Good morning. Frequent fliers of Tata-owned airline Vistara may not be happy that it’s merging with Air India. Vistara’s services, most people would agree, are far superior to Air India, the national carrier. The management at both the airlines realise that, and are aiming to meet that benchmark under tight deadlines. This task will be easier said than done for Air India. Read on to know more. 

Meanwhile, lots of family-owned businesses in India have shown interest in a 40% stake in Coca-Cola South Asia (India)’s wholly-owned subsidiary Hindustan Coca-Cola Beverages (HCCB). Will their bets pay off? 

THE TAKE

Changing Engines Mid-Air Might Be Easier Than Air India’s Upcoming Challenge

Companies compare the challenge of keeping a company running while undergoing transformations to changing an engine mid-flight. Air India faces a similar challenge, but the problem involves an internal mid-air change, rather than external. This is proving to be difficult.

The airline has set a target of November 12 for a full merger and integration with Air Vistara, the clearly superior product from the same owners — the Tatas. The benchmark for the merged entity seems to be the quality of products and services that were offered by Vistara, the smaller of the two airlines. This is a desirable and grand outcome to aim for but not an easy one to execute.

It is rare for a large organisation to become the smaller one it acquires. For this alone, the transition process will be interesting to watch. The managements obviously realise this and are churning staff to make them more uniform in age and experience where feasible.

The latest news is that Air India has announced a $400 million refurbishment programme to overhaul 67 of its older aircraft which will begin with the 27 narrow-body Airbus A320neo planes, followed by 40 wide-body Boeing aircraft. The revamp will see a consistent three cabin layout with business, premium economy and economy seatings for all aircraft, like Vistara.

The Economic Times quoted Air India saying the first narrowbody aircraft, a single-aisle A320neo, went into the hangar on Monday and is expected to re-enter commercial service in December 2024. It will join eight recently-delivered and operational Air India A320neo aircraft that already feature the upgraded cabin interiors and configuration.

Three to four aircraft will similarly get upgraded every month with a completion date of mid-2025, which is what The Core has estimated from interviews on the likely date for an integrated company and a glitch-free product.

But it is largely the domestic product or short-haul flights and only involves smaller aircraft. Upgrading the 40 widebody aircraft, also where Air India gets the maximum flak for poor product, will start in early 2025 and will obviously go on for some time.

“Over time, all the legacy widebody aircraft will also be refitted. This comprehensive upgradation of Air India’s physical product is an important component of Air India transforming into a world-class airline,” said Campbell Wilson, chief executive officer and managing director of Air India.

Vistara had said its aircraft and passengers will be handled by Air India from November 12.

Air India's fleet currently comprises 128 aircraft while Vistara has 70 aircraft. And Air India flies to several lucrative international routes.

Handling this change, to stick to the mid-air engine and now cabin change analogy, will require very solid and consistent communication with all stakeholders, including for example Vistara passengers who will surely protest when they land up in older Air India aircraft. Changing engines mid-air might be easier compared to the challenge that lies ahead for Air India.

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DIVERGENT VIEW

Will Indian Companies Find Their Pot Of Gold In The Soft Drinks Market?

The Burman family of Dabur and the Bhartias of the Jubilant Group have both been reported to have bid for the 40% stake in HCCB. Word is that parent company Coca-Cola is mulling over whether this will be a couple of co-investors or a consortium. 

For Jubilant and Dabur this is a strategic move. Both these companies have a presence in the Indian food and beverages market. Diversifying successfully into high-profile segments like soft drinks would be akin to discovering a pot of gold. 

Indian companies have been taking steady steps into the non-alcoholic fizzy beverages markets dominated by the Big Two (Coke and Pepsi) for some years now, it is particularly now that the mainstream of India Inc, especially family businesses, are taking bigger and firmer strides. But the big question is: will they lose their shirts?

CO:RELATION

Stretching It Far

There is excitement about the widely anticipated US Federal Reserve interest rate cut. Typically, share prices in emerging markets rally when the US cuts rates. While that may happen again, India may not join the party. Valuations in India are stretched. Current market prices are significantly higher than the long-term averages. 

From an international standpoint, the story gets worse. Indian shares have always enjoyed a premium over other emerging markets in terms of valuation. This time, it is already sky-high. The 12-month forward PE for MSCI India, a benchmark index used by global investors, is at a premium of 102% against the last 15-year average premium of 52%. A similar trend is seen if you compare MSCI India's price-to-book value. That means shares in other emerging markets are substantially cheaper than Indian equities. If quality companies with substantial profit growth abroad are available at a cheaper valuation, foreign investors could give Indian equities a miss at the start of a global rally.

CORE NUMBER

$34.7 billion

This is how much India’s merchandise exports contracted in August, a 9.3% decrease, thanks to lowered global demand and geopolitical situations. It had hit an eight-month low in July, contracting 1.47% to $33.98 billion. Meanwhile in August imports rose 3.3% to $64.4 billion. India’s trade deficit widened to $29.65 billion in August from $23.5 billion in July.  Commerce secretary Sunil Barthwal said that global logistical challenges, a recession in Europe and a slowdown in China were among the things that contributed to the slowdown.

FROM THE PERIPHERY

—🚘 Tata Motors and Jaguar Land Rover (JLR) will begin manufacturing electric vehicles (EVs) in India for global markets. N Chandrasekaran, chairman of Tata Sons highlighted long-standing synergies between the two brands and revealed plans to produce EVs on JLR's Electrified Modular Architecture (EMA) platform. Two models — one from Tata Motors and one from JLR, likely the Tata Avinya, will be manufactured at Tata’s Sanand plant in Gujarat, including a former Ford facility. JLR’s export plans will be revealed within a year. Additionally, a Rs 9,000 crore project in Tamil Nadu is set to become another major EV hub for Tata Motors and JLR.

—🚢 Freight rates at Indian ports surged by nearly 70% year-on-year in August, reflecting ongoing global shipping disruptions and strong demand. This sharp rise follows a two-year lull, The Times of India reported. Rates for 40-foot-high cube containers climbed from US $2,600 in Q1 2024 to over US $2,800 in Q2 across ports like Chennai, Nhava Sheva and Mundra. Chennai experienced the steepest hike, with rates rising 50% from April to August 2024. Higher shipping costs, driven by geopolitical issues, are expected to squeeze company margins in FY25. 

—🛍️ Recent political developments in Bangladesh have had a minimal impact on India’s trade, constituting only 2.5% of India's total exports and 0.3% of imports, a report by credit rating agency CRISIL revealed. Sectors like fast moving consumer goods (FMCG), cotton yarn and soft luggage might face small, manageable challenges, while industries like shipbreaking, jute and readymade garments could benefit. The credit quality of Indian companies is unaffected for now, though prolonged disruptions could harm export-dependent industries. Bangladesh accounts for 8-10% of cotton yarn sales, making it crucial for major exporters, according to CRISIL.

—🛒 While there are growing concerns for businesses that post-pandemic revenge spending is slowing down, a report by the research arm of financial services company Centrum said that India’s FMCG sector could see a boost in the coming months, especially in rural areas. The report noted a “downward trend” in rural inflation and an increase in real wages in these areas and said that could push growth in these areas. It also said that India’s apparel retail, which has grown at a compounded annual growth rate of 10.2% in the last 10 years, will continue to grow fuelled by rising incomes and demand for affordable fashion, especially from Gen Z.

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