A merger between AirAsia India (I5, Bangalore Int'l) and Vistara (UK, Delhi Int'l) is one of the options their conglomerate parent Tata Sons is considering, having set up a strategy team headed by group chief financial officer Saurabh Agrawal to explore various possible solutions such as mergers and rebranding its airline ventures, two sources told the Hindustan Times and its financial offshoot Mint on condition of anonymity.

Tata, which is among those that have expressed an interest to acquire flag carrier Air India (AI, Mumbai Int'l), revealed its intention in December to raise its stake in AirAsia India from 51% to 84% by buying part of the stake held by its Malaysian partner AirAsia Group.

As previously reported, before the end of 2020 it duly moved to increase its holding to 83.67% for a total consideration of USD37.66 million. This deal has not yet closed, however. Under the share-purchase pact with AirAsia, Tata has the option of raising its stake in AirAsia India to 100%, but this may not happen if Tata opts not to close the deal on the additional 32.67% by the end of March.

A decision on the low-cost carrier’s fate is expected to be taken by the end of March, the sources said, by which time more clarity is hoped for on Tata’s bid for Air India.

“A final decision in this regard depends on whether AirAsia continues as a minority investor,” one source said. “In the event of AirAsia continuing its investment, Tata Sons may not be required to pay a royalty for the use of the brand name, which is a key factor.”

Tata also owns 51% of full-service airline Vistara, with the rest held by Singapore Airlines (SQ, Singapore Changi). A potential merger of the two carriers under the Vistara brand would need consent from Singapore.

“A merger with Vistara depends on many factors, including improvement in load factor, cash flows, vaccinations, global lockdowns and travel restrictions, the proposed deal with Air India, the consent of Singapore Airlines, the completion of pending aircraft orders, and competition from other airlines in India,” a source said. “If all this works, several sectors will open up for flights, improving prospects for AirAsia India.”

Tata is also reportedly studying the idea of merging AirAsia India, Vistara, and Air India if it wins the bid for the flag carrier, possibly operating them under a new brand - if Singapore Airlines consents.

“The Air India deal will depend on the government as it will have to absorb a large part of its debt. If the government keeps conditions including keeping the Air India brand name intact for a time period, a different strategy will be required,” the source explained.

Tata may then run Air India separately or merge AirAsia India into Air India, or it may operate Air India separately while merging AirAsia India and Vistara as a single entity.

“The first will depend on the conditionality kept by the government and the price at which the proposed deal is formalised. The second will depend a lot on how the balance sheet of AirAsia India improves, how Covid-19 subsides and routes open up, and whether Singapore Airlines agrees to a merger at a future date after March 31,” the source concluded.