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Al ii mergers and aquistions in indian civil aviation
 

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    Al ii mergers and aquistions in indian civil aviation Al ii mergers and aquistions in indian civil aviation Document Transcript

    • 2012MERGERS AND ACQUISITIONS ININDIAN CIVIL AVIATION:A CRITICAL ANALYSIS Hamsathul Haris K NALSAR 3/24/2012 1
    • INDEX1. INTRODUCTION2. MERGERS AND ACQUISITIONS 2.1 MERGERS 2.2 ACQUISITIONS 2.3 DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS 2.4 TYPES OF MERGERS 2.5 ADVANTAGE OF MERGERS AND ACQUISITIONS 2.6 DISADVANTAGES OF MERGERS AND ACQUISITIONS3. MERGERS AND ACQUISITIONS IN INDIAN CIVIL AVIATION4. MERGER BETWEEN KINGFISHER AIRLINES AND AIR DECCAN 4.1 CRITICAL ANALYSIS5. MERGER BETWEEN JETAIRWAYS AND AIR SAHARA 5.1 CRITICAL ANALYSIS6. MERGER BETWEEN AIR INDIA AND INDIAN AIRLINES 6.1 POST MERGER SCENAREO 6.2 CRITICAL ANALYSIS7. CONCLUSION8. REFERENCE/BIBLIOGRAPHY 2
    • 1. INTRODUCTIONIndian civil aviation sector has completed 100 years in 2011. Tata airlines promoted by J.R.D.Tata, father of civil aviation in India, was the first airline in India. The first flight of the airlinewas on 15th October 1932 from Karachi to Mumbai via Ahmadabad. At that time, there were afew transport companies operating within and also beyond the frontiers of the country, carryingboth air cargo and passengers. Some of these were Tata Airlines, Indian National Airways, AirService of India, Deccan Airways, Ambica Airways, Bharat Airways and Mistry Airways. On 29June 1946 Tata airlines was converted into a public company under the name of air India. 1948,after the independence of India, 49% of the airline was acquired by the Government of India,with an option to purchase an additional 2%. In return, the airline was granted status to operateinternational services from India as the designated flag carrier under the name Air IndiaInternational. On 8 June 1948, a Lockheed Constellation L-749A named Malabar Princess(registered VT-CQP) took off from Bombay bound for London Heathrow via Cairo and Geneva.This marked the airlines first long-haul international flight, soon followed by service in 1950 toNairobi via Aden. On 25 August 1953, the Government of India exercised its option to purchasea majority stake in the carrier and Air India International Limited was born as one of the fruits ofthe Air Corporations Act that nationalized the air transportation industry. Indian airlines alsocame into existence in 1953 with the enactment of the air corporation‘s act 1953. It was formedwith the merger of eight domestic airlines and was entrusted with the responsibility of providingair transportation within the country as well as to the neighboring countries in Asia.Indian airlines flight free run over the Indian skies ended with the entry of private carriers afterthe liberalization of the Indian economy in the early 1990‘s when many private airlines like jetairways, air Sahara, east-west airlines and ModiLuft entered the fray. The entry of low costairlines like air Deccan, indigo and spice jet has revolutionized the Indian aviation scenario.During the year 2006-07 overall the passenger traffic grew by more than 27% and cargo trafficgrew by a modest 11%. Similarly aircraft movement has also grown by almost 27% in India withover 19 million passengers flying in 2008 when compared to 2007 which was 17 million. As perthe latest data by the Directorate General of Civil Aviation passengers carried by domesticairlines in 2011 is 60.663 million as against 52.021 million in 2010 thereby registering a growthof 16.6%. 3
    • 2. MERGERS AND ACQUISITIONS2.1 MERGERSMergers involve the mutual decision of two companies to combine & become one entity. Thecombined business can cut cost of operation & increase profit which will boost shareholdersvalue for both groups of shareholders. In Merger of two corporations, shareholders usually havetheir shares in the old organization & are exchanged for an equal numbers of shares in themerged entity. According to the Oxford Dictionary ―merger‖ means ―combining of twocompanies into one‖. Merger is a fusion between two or more enterprises, whereby the identityof one or more is lost and the result is a single enterprise. In merger the assets and liabilities ofthe companies get vested in another company, the company that is merged losing its identity andits shareholders becoming shareholders of the other company. All assets, liabilities and the stockof one company are transferred to Transferee Company in consideration of payment in the formof: Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes.In the pure sense, a merger happens when two firms, often of about the same size, agree to goforward as a single new company rather than remain separately owned and operated. This kind ofaction is more precisely referred to as a "merger of equals." For Example, both Daimler-Benzand Chrysler ceased to exist when the two firms merged, and a new company, Daimler Chrysler,was created.2.2 ACQUISITIONSAcquisition in general sense is acquiring the ownership in the property. In the context of businesscombinations, an acquisition is the purchase by one company of a controlling interest in the sharecapital of another existing company. On the other hand, Acquisition means the purchase of asmaller company by much larger one. A larger company can initiate an Acquisition of smallerfirm which essentially amounts to buy the company in the face of resistance from smallercompany‘s management. Unlike Mergers in an Acquisition the acquiring firm usually offers a 4
    • cash price per share to target firm‘s shareholders. Acquisition means an attempt by one firm togain majority interest in the another firm called target firm &dispose-off its assets or to take thetarget firm private by small group of investors. A company can buy another company with cash,stock or a combination of the two. Another possibility, which is common in smaller deals, is forone company to acquire all the assets of another company. An acquisition may be affected by;(a) Agreement with the persons holding majority interest in the company management likemembers of the board or major shareholders commanding majority of voting power;(b) Purchase of shares in open market;(c) To make takeover offer to the general body of shareholders;(d) Purchase of new shares by private treaty;(e) Acquisition of share capital through the following forms of considerations viz. means of cash,issuance of loan capital, or insurance of share capital.There are broadly two kinds of strategies that can be employed in corporate acquisitions. Theseinclude:Friendly Takeover:-The acquiring firm makes a financial proposal to the target firm‘s management and board. Thisproposal might involve the merger of the two firms, the consolidation of two firms, or thecreation of parent/subsidiary relationship.Hostile Takeover:-A hostile takeover may not follow a preliminary attempt at a friendly takeover. For example, it isnot uncommon for an acquiring firm to embrace the target firm‘s management in what iscolloquially called a bear hug.2.3 DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS:-Although they are often uttered in the same breath and used as though they were synonymous,the terms merger and acquisition mean slightly different things. When one company takes overanother and clearly established itself as the new owner, the purchase is called an acquisition.From a legal point of view, the target company ceases to exist, the buyer "swallows" the businessand the buyers stock continues to be traded. 5
    • In the pure sense of the term, a merger happens when two firms, often of about the same size,agree to go forward as a single new company rather than remain separately owned and operated.This kind of action is more precisely referred to as a "merger of equals." Both companies stocksare surrendered and new company stock is issued in its place. For example, both Daimler-Benzand Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler,was created. In practice, however, actual mergers of equals dont happen very often. Usually, onecompany will buy another and, as part of the deals terms, simply allow the acquired firm toproclaim that the action is a merger of equals, even if its technically an acquisition. Beingbought out often carries negative connotations, therefore, by describing the deal as a merger, dealmakers and top managers try to make the takeover more palatable.A purchase deal will also be called a merger when both CEOs agree that joining together is in thebest interest of both of their companies. But when the deal is unfriendly - that is, when the targetcompany does not want to be purchased - it is always regarded as an acquisition. Whether apurchase is considered a merger or an acquisition really depends on whether the purchase isfriendly or hostile and how it is announced. In other words, the real difference lies in how thepurchase is communicated to and received by the target companys board of directors, employeesand shareholders.2.4 TYPES OF MERGERS:-There are three main types of mergers which are Horizontal merger, Vertical merger &Conglomerate merger. These types are explained as follows;1. Horizontal Merger:-This type of merger involves two firms that operate & compete in a similar kind of a business.Horizontal merger is based on the assumptions that it will provide economies of scale from thelarger combined unit. The economies of scale are obtained by the elimination of duplication offacilities, broadening the product line, reduction in the advertising cost. Horizontal mergers alsohave potentials to create monopoly power on the part of the combined firm enabling it to engagein anticompetitive practices.Examples: - 6
    • Mumbai - Glaxo India Limited and Smith Kline Beecham Pharmaceuticals (India) Limited have legally merged to form GlaxoSmithKline Pharmaceuticals Limited in India (GSK). A merger would let them pool their research & development funds and would give the merged company a bigger sales and marketing force. Merger of Centurion Bank & Bank of Punjab. Merger between Holicim & Gujarat Ambuja Cement ltd2. Vertical Merger:-A vertical Merger involves merger between firms that are in different stages of production orvalue chain. A company involved in vertical merger usually seeks to merge with anothercompany or would like to take over another company mainly to expand its operations bybackward or forward integration. The acquiring company through merger of another unitsattempt to reduce inventory of raw materials and finished goods. The basic purpose of verticalmerger is to eliminate cost of searching raw materials. Vertical merger takes place when bothfirm plan to integrate the production process and capitalize on the demand for the product. Acompany decides to get merged with another company when it is not in a position to get strongposition in a market because of imperfect market of intermediary product, scarcity of resources.Example: - Among the Indian corporate that have emerged as big international players is theVideocon group. The group became the third largest colour picture tube manufacturer in theworld when it announced the purchase of the colour picture tube business of France-basedThomson SA, which includes units in Mexico, Poland and China, for about Rs 1260 crore.3. Conglomerate merger:-Conglomerate mergers means mergers between firms engaged in unrelated types of businessactivity. The basic purpose of such combination is utilization of financial resources. Such type ofmerger enhances the overall stability of the acquirer company and creates balance in thecompany‘s total portfolio of diverse products and production processes and thereby reduces therisk of instability in the firm‘s cash flows. Conglomerate mergers can be distinguished into threetypes:I. Product extension mergers these are mergers between firms in related business activities andmay also be called concentric mergers. These mergers broaden the product lines of the firms. 7
    • II. Geographic market extension mergers: These involve a merger between two firmsoperating in two different geographic areas.III. Pure conglomerates mergers: These involve mergers between two firms with unrelatedbusiness activities. They do not come under product extension or market extension.2.5 ADVANTAGES OF MERGERS & ACQUISITIONS:Mergers and acquisitions is the permanent combination of the business which vest managementin complete control of the business of merged firm. Shareholders in the selling company gainfrom the mergers and acquisitions as the premium offered to induce acceptance of the merger oracquisitions. It offers much more price than the book value of shares. Shareholders in the buyingcompany gain premium in the long run with the growth of the company. Mergers andacquisitions are caused with the support of shareholders, managers and promoters of the combingcompanies. The advantages, which motivate the shareholders and managers to give their supportto these combinations and the resulting consequences they have to bear, are briefly noted below.From shareholders point of view: - Shareholders are the owners of the company so they mustget be benefited from the mergers and acquisitions. Mergers and acquisitions can affect fortuneof shareholders. Shareholders expect that investment made by them in the combining companiesshould enhance when firms are merging. The sale of shares from one company‘s shareholders toanother and holding investment in shares should give rise to greater values. Following are theadvantages that would be generally available in each merger and acquisition from the point ofview of shareholders;1. Face value of the share is increased.2. Shareholders will get more returns on the investments made by them in the combiningcompanies.3. Sale of shares from one company‘s shareholder to another is possible.4. Shareholders get better investment opportunities in mergers and acquisitions.From manager’s point of view: - Managers are concerned with improving operations of thecompany, managing the affairs of the company effectively for all round gains and growth of thecompany which will provide them better deals in raising their status, perks and fringe benefits.Mergers where all these things are the guaranteed outcome get support from the managers. 8
    • From Promoters point of view: -1. Mergers offer company‘s promoters advantages of increase in the size of their company,financial structure and financial strength.2. Mergers can convert closely held and private limited company into public limited companywithout contributing much wealth and losing control of promoters over the company.From Consumers point of view: - Consumers are the king of the market so they must get somebenefits from mergers and acquisitions. Benefits in favor of the consumer will depend upon thefact whether or not mergers increase or decrease competitive economic and productive activitywhich directly affects the degree of welfare of the consumers through changes in the price level,quality of the products and after sales service etc. Following are the benefits that consumers mayderive from mergers and acquisitions transactions;1. Low price & better quality goods: - The economic gains realized from mergers andacquisitions are passed on to consumers in the form of low priced and better quality goods.2. Improve standard of living of the consumers: - Low priced and better quality productsdirectly improves standard of living of the consumers.2.6 DISADVANTAGES OF MERGERS & ACQUISITIONS:Merger or acquisition of two companies in the same field or in diverse field may involvereduction in the number of competing firms in an industry and tend to dilute competition in themarket. They generally contribute directly to the concentration of economic power and are likelyto lead the merger entities to a dominant position of market power. It mayResult in lesser substitutes in the market, which would affect consumer‘s welfare. Yet anotherdisadvantage may surface, if a large undertaking after merger because of resulting dominancebecomes complacent and suffers from deterioration over the years in its performance. Followingare some disadvantages of mergers and acquisitions; Creates monopoly- when two firms merged together they get dominating position in the market which may lead to create monopoly in the market. 9
    • Leads to unemployment-Raiders shouldn‘t have the right to buy up firms they have no idea how to run – the employees who have spent their lives building up the firm should be making the decisions. Raiders become filthy rich without producing anything, at the expense of hardworking people who do produce something. M&A damages the morale and productivity of firms. Corporate debt levels have risen to dangerous levels. Managers pressured to forego long-term investment in favor of short-term profit. Shareholders may be payed lesser dividend if the firm is not making profits. There may be a possibility that shareholders would be paid less returns on investment if the company is not earning enough profit. Corporate raiders use their control to strip assets from the target, make a quick profit, destroying the company in the process, throwing people out of work. 3. MERGERS AND ACQUISITIONS IN INDIAN CIVIL AVIATION:Mergers and acquisitions in the Indian civil aviation dates back to the 1950s when thegovernment of India through the air corporations act 1953 nationalized all airline industry toform Air India and Indian airlines. Tata Airlines became Air India and former freedom domesticairlines, Deccan Airways, Airways India, Bharat Airways, Himalayan Aviation, KalingaAirlines, Indian National Airways and Air Services of India, were merged to form the newdomestic national carrier Indian airlines.In the 1990s after the economic liberalization many private airlines sprang up and competitionalso increased. The biggest merger year in the Indian aviation industry was 2007 where 6 of themajor airlines of India merged into three. Each airline had its own reason for merger which isdiscussed below. 4. MERGER BETWEEN KINGFISHER AIRLINES AND AIR DECCANAir Deccan was operated by Deccan Aviation. It was started by Captain G. R. Gopinath and itsfirst flight took off on 23 August 2003 from Hyderabad to Vijayawada. It was known popularlyas the common mans airline, with is logo showing two palms joined together to signify a birdflying. The tagline of the airline was "Simpli-fly," signifying that it was now possible for thecommon man to fly. The dream of Captain Gopinath was to enable "every Indian to fly at least 10
    • once in his lifetime." Air Deccan was the first airline in India to fly to second tier cities likeHubli, Mangalore, Madurai and Visakhapatnam from metropolitan areas like Bangalore andChennai. On 25 January 2006, Deccan went public by filing a red herring prospectus with theSecurities and Exchange Board of India. Deccan planned to offload 25 percent of its stake in theinitial public offering (IPO) that opened on 18 May. However, due to the stock market downturnat that time, Air Deccans IPO barely managed to scrape through, even after extending the issueclosing date and reducing the price band.Kingfisher Airlines was established in 2003. It is owned by the Bengaluru based UnitedBreweries Group. The airline started commercial operations in 9 May 2005 with a fleet of fournew Airbus A320-200s operating a flight from Mumbai to Delhi. It started its internationaloperations on 3 September 2008 by connecting Bengaluru with London.Less than expected growth in the Indian aviation sector coupled with overcrowding and theresultant severe competition between airlines resulted in almost all the Indian carriers, includingAir Deccan, running into heavy losses. After initially trying to get in fresh capital for running theairline, Captain Gopinath eventually succumbed to pressures for consolidation. On 19 December2007, it was announced that Air Deccan would merge with Kingfisher Airlines. Since Indianaviation regulations prohibited domestic airlines from flying on international routes until theyhad operated in the domestic market for five years, it was decided to instead merge KingfisherAirlines into Deccan Aviation, following which Deccan Aviation would be renamed KingfisherAirlines. This was because Air Deccan was the older of the two airlines, and therefore would bethe first to qualify for flying on international routes. The merger became effective April 2008,with Vijay Mallya becoming the Chairman and CEO of the new company, while G. R. Gopinathbecame its Vice-Chairman.Air Deccan began its operations with one aircraft and with one flight but after the alignment withKingfisher Airlines, has a total fleet of seventy one aircrafts-41 Airbus and 30 ATR aircraft(Business Standard, June 7, 2007, p-8). It operates 537 flights (Business Standard, June 3, 2007,p-4) and covers 70 destinations. It offers point to point service. Before Air Deccan arrived on thescene in 2003, a flight from Bangalore to Delhi cost Rs 12,000. The arrival of Deccan led to thisfalling to Rs 2,500. As LCCs like SpiceJet, Indigo and others sprouted and followed AirDeccan‘s lead, even full service airlines were forced to cut fares to stay in the business. Result: 11
    • domestic air travel really took off; the number of passengers flying within the country jumpedfrom 29.2 million in 2003 to 44.38 million in 2006.After the merger, it was expected that Kingfisher will focus more on the international routeswhile Air Deccan will give it a wider domestic reach. Also Air Deccan was to continue as a lowcost carrier while Kingfisher will function as a full-service carrier. There was immense synergiesas both operate Airbus. The average age of the Air Deccan fleet is 6.1 years as of Apr 2006. AirDeccan operates a fleet of 43 aircraft comprising 20 brand new Airbus A320 aircraft and 23 ATRaircraft. The Airbus aircraft serve metro routes while ATR are utilized for Tier II and III citesand also for small airports. The newly formed company had revisited their fleet plan incoordination with each other to rationalize the fleet structure. Working on these lines thecompany has already placed orders from the European aircraft major, Airbus Industries for about90 aircrafts. These include five of the largest aircraft-A380, the first of which is slated to bedelivered to kingfisher by 2011. The merger was to benefit the entity by offering operationalsynergies like inventory management, maintenance, engineering and overhaul which wouldreduce the overall cost by 4% to 5% i.e around Rs. 300 million. Further the company would beable to rationalize its routes in a better way by changing its fare structure which will attract morepassengers. On operational grounds the merger was expected to help kingfisher expand itsinternational base as it finishes a 5 year mandatory period to fly domestic before getting aninternational license. Secondly on financial grounds it would mean a lot to kingfisher because ofsavings on operational cost. Other reasons for the merger were that both the companies had themaintenance contract with Lufthansa tecknik, both the companies have airbus fleet and sametype of engines and brakes.4.1 CRITICAL ANALYSISAny Indian airline requires five years of domestic flying experience and a fleet of 20 aircraft toget permission to fly international. Kingfisher Airlines was only two years old in 2007, when itacquired over four-year-old Air Deccan. The objective of the acquisitions made by Indiancarriers has been just to acquire market share and not to create a big merged entity that couldshare each other abilities to expand further. Kingfisher Airlines acquired Air Deccan in 2007 anddespite many changes in logo and name ran it as an LCC division of the airline. Removing AirDeccan as an independent operator took out the airline that was most responsible for the 12
    • irrational fares in the market place and, to this extent, it restored some pricing discipline whichadvantaged the entire industry. However, integrating such different carriers (one, a classic lowcost airline and the other a 5 star carrier), has proven to be extremely difficult. The hugecombined network and distinct inflight products of the two carriers, has created duplication andconfusion about the brand. This has been damaging to Kingfisher, with repercussions for itsfinancial performance. The combined entity has a large network and diverse operations that areproving to be hard to manage and consequently in 2011, kingfisher announced to call off its low-cost operations. 5. MERGER BETWEEN JET AIRWAYS AND AIR SAHARAJet Airways, which commenced operations on May 5, 1993, has within a short span of 14 yearsestablished its position as a market leader. The airline has had the distinction of being repeatedlyadjudged Indias Best Domestic Airline and has won several national and international awards.Jet Airways currently operates more than 365 flights daily with a fleet of 80 aircraft, whichincludes 10 Boeing 777-300 ER aircraft, 8 Airbus A330-200 aircraft, 53 classic and nextgeneration Boeing 737-400/700/800/900 aircraft and 9 modern ATR 72-500 turboprop aircraft.With an average fleet age of 4.3 years, it is the operator of the youngest aircraft fleet in Asia.Air Sahara was established on 20 September 1991 and began operations on 3 December 1993with two Boeing 737-200 aircraft as Sahara Airlines. Initially services were primarilyconcentrated in the northern sectors of India, keeping Delhi as its base, and then operations wereextended to cover all the country. Sahara Airlines was rebranded as Air Sahara on 2 October2000, although Sahara Airlines remains the carriers registered name. On 22 March 2004 itbecame an international carrier with the start of flights from Chennai to Colombo.Jet Airways announced its first takeover attempt on 19 January 2006, offering US$500 million(2000 crore rupees) in cash for the airline. Market reaction to the deal was mixed, with manyanalysts suggesting that Jet Airways was paying too much for Air Sahara. The Indian CivilAviation Ministry gave approval in principle, but the deal was eventually called off overdisagreements over price and the appointment of Jet chairman Naresh Goyal to the Air Saharaboard. Following the failure of the deal, the companies filed lawsuits seeking damages from eachother. A second, eventually successful attempt was made on 12 April 2007 with Jet Airwaysagreeing to pay 1,450 crore ($340 million). The deal gave Jet a combined domestic market 13
    • share of about 32%. On 16 April Jet Airways announced that Air Sahara will be renamed asJetLite. The takeover was officially completed on 20 April, when Jet Airways paid 400 crore.The deal would give Jet more than 32 per cent share of the domestic aviation market at that timeand add at least 27 aircraft to its 62-aircraft fleet, in addition to prime landing and take-off slotsat major airports such as London Heathrow, New Delhi and Mumbai. It would become the onlyprivately owned Indian airline with permission to fly overseas. More than in the capital or assetvalue, it is in the entrepreneurial advantages and the rights Air Sahara holds in the variousdomestic sectors and airports, as well as the license to fly a few international routes, that waswhere it‘s true value lie. Although others in the aviation industry, including rival Kingfisher,were also interested in the acquisition, the price tag apparently kept them out. Jet Airways hastaken its own time to work out the deal, under which it says it will not take on the liabilities ofSahara. The deal has distinct advantages for both the parties — it can make Jet the major playerin the domestic sector, with a market share of about 32 per cent in traffic, and bale Air Saharaout of its mounting liabilities. Going by market reports, much of the amount would go towardssettlements of dues and debts. Further, the deal marks the first major step towards consolidationin the Indian aviation industry which has witnessed unplanned and unbridled growth over thepast few years. The two airlines were among the first to enter the field when it was opened to theprivate sector. This combination was expected to dominate the Indian airline market for the nearterm as Jet will have a larger scale and scope than any other Indian carrier. It was expected tohelp Jet‘s new business model to align market shifts with products (network, aircraft size, andfrequency), cost structure and financial resources. It also helped to leverage its domestic size todevelop a stronger international presence. Moreover, in international operations, Jet had boughttime, by reducing competition, to put its house in order. Another important benefit that JetAirways derived from the acquisition of Sahara Airlines was that their order for the additional 10B737NG aircraft which were scheduled for delivery between June 2009 and August 2011thereby enabled Jet Airways to have access to additional aircraft to expand its fleet. Thisrepresented substantial additional intangible assets for Jet Airways since it had no aircraft onorder and delivery positions were not available before 2011 or only available at a premium. 14
    • 5.1 CRITICAL ANALYSIS As per the Centre for Asia Pacific Aviation, the acquisition of Air Sahara by Jet Airways was maybe the carrier‘s first major strategic error. Allowing Sahara to exit from the market would have resulted in a market correction that would have been to the benefit of all players. Jet incurred a high acquisition price and has been funding operating losses ever since. The process of integration has been difficult and costly and continues to negatively impact Jet Airways. It is reported that Jet Airways has yet to settle the full purchase price for the carrier, reflecting the state of its financial situation. Jet Airways‘ bottom line has been further impacted by an aggressive international expansion which stretched the carrier‘s resources and damaged investor confidence. The airline has since been forced to cut a number of existing routes and halt new services as it consolidates its overseas network. To address the overcapacity in its long haul fleet, Jet Airways has leased a number of wide body aircraft to Gulf Air and Oman Air. 6. MERGER BETWEEN AIR INDIA AND INDIAN AIRLINESThe government of India on 1 march 2007 approved the merger of Air India and Indian airlines.Consequent to the above a new company called national aviation company of India limited wasincorporated under the companies act 1956 on 30 march 2007 with its registered office at newDelhi. The merger of the two airlines would enable them to leverage their combined assets andcapital better and build a strong and sustainable business. The potential synergies were expectedto enhance the new combined airline‘s profitability by over US$133 million per annum, or aboutfour per cent, of their current combined assets. By 2010-11, when all the new aircraft ordered bythe two carriers are inducted into the fleet, the merged entity‘s employee-aircraft ratio wouldcome be about 200:1, comparable with any major global airline. While Air-India has ordered 68Boeing planes, Indian has finalized the acquisition of 43 Airbus aircraft. According to the reportsubmitted by Accenture, there will be no manpower rationalization as the consultancy hassuggested ‗careful integration‘ of manpower at various levels. It has also suggested a top-tobottom integration of the employees. It is proposed that the pay-scales be revised to bring parityin promotion procedures.The aim of the merger was to 15
    • Create the largest airline in India and comparable to other airlines in Asia. The mergerbetween the two state-run carriers will see the beginning of the process of consolidationin the Indian aviation space - the fastest growing in the world followed by China,Indonesia and Thailand.Provide an Integrated international/ domestic footprint which will significantly enhancecustomer proposition and allow easy entry into one of the three global airline alliances,mostly Star Alliance with global consortium of 21 airlines.Enable optimal utilization of existing resources through improvement in load factors andyields on commonly serviced routes as well as deploy ‗freed up‘ aircraft capacity onalternate routes. The merger had created a mega company with combined revenue of Rs150 billion ($3.7billion) and an estimated fleet size of 150. It had a diverse mix of aircraftfor short and long haul resulting in better fleet utilization.Provide an opportunity to fully leverage strong assets, capabilities and infrastructure.Provide an opportunity to leverage skilled and experienced manpower available with boththe Transferor Companies to the optimum potential.Provide a larger and growth oriented company for the people and the same shall be inlarger public interest.Potential to launch high growth & profitability businesses (Ground Handling Services,Maintenance Repair and Overhaul etc.)Provide maximum flexibility to achieve financial and capital restructuring throughrevaluation of assets.Provide an increased thrust and focus on airline support businesses.Economies of scale enabled routes rationalization and elimination of route duplication.This resulted in a saving of Rs1.86 billion, ($0.04 billion) and the new airlines will beoffering more competitive fares, flying seven different types of aircraft and thus beingmore versatile and utilizing assets like real estate, human resources and aircraft better.However the merger had also brought close to $10 billion (Rs 440 billion) of debt.The new entity was in a better position to bargain while buying fuel, spares and othermaterials. There were also major operational benefits as between the two they occupied alarge number of parking bays and hangers, facilities which were usually in acute short 16
    • supply, at several large airports in the country. This worked out to be a major advantage to plan new flights at most convenient times. Traffic rights - The protectionism enjoyed by the national carriers with regard to the traffic right entitlements is likely to continue even after the merger. This will ensure that the merged Airlines will have enough scope for continued expansion, necessitated due to their combined fleet strength. The protectionism on traffic rights have another angle, which is aimed at ensuring higher intrinsic value , since the Government is likely to divest certain percentage of its holding in the near future.6.1 POST MERGER SCENAREO NACILs employee-to-aircraft ratio, a gauge of efficiency, is the highest among its peers at 222:1 (the global average is 150:1), resulting in a surplus employee strength of almost 10,000. The wage bill of the merged company, which was 23 per cent of total expenditure at the time of incorporation, is expected to rise sharply due to a grade re- alignment. Fleet Expansion NACILs fleet expansion seems out of sync with the times, as most airlines are actually rounding their fleet and cancelling orders for new planes. While other Indian airlines have withdrawn over a third of their aircraft orders slated for delivery in 2009, NACIL plans to induct 30 aircraft in this fiscal and another 45 by March-end 2012. This means NACIL would face a wall of debt going forward. Mutual Distrust and strong unions The distrust between the two sides of Air India and Indian Airlines is almost palpable. For sure, many jobs will become redundant when functions are unified. Many of those appointed are from Indian Airlines, fuelling resentment among Air India employees. Integration has become a tightrope walk for the management. Strong opposition from unions against management‘s cost-cutting decisions through their salaries have led to strikes by the employees. Increased Competition The flux at the top has led to delays in decision-making at a time when demand for air travel has dropped around 8-10% over the last year and competition has heated up in the sector. The national carrier‘s domestic market share has been under pressure ever since budget carriers and new private airlines took wing. Air India‘s 17
    • domestic market share dropped from 19.8% in August 2007, when the merger took place, to 13.9% in January 2008 before rising to 17.2% in February 2009. Lower load factor Though the overall operating performance has been steady, Air India passenger load factor of 63.2%, which was the company‘s record, lags the industry average of 75% in 2006-07.The load factor difference is even greater when compared to other low fares carriers such as Air Deccan. The company‘s load factor is decreasing year by year, in 2005- 06 load factor is 66.2% which is more than present load factor. Air India load factor is likely to be low because of the much higher frequency operated on each route. Lower load factor could decrease the company‘s margins.6.2 CRITICAL ANALYSIS:The merger between Air India and Indian Airlines made perfect sense on paper for over adecade. Their complementary networks, common ownership and need to generate greaterefficiencies all pointed to the benefits of a merged entity. As it was, the merger coincided with aflurry of increased domestic and international competition, placing great pressure onmanagement. Successful implementation required robust guidance and a capable execution teamto handle such a complex undertaking. Instead, the process moved ahead without firststrengthening the management and organization structure. More attention was devoted todiscussion around non-core issues such as long term fleet acquisitions and establishingsubsidiaries for ground handling and maintenance, than to addressing the state of the flyingbusiness. Air India has continued to see its domestic market share decline. The situation wascompounded by the cultural chasm between Air India and Indian Airlines, leading to an increasein internal politics, a potentially messy situation in an entity with 35,000 employees. A bloatedworkforce, unproductive work practices and political impediments to shedding staff made thecreation of a viable business model extremely challenging. The situation calls for a depth ofleadership across the organization which still does not exist. There appears to be no clearbusiness plan to revive the carrier and effecting a turnaround now appears to be a herculean task. 7. CONCLUSIONKingfisher Airlines announcement to discontinue with Red, its low-cost wing formed aftermerging with Air Deccan, raises the question on the success of mergers of aviation companies inthe country. Analysts say mergers by Indias airlines have not been successful so far because of 18
    • their objectives: its to either kill competition or acquire flying rights to fly international. Somealso say the Indian aviation did not see any mergers, it was outright acquisitions and thecompany that was acquired lost its identity.The aviation industry in India is growing at 20 per cent per annum, making it one of the largestin the world. Six major Indian carriers with around 400 aircraft catered to 143 millionpassengers, including 38 million international, in 2010-11. Out of the 38 million internationalpassengers, Indian carriers flew 35 per cent of them in 2010-11. Attempts by full-service carriersto run two different kinds of services (both full service and low cost) within the same airline alsocreated serious problems, as there is a lot of difference in the costs, the turnaround time ofaircraft, the training modules and the distribution models. But this consolidation, aimed atcreating a more viable business model, took place against the background of an industry that wasbeginning to exhibit the first signs of distress. The bullish fleet orders placed by Indian carrierssaw capacity being introduced at the rate of 6 to 6.5 aircraft a month, whereas the actual growthin demand was closer to 3 aircraft equivalents. Aside from the mis-match between supply anddemand, the rate of growth was simply too great for the industry to handle from a managementand capital perspective. In a fragmented market, with multiple start-ups chasing market share,loss-leader pricing was widespread and Air Deccan in particular was responsible for setting fareswell below cost as it fought to retain its first mover market share. The rapid increase in capacityat a time when the airport modernization program was yet to deliver upgraded infrastructure,meant that airports and airways were highly congested, increasing airline operating costs. Withthe inadequate surface access and airport (and airways) infrastructure, airlines were unable tosecure a significant competitive edge over other means of travel, thereby excluding huge parts ofthe still-untapped leisure market. In a period of global boom, demand for skilled personnel suchas pilots and engineers also outstripped supply leading to a sharp escalation in wages, and insome cases grounding of aircraft due a shortage of staff. Balance sheets were stretched as aresult of the aggressive fleet induction programs, combined with the mounting operational losses.These early signs of growing pains were largely ignored and airlines continued to pursueaggressive but unachievable growth strategies. The flaws in this approach were exposed by theastronomical fuel prices in 2008 which created an impossible operating environment, not onlyfor Indian airlines, but for the entire global industry. 19
    • 8. REFERENCE/BIBLIOGRAPHY1. www.wikipedia.org2. Mergers & Acquisitions in Aviation Sector – esha tyagi3. www.rediff.com4. www.investopedia.com5. Consolidation In The Sky- A Case Study On The Quest For Supremacy Between Jetlite And Kingfisher Airlines – Dr Salma ahmed & Yasser Mahfooz, Aligrah Muslim University6. Indian Airlines prepare for consolidation round II – Centre for Asia Pacific Aviation 20