, the Tata group with its existing banking relationships and the backing of the massive equity portfolio of Tata Sons will find it easy to get the requisite debt. The tougher part will be getting the equity funding. While private equity funds and even sovereign funds are being sounded out, it must be remembered that PE funds normally don’t invest in airline business and that could be a big roadblock.

The acquisition of Air India is part of the larger game plan of the Tatas to dominate the skies in the domestic market. Tatas already have Vistara and Air Asia flying under their banner. Now Air India becomes the third airline to enter the Tata fold. With the 3 players combined, Tatas have a market share of close to 25% in India and that gives them a good starting point to take on the challenge posed by market leader, Indigo Airlines. Air India will be acquiring control of 83.67% capital of low-cost carrier, AirAsia India. 

As Air India goes through a state of flux and rethinking, it has been losing market share. In fact, its market share has come down in the last one year from 11.2% to just about 8.4% in July 2022. The other two airlines of the Tata group; Vistara and AirAsia India have market share of 10.4% and 4.6% respectively. However, both Vistara and Air India are doing better than Go Air and Spice Jet, whose market share is just about 8%. The fund infusion will help Air India attain operational efficiency as well as regain market share. 

Air India also has big plans on the spending side. It will use funds to induct new aircraft and offer differentiated customer service initiatives to attract passengers. The latter has been one of the major goals of the Tata group. Tata will take up the overhaul and expansion of Air India and its unit Air India Express in an aggressive way. Tatas will soon close orders for 200 narrow-body A320 Neo jets and widebody aircraft to be delivered by early next fiscal. Even with the merger, Air India would be far short of the 58.8% market share of Indigo Airlines. That would be the tougher part.