Indian-Air India

Indian-Air India : Merger of Promise

The proposed merger of Air India and Indian marks the beginning of the consolidation era in the Indian aviation space.

In line with the global trend of consolidation, the stage is all set for the Indian aviation industry to create a single mega national carrier which is also poised to become South Asia's largest airline. Touted as the mother of Indian aviation mergers, the merger of Air India and Indian is expected to form India's largest airline with a clout to take on the domestic and international competition.

The formal approval given for the merger by the Union Cabinet on March 1, 2007 paved the way for the birth of the Rs. 15,500 cr airline which is almost thrice the size of its closest domestic rival, Jet Airways. Catapulting its position to be among the top 30 league of airlines in the world, the new jumbo entity has the potential to regain the dominant market share that the two state-owned airlines once enjoyed, provided proper restructuring efforts are put into practice. Though the cost of integration of the merger is estimated to be around Rs. 200 cr, it is also expected to reap a net benefit of Rs. 600 cr by the end of the next three years.

Merger motives

The merger move, first mooted around 20 years ago, seems to be inevitable now for both the public sector airlines which are burdened with ageing aircraft and are desperately in need to overhaul their fleets. The merger is expected to help the two ailing giants to revive from the brink of collapse.

Air India, founded in 1932 by Tata group as Tata Airlines, mostly operates on international routes and serves more than 40 destinations across the globe. Though the government initially bought 49% of the airline's shares in 1946, making it a public company and renaming it as Air India, it subsequently bought the remaining stakes also and made it fully government-owned. However, Air India, once considered among the most preferred airlines for international travel in the 1970s and 1980s, lost its sheen because of government apathy. As time passed by, Air India lost its market share to other international airlines which were not only aggressive in marketing and services but also were successful in replacing their old fleet of aircraft.

On the other hand, Indian, set up in 1953 as Indian Airlines, mostly serves the domestic arena besides a few neighboring countries. The airline has also been suffering from huge losses due to bureaucratic management process. Added to this, the private players which were allowed to operate are now capturing its market share with better customer service, attractive deals and lesser delays. Though at the beginning , India had just two domestic carriers—Indian, Air India—the number has increased substantially in the past couple of years. Now, many players like Kingfisher, Air Saraha, Jet Airways, Go Air, Air Deccan, SpiceJet, Paramount, Indigo and Indus have entered the air space .

Besides these, many others like Trans India, Easy Air, and Air Dravida have been awaiting the government's approval to take advantage of the air travel boom which has been primarily driven by the increased income levels of the average Indian. Jet airways and Kingfisher, closest rivals of the two public sector airlines, have around 44 and 23 fleets respectively and are gearing up to induct about 20 and 109 aircrafts respectively, by 2009. All these factors are posing stiff challenges for the government-owned airlines which have been witnessing declining market shares.

In an attempt to increase their market shares, both Indian and Air India have started eating into each other's market share. The Indian Government, the owner of these two airlines, has finally decided to merge these two ailing giants to protect the economic interests of both entities as well as to realize the synergies.

Leveraging synergies

The merger of the duo is the latest buzz in the Indian aviation sector. The deal would be executed in a phased manner over the next two years to create a mega airline and thus reap a net benefit of Rs. 600 cr by the end of the next three years. One of the best-loved mascots, Air India's Maharaja, might be retained as the mascot of the newly formed airline as well.

The merger formalities are expected to be completed by 2010, forming a new entity with over 33,000 employees and a fleet size of 112 new-generation aircrafts. The government has already placed orders for 68 and 43 planes from Boeing and Airbus respectively. The merged entity can compete effectively with airlines like UAE carrier Emirates which has a fleet size of 93 new aircraft, Singapore Airlines with 118 and Malaysian Airlines with 110 aircrafts respectively.

The merged entity can effectively leverage the strong domestic network of Indian to room in international flights through the class hub-and-spoke-operations in a similar way that many global major airlines do. On the other hand, the merged entity can reap the benefits of the international network—easily access the American and European aerospace—which Air India brings with it.

The merged entity can also leverage the tax benefits to offset its losses. Since the Finance Ministry has given its approval to extend Section 72A tax benefits of the Income Tax Act to the merged entity, it will enable the new jumbo to offset the accumulated losses and the unabsorbed depreciation against the future years' profits. Indian can set off Rs. 1,150 cr against the profits for the years to come.

The integration plan envisages that the low-cost subsidiaries of both the airlines be clubbed into one which would act as a subsidiary to the merged entity. This subsidiary would offer low-cost travel services to a selected few domestic and international arenas. Besides this, the new entity is expected to work on a business model which would create separate Strategic Business Units (SBUs) to look after different areas of service like Maintenance-Repair-Overhaul (MRO), cargo, engineering, Low-Cost Carriers (LCCs), jet shop and ground handling.

Post-merger, there are more chances for the new entity to witness significant increase in valuations as it will emerge as a much bigger and stronger player than the individual entities. Hence, the concerned authorities have decided to carry out the IPO after the merger, though it was earlier planned before the merger. Thus, the merged entity is also poised to enjoy the benefit of increased valuations.

Integration challenges

Besides benefits, the merger is also likely to pose some serious integration challenges due to completely divergent operations and different fleet composition as well as diverse organizational cultures. The fact that the size of the workforce is large makes it all the more difficult to carry out integration efforts simultaneously across all centers of the world. Divergent operations and fleet sizes of the duo bring out issues like managing spares, pilot training, etc.

Different workforce with different pay structures and different cultures may also raise few human resource concerns. For instance, issues like which pilots should fly overseas may also turn out to be a matter of debate. As pilots flying overseas receive huge amounts of international allowances, crew of both companies will be interested to work in the international arena. Rationalization of staff could be the only solution to such issues. However, such rationalization of staff is also prone to create turbulence within the system. On the other hand, without rationalization, the merged entity cannot reap economies of scale. At this critical juncture, the airlines should also see to it that they do not lose out their priced staff and pilots to other competitors. Against this challenging backdrop, the aviation authorities have a daunting task ahead to carry out the merger integration process smoothly and successfully.

Players on the prowl

Though the merged entity can enjoy the privilege of increased market share, which is one of the objectives of the merger, it could just be a temporary benefit than a permanent one. To be successful in the long haul, it should rather address the underlying factors which led to the declining glory of these two airlines. Perhaps, after the merger is through, the government might offload some of its share to the public and perhaps a strategic partner would be brought in. All this would probably bring in more transparency and accountability which is very much the need of the hour.

The merger of the two airlines can be envisaged as the beginning of the consolidation efforts in the Indian aviation space which is the fastest growing in the world. Air traffic to India has been growing at a rapid pace of 40% compared to 15-20% growth at the global level. Private players are on a prowl to cash in on the growing demand. Jet Airways had felt the necessity much before, thus seeking to acquire Air Sahara in 2006. Though the deal had collapsed then, Jet Airways has recently clinched a fresh deal to takeover Air Sahara which is valued at $337.8 mn. Besides this, analysts opine that other arch rivals like Kingfisher and SpiceJet are also gearing up to consolidate themselves. All these speculations signify that the merger of Air India and Indian will set the ball rolling to further consolidation frenzy in the Indian aviation space.

- D Satish and Y Bala Bharathi