The Core Report

Good morning, it's Monday, the 2nd of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.

Before I start, happy September, it seems like a pretty busy month for most people I know including a spate of conferences.

The Take: Grin and bear it
Mergers or acquisitions are not new in the Indian landscape. But few have been or will be as public and consumer facing as Air India and Vistara, least for the social media noise the inevitable problems could create.

Products and services have seen owners change all the time in India..

That could range from soaps and medicines to cement and steel. Services could include hotels to even airlines, like Kingfisher buying Air Deccan or Jet buying Sahara Airlines. Both fairly large deals for their time were announced in 2007 and both acquirer and obviously acquired airlines have since shut down.

Air India has announced Vistara will cease to exist in its current form From November 12 this year, a logical culmination of a process that started in November 2022.

Fact is the Tatas now own Air India and there was not much logic in continuing two separate brands and airlines from a management point of view.

The Tatas owned 51% while Singapore Airlines owned 49% in Vistara and as the merger goes through by year end, Singapore Airlines will own around 25% in the combined entity which includes Air India and Vistara.

The biggest problem of course is that there is a sharp difference between the two products. Vistara is more premium and preferred by business travellers, Air India is less premium and preferred more by leisure travellers and also something that many people actively avoid at all costs, particularly international, though its a full service carrier, serving hot meals versus let's say a Indigo where food is pre-ordered and paid for.

The premiumness can be subjective of course but the fares reflect the difference. Business class fares on the two airlines on a Mumbai - Delhi sector could vary by more than 50% or even more at times at similar departure times. Though I can sense that the airlines are synchronising fares increasingly.

And that is a problem. Like for like, the experience on most Air India flights is not the same, even if the aircraft is newer, like the Airbus A350 on some domestic routes, though that does help balance things out somewhat.

What should the airlines do and more on that shortly.

To quote a simple example, boarding procedures on Air India are totally random and chaotic, almost like the good old days, while Vistara is orderly and disciplined.

For business travellers this matters, who also by the way, do not pay so much importance to food, as long as it is competent.

Vistara flies to quite a few international destinations east and west of India and once again, the experience can be dramatically different.

You could be on an ageing, battered and rattling Air India A320 and a quiet and well turned out A321, both to Singapore, leaving an hour or so apart from Mumbai.

All this means that Air India will have a massive problem managing the transition and while it intends to have as many new aircraft as possible and will do, the interim period will be like Russian Roulette for passengers, particularly if there is no choice of aircraft

And while that is something the Tatas cannot control - I still understand the management imperative to merge - hopefully it will communicate much better and focus literally half its energy on that.

Maybe the pain will not last long.

And that brings us to the top stories and themes of the day

The markets now sit on their longest rally ever.

GST collections cross Rs 175,000 crore again, steady in recent months.

GDP slows down as projected, economists are revising full year growth figures downwards

Container cargo companies are seeing a bumper year.

The perils of merging a 92 year old airline with a 9 year one.

Markets
The Nifty 50 rose for the 12th consecutive session on Friday, its longest-ever rally even as the markets hit all time highs again.

The BSE Sensex added 231.16 points to close at 82,365.77 in Friday’s trade after hitting an all-time high of 82,637.03 during intra-day trade.

The Nifty50 too closed higher at 25,235.90, up 83.95 points, after hitting an all-time high of 25,268.35 during the intra-day trade on Friday.

Oil prices are down below $77 a barrel now at $76.93

Bloomberg reports that oil fell sharply as traders priced in expectations that OPEC will proceed with previously announced output hikes in the fourth quarter, though the group has warned repeatedly that it could “pause or reverse” the hikes if necessary.

Brent, the global crude benchmark notched its first back-to-back monthly loss this year, with Goldman Sachs Group Inc. and Morgan Stanley the latest to slash their price forecasts, citing the disappointing demand outlook in top importer China, Bloomberg said.

GDP Slows Down, As Predicted
India’s GDP has slowed in the first quarter of the current financial year to a five quarter low, an event that was projected and forecast by almost all economists as we discussed last as well in some detail.

The reason is a continuing decline in agriculture, private consumption and government expenditure.

So during the first quarter of the current fiscal, real GDP grew by 6.7%, as against 7.8% in Q4, FY24 and 8.2% a year ago.

The question of course is the outlook for the coming year, assuming elections, among other factors, slowed down spending and consumption.

Which brings me to a question I have pondered upon in recent times.

Do major elections slow down economies elsewhere in the world, particularly the developed world ? Am not sure of the answer and there may not be a black and white one but will leave it for you to ruminate upon.

Last year, the economy grew 8.2%, a figure that surprised many on the upside.

India of course is still the fastest-growing major economy in the world, as China's GDP growth in the April-June quarter came in at 4.7 per cent, on a much larger base of course.

Crisil Chief Economist DK Joshi says the slowdown in GDP growth in the first quarter was a foregone conclusion due to signs of weak urban consumption, tepid corporate results and slowdown in government spending.

The National Statistical Office (NSO) estimates the GDP growth at 6.7% against our expectation of 6.8%.

Looking ahead, Crisil says it is seeing initial signs of pick up in rural consumption and also expects private consumption demand to improve this year over an anaemic growth of 4% in fiscal 2024.

Higher agricultural growth will augment income and lower food inflation will improve discretionary spending ability.

In addition, government spending on employment and asset generating schemes (PM Awaas Yojna for urban and rural areas) can provide additional support to consumption growth in the rest of the fiscal.

So Crisil expects the economy will grow at 6.8% this year.

GST Collections Are Up
India collected Rs 1.75 trillion in Goods and Services Tax (GST) for the month of August or Rs 175,000 crore, up 10 per cent from a year earlier.

According to provisional data released by the finance ministry on Sunday, the rise in domestic GST collection was 9.2 per cent, while that from imports was over 12.1 per cent.

The August number is related to goods consumed and services availed in July.

The previous month was Rs 182,000 crore and March was Rs 210,000 crore, also being the year end.

Seen over a one year period, collections seem to be somewhat consistent with some increases followed by small dips.

Container Shipping Industry Sees Record Volumes, High Profits
Tensions in the middle east and the resultant re-routing of traffic, among other reasons, has led to the global container shipping industry seeing profits surge to more than $10 billion in the second quarter on record volumes and rising freight rates after Red Sea diversions, according to a new analysis quoted by Bloomberg.

Net income for the world’s major container carriers, including Denmark’s A.P. Moller-Maersk A/S and China’s Cosco Shipping Holdings Co., almost doubled from the first three months of the year and topped the $8.88 billion haul from the second quarter of 2023, according to a report released Saturday by industry veteran John McCown.

Profit for the current quarter may also be set to show another “material increase” given how well the market for international goods trade has been holding up, he said.

The last time the industry saw such good times was during the pandemic thanks to strong consumer demand and supply disruptions because of Covid.

The container shipping industry transports 80% of global merchandise trade.

Air India & Vistara, Keeping Passengers Happy
A big challenge for Air India as it merges with Vistara will be to try and ensure loyal Vistara passengers do not feel short changed as they navigate between the two products.

Vistara was launched in 2015 and is thus barely a decade old.

Air India was founded in 1932 which makes it 92 years old right now.

Obviously, a 92-year-old airline, which has spent roughly 70 years in tight and debilitating Government control, merging with a 9-year old airline cannot mean good news.

I do intend to follow this merger a little closely, also because aviation is something we cover frequently.

I reached out to Ajay Awtaney, Aviation Journalist and Editor, LiveFromALounge.com and began by asking him what operational challenges do you foresee for the merger from a passenger experience point of view.

INTERVIEW TRANSCRIPT

Ajay Awtaney: I think there will be a lot of confusion that's going to come over the next 60 days or so. I think we are 74 or 73 days away from this merger at this point of time. I think some of the initial confusion is already out there, and a lot of it is going to be dealing with two different brands, right? I mean, people who've already booked the tickets on Vistara will we are now in a short memory environment, right? People don't have that kind of attention span, so if they don't pay attention to details, at some point of time, these people will receive emails or messages telling them that the Vistara flight numbers have changed into Air India flight numbers, and then they will arrive, and they will most probably still see a Vistara, nearly aircraft, and still the aubergine uniform pantsuit people serving them in that so it's going to be a confusion more on the visual aspect, I think a lot. But if they lined up everything very well, a lot of things should go out very smoothly, and they still have about 70 days to go within. So I think the good thing is that both the airlines operate on the same reservation system, so it should not be problem. Bookings should not be lost in the transition. It's just going to be a lot of people turning up and being confused about its boarding in Air India flight, or Vistara flight, which is going to be one and the same thing as a telecom book.

Govindraj Ethiraj: So you're saying that the aircraft will still carry the Vistara colors, and the in flight crew will be wearing the same Vistara, except that when I booked a ticket, I will have no choice about where I would go.

Ajay Awtaney: See yes, this is my interpretation, that what will happen is that Vistara will merge into Air India on the night of 11th and 12th of November, right? So as of 12, everyone who's a Vistara employee will become a Air India employee and so on. But it's going to be impossible to repaint all these aircraft right overnight. So what will happen, perhaps, is that over the next one or two years, these aircraft will go into the paint shop and be recolored whatever similar thing for the uniforms. Right, from what I hear from the people involved, nothing is going to majorly change over next three to four months right after the merger, the first aspect to take care of them, for them is the fact that they ride out any fog season. The North India fog season very well. So I would imagine the schedules will be synced up, and a lot of these changes will start the maybe three to four months after post February 2025.

Govindraj Ethiraj: If I was a frequent flyer of either brand. Would I benefit in any way, or perhaps lose something? Or how are you seeing that

Ajay Awtaney: Vistara has already announced that Vistara frequent flyer program will merge into air India's loyalty program, which is called Flying returns. So the good thing is that even if you on the day of the merger, let's say an elite member, like the gold or the Platinum, for even five more days, you're going to get a one year extension into the new program. Okay, so because Air India is a member of star alliance, it's the better thing for people, because now your perks from an India gold or India platinum will continue, and you can stand on all the other star alliance, carriers like Singapore Airlines, Lufthansa united, or whatever else that you will be travel on so that's the benefit. The problem is, we, at this point of time, do not know the exact date of when club Vistara members from transitioning to, you know, Air India flying returns, they've already started the process of taking approvals from each and every frequent flyer program member. So you would have gotten an email. I got an email. We to link all accounts, but on the which date exactly, will this transition happen? We don't know yet.

Govindraj Ethiraj: Again, operational sort of question. So what are the one or two areas that you feel they need to be careful about so as not to upset flyers? You know? I mean, I'll give you the context, at least from where I'm coming from, there is a perception, including from many of us, that, you know, Vistara was a superior product, particularly for business travelers and Air India is not but that's one view. But in general, where do you feel both need to be careful in order to, you know, keep everyone happy.

Ajay Awtaney: One of the big things that will be is going to be enough customer communication. Okay? So they're just, we're just 48 hours since the announcement really came through. So it's going to be a few days, but a lot of information will trickle out in the coming days. Okay? Air India needs to own upon the fact that they need to communicate very effectively with Vistara. The second thing product parity is not going to happen overnight. But the good news is, for example, if you booked a Vistara flight, most probably, you will not see an Air India aircraft in the next four or six months at least. So if you booked a aircraft which you expected, let's say what you've time paid, you will still get that and so on. So that product quality will not go down immediately, at least, but over a period of time, obviously, anything needs to make sure that SMB and other aspects, crew training and so on, come to the level of this startup, that's going to be a long drawn battle. It's going to take them years to do that. It's not going to be something that's going to happen overnight.

Govindraj Ethiraj: Right Ajay, thank you so much for joining me.

Ajay Awtaney: Thanks Govind.