AIR INDIA - A PASSIVE INVESTMENT, A STRATEGIC INVESTMENT, AND A GAME THEORY VIEW

Back in 2015 there was much public argument AGAINST selling Neptune Orient Lines. "This is a national asset, why are we giving it away?". The counter official argument was essentially: "Strategic sentiment cannot override commercial reality."  

Today, with SIA's 25.1% investment in Air India, the sentiments are completely reversed.

NOL's losses produced a debate about whether a strategic national champion had outlived its usefulness. Air India's losses are producing a debate about whether Singapore capital should continue supporting an external strategic investment.

There are basically two ways to view the investment.

All those who are against the cash call look through the lens of a passive investor. Losses, poor ROI, poor track record, etc etc. A persistent expert says First Principles -- cut losses, stop-loss order. They have good experience on Phillips Trading platform and think SIA can just click a button and exit.

As I explained in the last three posts, SIA's investment in Air India is an active strategic investment. Traditional financial analysis don't apply here. I have a "pestinent" stalker who imagines he is a retail investment expert telling me "first principles" in a hundred different ways. All I asked of him repeatedly is can you explain what does the term "strategic" mean when one says Air India is a strategic investment. There is no response.

A strategic investment means there are broader outcome objectives to consider. The profitability of the investee company is but one consideration. In fact, there are many celebrated instances of strategic investments where the investor knowingly makes massive losses in an investment for other strategic gains.  Let me illustrate one example.

Microsoft’s multi-decade investment in Xbox is a textbook example of a strategic investment - a venture where the primary goal was long-term market placement and ecosystem control rather than immediate profit margins. They intentionally absorbed massive losses during the original Xbox era to establish a foothold in the gaming ecosystem. It was not about selling software; it was a defensive and offensive chess move. It was a Battle for the Living Room - a battle to prevent Sony’s PlayStation 2 capturing the living room that could eventually threaten the PC ecosystem. Microsoft suffered billions of losses initially, but in the 2010s made massive gains from Xbox. However, later developments have made Xbox a huge liability today. The point made is that Xbox was not an investment where Microsoft seeks to make money from it. They knew the losses that would come. But it was a strategic move to protect their PC ecosystem. 

SIA's investments in Air India is a similar strategic investment. It is not purely an investment to make money out of Air India, but a partnership with Tata to build the Changi Airport, Indira Gandhi International Airport (New Delhi) and Chhatrapati Shivaji Maharaj International Airport (Mumbai) into  multi-hubs. It is a tie-up with potential substantial returns for Air India (of which SIA has a 25.1% share), for SIA itself, Changi Airport and Singapore Engineering. It is not a passive investment hoping for good ROI from Air India, but a defensive and offensive strategy of SIA in the face of strong headwinds coming in the aviation industry in terms of external shocks (oil price uncertainty, dynamic geopolitics, possibility of expanded ME war which impacts air routes, new airplane types, and competition especially its Kangaroo Route that is under attack.

To make a fair assessment of the investment requires viewing through macroeconomics lens with a deep knowledge of aviation economics. I think the Singaporean public needs a lot of humble pie to think that they understand the situation better and have more domain knowledge and data than the folks in SIA.

I have debates with the affable Goh Meng Seng all the time. He is adamantly against this Air India investment and he mentioned he applied Game Theory to this investment that supports his conviction. Unfortunately he didn't provide a Game Theory explanation when I requested. But Goh is right that Game Theory can offer insights to this situation. I therefore attempt to try to use Game Theory to see what it says. I am not an expert in this, just using rudimentary knowledge.

One may want to look at the Prisoner's Dilemma and Chicken Game. Very briefly, these theories may be summed up as :

Prisoner's dilemma: "We should cooperate, but I can't trust you to cooperate."
Chicken game: "I want you to back down, but I don't want to back down."


. Fig.1 Prisoners' Dilemma (Fund : Refuse to fund)

        

When we think of game theory, prisoners' dilemma comes to mind first. The prisoners dilemma is a mind game that goes like this. I am paraphrasing from the original. Two prisoners in isolation cells were each told the same thing. Give evidence against the other and you go free. Refuse, and you get 2 years jail. Both were told the other prisoner is given the same deal.

In a single interaction, the outcome may not be rational. In repeated iteration, co-operation is the most likely outcome. Fig. 1 shows the (F:F) co-operation is best for Air India and SIA.

"The prisoner's dilemma models many real-world situations involving strategic behavior. In casual usage, the label "prisoner's dilemma" is applied to any situation in which two entities can gain important benefits by cooperating or suffer by failing to do so, but find it difficult or expensive to coordinate their choices." (Wikipedia)

However, this game theory depends on both agents making decisions in isolation, not aware of the other's action. This is not appropriate in our case here.

Fig. 2 The Chicken Game

The Chicken Game resembles more the situation we are having here. The actions are sequential. The possible outcomes are the same as Prisoners' Dilemma:

(F:F), (F:R); (R:F) & (R:R)
(F:F) Co-operation remains the best outcome.

Under both Prisoners and Chicken, (F:R) where SIA funds and Tata refuses, theoretically SIA is trapped. In reality this is unlikely as Tata is the majority owner.

What the Chicken shows is that SIA holds the power. It has leverage. It can threaten "R", in which case Tata will be forced to respond.  This is a game that SIA can play at each future cash call, or other decisions. But each iteration played the same way will have a crushing reputational effect on SIA.

Indeed that seems to be exactly the actual situation. SIA leveraged on its strength. Latest media reports say SIA will now require more stringent requirements and to consider future cash calls and decisions will be made according to milestones achieved.

But I read these reports with a chuckle. If you believe in this, I got a bridge to sell you. This is just for domestic consumption, an appeasement to the rising chorus of contempt. Obviously SIA will review in accordance with milestones obscured somewhere in the voluminous stack of agreements signed two-three years ago. These massive corporate deals aren't playing masa-masa. One can drown in the schedules, tasks, and time-tables

Co-opetition:

These Game Theories show (F:F) or co-operation is the best outcome for both, so I am actually puzzled how Goh Meng Seng say using this game logic he is convinced Air-India is not a good investment for SIA. 

What is glaringly absent in these games is other key players -- the competitor. In this case, it is Qantas and the Gulf carriers - Emirates, Oman and Ethihad.

In aviation industry, there is a buzz word - "Co-opetition" This means in certain routes, we may cooperate; in other routes, we compete. All airlines in the world do this. Air India is about Tata-SIA cooperation to develop the 3-airport multi-hubs. Competition remains on some routes, but there are many areas where both cooperate for immense benefits. 

I am thinking to an ordinary reader, the game logic tells him nothing except that co-operation is mutually good. Without using big words like Game theory, one instinctively knows there can only be two outcomes:

(F:F) or (R:R)

Both Air India and SIA cooperate and have multi-hubs, or don't cooperate and have their own single hubs. There cannot be (F:R) or (R:F) situations because the joint venture collapses. Goh Meng Seng mentioned that we can still have the benefits of codeshare without the Air India investment. That is true, but with Air India-SIA in co-opetition, there will be more competition than cooperation as the single hubs wrestle for market dominance.

In the next post I will show to some details with domain knowledge, and you can see clearly why the investment in Air India makes sense and thus affects the risk-returns calculation.

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