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Airline mergers and acquisitions are on the rise across the globe. Theses mergers and acquisitions are highly strategic involving several considerations Moreover airline mergers and acquisitions bear serious implications for travelers as well as airline employees. Important issues related to airline mergers and acquisitions are time, approvals, efficiency, competition, passenger benefits and strife.
VED PRAKASH TIWARIBBA
2007-2010AMITY UNIVERSITY
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[ ] February 22, 2010
AMITY UNIVERSITY
Mergers and Acquisitions: Aviation Industry
Kingfisher and air deccan
Air india and Indian airlines
For the partial completion of BBA programme
Submitted To: Submitted By:
Mr.Ashish Noel Ved Prakash Tiwari
A3906407446
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Abstract
Airline mergers and acquisitions are on the rise across the globe. Theses
mergers and acquisitions are highly strategic involving several
considerations.
Moreover airline mergers and acquisitions bear serious implications for
travelers as well as airline employees. Important issues related to airline
mergers and acquisitions are time, approvals, efficiency, competition,
passenger benefits and strife.
The airlines industry is abuzz with news of mergers and acquisitions. In the
last few years airline mergers and acquisitions have been a growing trend in
several countries across the globe. However mergers and acquisitions in the
aviation industry are highly strategic in nature and are undertaken after
taking into consideration several important factors.
Some of the important factors considered by airlines in taking merger and
acquisition decisions are -
The coverage area of the other airline. Strategically an airline would like to
merge with or acquire an airline that operates in routes different from its
own. This helps in expanding service coverage and avoiding overlapping of
flight schedules. The quality of service and brand image of the other airline.
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If the other airline has any partnership with a rival group of airlines.
From the point of view of customers mergers and acquisitions may lead to
increased airfares. This is because mergers and acquisitions reduce the
number of operators thereby reducing competition and pushing up prices in
the aviation industry.
Airline mergers and acquisitions also have important impacts on the
employees of the participating airlines.
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Index
Particular page no.
1.Abstract 3
2.Introduction 10
3.motive behind m&n 16
4.merger success 22
5. merger failure 24
6.merger wave 26
7.Aviation industry 31
8.Kingfisher red 33
9.Air deccan 36
10.Indian airlines 47
11.Air india 48
12.Merger 53
13.Conclusion 57
14.Biblography 60
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CERTIFICATE
This is to certify that the present study “mergers and acquisition in
aviation industry” has been carried out by Ved Prakash Tiwari of BBA , under
my direct supervision. I am glad to forward this for the partial fulfillment for BBA.
Project guide: Mr.Ashish Noel
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Acknowledgement
I would like to heart fully acknowledge my gratitude and thanks to all the panelists
who took active part in accomplishing my project.
At the very outset, I wish to thank Mr.Ashish Noel, who helped me to choose such
an interesting topic to work upon as a full fledged project and guiding me at each
step interacting with him gave me a completely different view to look at a subject,
throughout its completion.
I am also thankful to all the faculty of my institute, who helped me in giving all the
required information in a very cooperative manner. The project would not have
been possible without the help of my friends and colleagues who have been patient
enough with me.
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Objective
The idea behind the research project is to study Merger and Acquisition and based
on the study finding out the main reason a firm goes for a merger. Also will try to
find if the M&A is always beneficial or it backfires also and the reason for the
same. I will be developing a case study on the proposed merger of kingfisher and
air deccan,air india and Indian airlines the study will help in finding the main
reason behind the merger and the advantages and benefits which companies derive
and the cost it will pay if it goes haywire.
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Methodology
The project will start with the study of literature (theory and various research
papers on ―Mergers and Acquisitions‖). The study of work of various researchers
and scholars will help me to have the overview of M&A, how it has evolved and
what are the rationale behind the process, motives, benefits and opportunities. Also
the problems faced by the firm going for it and the ex-efficiencies developed by
the firms during the process. To cover the part related to the literature I will go
through books on M&A and the research papers downloaded from internet. Then I
will try to narrow down my approach to Indian context. I will study one recent
M&A in aviation industry. Finally I will try to develop a case study regarding the
proposed merger of kingfisher and air deccan,air india and Indian airlines . As
throughout the project I shall be making use of secondary data. So the report will
be true only to the extent of the information available on the net and magazines and
newspapers.
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Introduction
Mergers and acquisitions
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of
corporate strategy, corporate finance and management dealing with the buying,
selling and combining of different companies that can aid, finance, or help a
growing company in a given industry grow rapidly without having to create
another business entity.
Acquisition
An acquisition, also known as a takeover or a buyout or "merger", is the buying of
one company (the ‘target’) by another. An acquisition may be friendly or hostile.
In the former case, the companies cooperate in negotiations; in the latter case, the
takeover target is unwilling to be bought or the target's board has no prior
knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm
by a larger one. Sometimes, however, a smaller firm will acquire management
control of a larger or longer established company and keep its name for the
combined entity. This is known as a reverse takeover. Another type of acquisition
is reverse merger, a deal that enables a private company to get publicly listed in a
short time period. A reverse merger occurs when a private company that has strong
prospects and is eager to raise financing buys a publicly listed shell company,
usually one with no business and limited assets. Achieving acquisition success has
proven to be very difficult, while various studies have shown that 50% of
acquisitions were unsuccessful.The acquisition process is very complex, with many
dimensions influencing its outcome.
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The buyer buys the shares, and therefore control, of the target company being
purchased. Ownership control of the company in turn conveys effective control
over the assets of the company, but since the company is acquired intact as a going
concern, this form of transaction carries with it all of the liabilities accrued by that
business over its past and all of the risks that company faces in its commercial
environment.
The buyer buys the assets of the target company. The cash the target receives from
the sell-off is paid back to its shareholders by dividend or through liquidation. This
type of transaction leaves the target company as an empty shell, if the buyer buys
out the entire assets. A buyer often structures the transaction as an asset purchase
to "cherry-pick" the assets that it wants and leave out the assets and liabilities that
it does not. This can be particularly important where foreseeable liabilities may
include future, unquantified damage awards such as those that could arise from
litigation over defective products, employee benefits or terminations, or
environmental damage. A disadvantage of this structure is the tax that many
jurisdictions, particularly outside the United States, impose on transfers of the
individual assets, whereas stock transactions can frequently be structured as like-
kind exchanges or other arrangements that are tax-free or tax-neutral, both to the
buyer and to the seller's shareholders.
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a
situation where one company splits into two, generating a second company
separately listed on a stock exchange.
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Distinction 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 over another and clearly establishes 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 business and the buyer's stock
continues to be traded.
In the pure sense of the term, a merger happens when two firms 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".
The firms are often of about the same size. Both companies' stocks are surrendered
and new company stock is issued in its place. For example, in the 1999 merger of
Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they
merged, and a new company, GlaxoSmithKline, was created.
In practice, however, actual mergers of equals don't happen very often. Usually,
one company will buy another and, as part of the deal's terms, simply allow the
acquired firm to proclaim that the action is a merger of equals, even if it is
technically an acquisition. Being bought out often carries negative connotations,
therefore, by describing the deal euphemistically as a merger, deal makers and top
managers try to make the takeover more palatable. An example of this would be
the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to in
the time.
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A purchase deal will also be called a merger when both CEOs agree that joining
together is in the best interest of both of their companies. But when the deal is
unfriendly - that is, when the target company does not want to be purchased - it is
always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on
whether the purchase is friendly or hostile and how it is announced. In other words,
the real difference lies in how the purchase is communicated to and received by the
target company's board of directors, employees and shareholders. It is quite normal
though for M&A deal communications to take place in a so called 'confidentiality
bubble' whereby information flows are restricted due to confidentiality agreements
(Harwood, 2005).
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Business valuation
The five most common ways to valuate a business are
1. asset valuation,
2. historical earnings valuation,
3. future maintainable earnings valuation,
4. relative valuation (comparable company & comparable transactions),
5. discounted cash flow (DCF) valuation
Professionals who valuate businesses generally do not use just one of these
methods but a combination of some of them, as well as possibly others that are not
mentioned above, in order to obtain a more accurate value. These values are
determined for the most part by looking at a company's balance sheet and/or
income statement and withdrawing the appropriate information. The information in
the balance sheet or income statement is obtained by one of three accounting
measures: a Notice to Reader, a Review Engagement or an Audit.
Accurate business valuation is one of the most important aspects of M&A as
valuations like these will have a major impact on the price that a business will be
sold for. Most often this information is expressed in a Letter of Opinion of Value
(LOV) when the business is being valuated for interest's sake. There are other,
more detailed ways of expressing the value of a business. These reports generally
get more detailed and expensive as the size of a company increases, however, this
is not always the case as there are many complicated industries which require more
attention to detail, regardless of size.
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Financing M&A
Mergers are generally differentiated from acquisitions partly by the way in which
they are financed and partly by the relative size of the companies. Various methods
of financing an M&A deal exist:
Cash
Payment by cash. Such transactions are usually termed acquisitions rather than
mergers because the shareholders of the target company are removed from the
picture and the target comes under the (indirect) control of the bidder's
shareholders.
Specialist M&A advisory firms
Although at present the majority of M&A advice is provided by full-service
investment banks, recent years have seen a rise in the prominence of specialist
M&A advisers, who only provide M&A advice (and not financing). These
companies are sometimes referred to as Transition companies, assisting businesses
often referred to as "companies in transition." To perform these services in the US,
an advisor must be a licensed broker dealer, and subject to SEC (FINRA)
regulation. More information on M&A advisory firms is provided at corporate
advisory.
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Motives behind M&A
The dominant rationale used to explain M&A activity is that acquiring firms seek
improved financial performance. The following motives are considered to improve
financial performance:
Economy of scale: This refers to the fact that the combined company can often
reduce its fixed costs by removing duplicate departments or operations, lowering
the costs of the company relative to the same revenue stream, thus increasing profit
margins.
Economy of scope: This refers to the efficiencies primarily associated with
demand-side changes, such as increasing or decreasing the scope of marketing and
distribution, of different types of products.
Increased revenue or market share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by capturing
increased market share) to set prices.
Cross-selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up the
bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell
complementary products.
Synergy: For example, managerial economies such as the increased opportunity of
managerial specialization. Another example are purchasing economies due to
increased order size and associated bulk-buying discounts.
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Taxation: A profitable company can buy a loss maker to use the target's loss as
their advantage by reducing their tax liability. In the United States and many other
countries, rules are in place to limit the ability of profitable companies to "shop"
for loss making companies, limiting the tax motive of an acquiring company.
Geographical or other diversification: This is designed to smooth the earnings
results of a company, which over the long term smoothens the stock price of a
company, giving conservative investors more confidence in investing in the
company. However, this does not always deliver value to shareholders (see below).
Resource transfer: resources are unevenly distributed across firms (Barney, 1991)
and the interaction of target and acquiring firm resources can create value through
either overcoming information asymmetry or by combining scarce resources.
Vertical integration: Vertical integration occurs when an upstream and
downstream firm merge (or one acquires the other). There are several reasons for
this to occur. One reason is to internalise an externality problem. A common
example is of such an externality is double marginalization. Double
marginalization occurs when both the upstream and downstream firms have
monopoly power, each firm reduces output from the competitive level to the
monopoly level, creating two deadweight losses. By merging the vertically
integrated firm can collect one deadweight loss by setting the upstream firm's
output to the competitive level. This increases profits and consumer surplus. A
merger that creates a vertically integrated firm can be profitable.
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However, on average and across the most commonly studied variables, acquiring
firms' financial performance does not positively change as a function of their
acquisition activity. Therefore, additional motives for merger and acquisition that
may not add shareholder value include:
Diversification: While this may hedge a company against a downturn in an
individual industry it fails to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversifying their portfolios at a much
lower cost than those associated with a merger.
Manager's hubris: manager's overconfidence about expected synergies from
M&A which results in overpayment for the target company.
Empire-building: Managers have larger companies to manage and hence more
power.
Manager's compensation: In the past, certain executive management teams had
their payout based on the total amount of profit of the company, instead of the
profit per share, which would give the team a perverse incentive to buy companies
to increase the total profit while decreasing the profit per share (which hurts the
owners of the company, the shareholders); although some empirical studies show
that compensation is linked to profitability rather than mere profits of the company.
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Effects on management
A study published in the July/August 2008 issue of the Journal of Business
Strategy suggests that mergers and acquisitions destroy leadership continuity in
target companies’ top management teams for at least a decade following a deal.
The study found that target companies lose 21 percent of their executives each year
for at least 10 years following an acquisition – more than double the turnover
experienced in non-merged firms.
M&A marketplace difficulties
In many states, no marketplace currently exists for the mergers and acquisitions of
privately owned small to mid-sized companies. Market participants often wish to
maintain a level of secrecy about their efforts to buy or sell such companies. Their
concern for secrecy usually arises from the possible negative reactions a company's
employees, bankers, suppliers, customers and others might have if the effort or
interest to seek a transaction were to become known. This need for secrecy has
thus far thwarted the emergence of a public forum or marketplace to serve as a
clearinghouse for this large volume of business. In some states, a Multiple Listing
Service (MLS) of small businesses for sale is maintained by organizations such as
Business Brokers of Florida (BBF). Another MLS is maintained by International
Business Brokers Association (IBBA).
A transaction typically requires six to nine months and involves many steps.
Locating parties with whom to conduct a transaction forms one step in the overall
process and perhaps the most difficult one. Qualified and interested buyers of
multimillion dollar corporations are hard to find. Even more difficulties attend
bringing a number of potential buyers forward simultaneously during negotiations.
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Potential acquirers in an industry simply cannot effectively "monitor" the economy
at large for acquisition opportunities even though some may fit well within their
company's operations or plans.
An industry of professional "middlemen" (known variously as intermediaries,
business brokers, and investment bankers) exists to facilitate M&A transactions.
These professionals do not provide their services cheaply and generally resort to
previously-established personal contacts, direct-calling campaigns, and placing
advertisements in various media. In servicing their clients they attempt to create a
one-time market for a one-time transaction. Stock purchase or merger transactions
involve securities and require that these "middlemen" be licensed broker dealers
under FINRA (SEC) in order to be compensated as a % of the deal. Generally
speaking, an unlicensed middleman may be compensated on an asset purchase
without being licensed. Many, but not all, transactions use intermediaries on one or
both sides. Despite best intentions, intermediaries can operate inefficiently because
of the slow and limiting nature of having to rely heavily on telephone
communications. Many phone calls fail to contact with the intended party. Busy
executives tend to be impatient when dealing with sales calls concerning
opportunities in which they have no interest. These marketing problems typify any
private negotiated markets. Due to these problems and other problems like these,
brokers who deal with small to mid-sized companies often deal with much more
strenuous conditions than other business brokers. Mid-sized business brokers have
an average life-span of only 12–18 months and usually never grow beyond 1 or 2
employees. Exceptions to this are few and far between. Some of these exceptions
include The Sundial Group, Geneva Business Services, Corporate Finance
Associates and Robbinex.
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The market inefficiencies can prove detrimental for this important sector of the
economy. Beyond the intermediaries' high fees, the current process for mergers and
acquisitions has the effect of causing private companies to initially sell their shares
at a significant discount relative to what the same company might sell for were it
already publicly traded. An important and large sector of the entire economy is
held back by the difficulty in conducting corporate M&A (and also in raising
equity or debt capital). Furthermore, it is likely that since privately held companies
are so difficult to sell they are not sold as often as they might or should be.
Previous attempts to streamline the M&A process through computers have failed to
succeed on a large scale because they have provided mere "bulletin boards" - static
information that advertises one firm's opportunities. Users must still seek other
sources for opportunities just as if the bulletin board were not electronic. A
multiple listings service concept was previously not used due to the need for
confidentiality but there are currently several in operation. The most significant of
these are run by the California Association of Business Brokers (CABB) and the
International Business Brokers Association (IBBA) These organizations have
effectivily created a type of virtual market without compromising the
confidentiality of parties involved and without the unauthorized release of
information.
One part of the M&A process which can be improved significantly using
networked computers is the improved access to "data rooms" during the due
diligence process however only for larger transactions. For the purposes of small-
medium sized business, these datarooms serve no purpose and are generally not
used.
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M&A Success
The success rate of acquiring and merging companies is between 40% and 50%
measured over a range of criteria (Kitching (1974), Egon Zehnder (1987), Norburn
and Schoenberg (1987), Bishop and Kay (1993).
To be successful, the merging companies should:
Be explicit about how the merger fits into the corporate strategies of the two
companies and make sure those criteria remain visible throughout.
Plan the integration in detail.
Have clear and tight management control of all the interfaces.
Communicate clearly, honestly and frequently to the whole work force to set
expectations. Management credibility will depend on whether it does what is says.
Not try to simply merge the two companies but build a new company, with an
identifiable brand, logo and name.
Build on the best practices and approaches of both companies to create the new
company and position those as the New Company‟s procedures. This will help to
avoid the winners and losers syndrome.
Focus on a few major issues which deliver the major synergies and cost savings.
Detail can distract the senior management from the key task.
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Move quickly. Speed is one way of reducing resistance. Remember, most mergers
take twice as long as expected. Therefore integrate selectively. Spend a time to
make the systems inter-work quickly and plan a fuller integration later.
Above all, remember you are dealing with people. They are the resource which
will make the merger work at every level and need to be treated with respect and
sensitivity. Mergers across geographic boundaries always create the potential for
extra cultural clash. US and UK mergers often appear to be easier because of
language and business process. However there are still national differences.
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M&A failure
Reasons for frequent failure of M&A were analyzed by Thomas Straub in
"Reasons for frequent failure in mergers and acquisitions - a comprehensive
analysis", DUV Gabler Edition, 2007. Despite the goal of performance
improvement, results from mergers and acquisitions (M&A) are often
disappointing. Numerous empirical studies show high failure rates of M&A deals.
The effect of M&A evolution in a transition economy, especially where the
presence of rent-seeking and relationship-based transactions is significant, may
cause destructive entrepreneurship. From a socio-economic and cultural views, the
degree of positive impacts it may result in for domestic entrepreneurship will
perhaps be the single most important indicator. Studies are mostly focused on
individual determinants. The literature therefore lacks a more comprehensive
framework that includes different perspectives.Using four statistical methods,
Thomas Straub shows that M&A performance is a multi-dimensional function. For
a successful deal, the following key success factors should be taken into account:
Strategic logic which is reflected by six determinants: market similarities, market
complementarities, operational similarities, operational complementarities, market
power, and purchasing power..
Organizational integration which is reflected by three determinants: acquisition
experience, relative size, cultural compatibility.
Financial / price perspective which is reflected by three determinants: acquisition
premium, bidding process, and due diligence.
Post-M&A performance is measured by synergy realization, relative performance
(compared to competition), and absolute performance.
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Short-run factors
One of the major short run factors that sparked in The Great Merger Movement
was the desire to keep prices high. That is, with many firms in a market, supply of
the product remains high. During the panic of 1893, the demand declined. When
demand for the good falls, as illustrated by the classic supply and demand model,
prices are driven down. To avoid this decline in prices, firms found it profitable to
collude and manipulate supply to counter any changes in demand for the good.
This type of cooperation led to widespread horizontal integration amongst firms of
the era. Focusing on mass production allowed firms to reduce unit costs to a much
lower rate. These firms usually were capital-intensive and had high fixed costs.
Because new machines were mostly financed through bonds, interest payments on
bonds were high followed by the panic of 1893, yet no firm was willing to accept
quantity reduction during that period.
Long-run factors
In the long run, due to the desire to keep costs low, it was advantageous for firms
to merge and reduce their transportation costs thus producing and transporting
from one location rather than various sites of different companies as in the past.
This resulted in shipment directly to market from this one location. In addition,
technological changes prior to the merger movement within companies increased
the efficient size of plants with capital intensive assembly lines allowing for
economies of scale. Thus improved technology and transportation were
forerunners to the Great Merger Movement. In part due to competitors as
mentioned above, and in part due to the government, however, many of these
initially successful mergers were eventually dismantled. The U.S. government
passed the Sherman Act in 1890, setting rules against price fixing and monopolies.
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Starting in the 1890s with such cases as U.S. versus Addyston Pipe and Steel Co.,
the courts attacked large companies for strategizing with others or within their own
companies to maximize profits. Price fixing with competitors created a greater
incentive for companies to unite and merge under one name so that they were not
competitors anymore and technically not price fixing.
Merger waves
The economic history has been divided into Merger Waves based on the merger
activities in the business world as:
Period Name Facet
1889 -
1904First Wave Horizontal mergers
1916 -
1929
Second
WaveVertical mergers
1965 -
1989Third Wave Diversified conglomerate mergers
1992 -
1998Fourth Wave
Congeneric mergers; Hostile takeovers; Corporate
Raiding
2000 - Fifth Wave Cross-border mergers
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Cross-border M&A
In a study conducted in 2000 by Lehman Brothers, it was found that, on average,
large M&A deals cause the domestic currency of the target corporation to
appreciate by 1% relative to the acquirers.
The rise of globalization has exponentially increased the market for cross border
M&A. In 1997 alone there were over 2333 cross border transactions worth a total
of approximately $298 billion. This rapid increase has taken many M&A firms by
surprise because the majority of them never had to consider acquiring Due to the
complicated nature of cross border M&A, the vast majority of cross border actions
have unsuccessful anies seek to expand their global footprint and become more
agile at creating high-performing businesses and cultures across national
boundaries.
Even mergers of companies with headquarters in the same country are very much
of this type (cross-border Mergers). After all,when Boeing acquires McDonnell
Douglas, the two American companies must integrate operations in dozens of
countries around the world. This is just as true for other supposedly "single
country" mergers, such as the $29 billion dollar merger of Swiss drug makers
Sandoz and Ciba-Geigy (now Novartis).
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Major M&A in the 1990s
Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999:
Rank Year Purchaser PurchasedTransaction value (in
mil. USD)
1199
9
Vodafone Airtouch
PLCMannesmann 183,000
2199
9Pfizer Warner-Lambert 90,000
3199
8Exxon Mobil 77,200
4199
8Citicorp Travelers Group 73,000
5199
9
SBC
CommunicationsAmeritech Corporation 63,000
6199
9Vodafone Group
AirTouch
Communications60,000
7199
8Bell Atlantic GTE 53,360
8199
8BP Amoco 53,000
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9199
9
Qwest
CommunicationsUS WEST 48,000
10199
7Worldcom MCI Communications 42,000
Major M&A in the 2000s
Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2009:
Rank Year Purchaser PurchasedTransaction value (in
mil. USD)
1 2000Fusion: America Online Inc.
(AOL)Time Warner 164,747
2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961
3 2004 Royal Dutch Petroleum Co.Shell Transport & Trading
Co74,559
4 2006 AT&T Inc. BellSouth Corporation 72,671
5 2001 Comcast CorporationAT&T Broadband &
Internet Svcs72,041
6 2009 Pfizer Inc. Wyeth 68,000
7 2000Spin-off: Nortel Networks
Corporation59,974
8 2002 Pfizer Inc. Pharmacia Corporation 59,515
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9 2004 JP Morgan Chase & Co Bank One Corp 58,761
10 2008 Inbev Inc.Anheuser-Busch
Companies, Inc52,000
Some of the important issues related to airline mergers and acquisitions are -
Time - Airline mergers and acquisitions take much longer time to
materialize than mergers and acquisitions in other industries. This is due to
the fact that a lot of considerations are involved from costs to operational
issues which are generally large in magnitude and complex in nature.
Approvals - Approvals are required from governments, often from different
levels and different authorities to establish airline mergers and acquisitions.
Efficiency - Airline mergers and acquisitions can lead to cost efficiency of
the operators by the elimination of overlapping routes. For the travelers
however, this often leads to lesser frequency of flights.
Competition - Mergers and acquisitions in the airline industry help to
reduce competition significantly. This helps airlines to achieve higher
operating margins. On the other hand, passengers may face higher airfares.
Passenger Benefits -Passengers, who are enlisted for frequent-travel
schemes and other similar ones, will have higher mileage pints.
Strife - Airline mergers and acquisitions are often accompanied by strife
related to seniority issues, new work rules, etc.
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Indian aviation industry
India is one of the fastest growing aviation markets in the world. With the
liberalization of the Indian aviation sector, the industry had witnessed a
transformation with the entry of the privately owned full service airlines and low
cost carriers. As of May 2006, private carriers accounted for around 75% share
of the domestic aviation market. The sector has also seen a significant increase
in number of domestic air travel passengers. Some of the factors that have
resulted in higher demand for air transport in India include the growing middle
class and its purchasing power, low airfares offered by low cost carriers, the
growth of the tourism industry in India, increasing outbound travel from India,
and the overall economic growth of India.
In addition to these factors, the emphasis on modernization of non-metro airports,
fleet expansion by airlines, service expansion by state owned carriers, development
of the maintenance, repair and overhaul (MRO) industry in India, opening up of
new international routes by the Indian government, establishment of new airports
and renovation and restructuring of the existing airports have added to the growth
of the industry.
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However, in mid-2006, many airline operators announced large losses. Analysts
opined that a combination of factors such as high aviation turbine fuel (ATF)
prices, rising labor costs and shortage of skilled labor, rapid fleet expansion, and
intense price competition among the players were responsible for the losses in this
sector. The problem was also compounded by new players entering the industry
even before the existing players could stabilize their operations. It was estimated
that the industry as a whole could face losses of over Rs. 22 billion in 2006-07.
Some experts expect the industry to consolidate in the near future. The government
also was keen to restrict the losses in this sector by closer scrutiny of the business
plans of new entrants, conducting quarterly financial audits, etc.
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Merger of kingfisher airlines and air deccan
Kingfisher Red
Kingfisher Red
IATA
IT
ICAO
KFR
Callsign
KINGFISHER
Founded25 August 2003
(as Air Deccan)
Fleet size Main article: Kingfisher Airlines#Fleet
Destinations Main article: Kingfisher Airlines destinations
Company slogan The Choice is Simple
Parent company United Breweries Group
Headquarters Bangalore, India
Key peopleG. R. Gopinath (Founder)
Vijay Mallya
Website www.flykingfisher.com
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Kingfisher Red, known formerly as Simplifly Deccan and prior to that as Air
Deccan, is a low-cost airline run by Kingfisher Airlines. It is headquartered in
Bangalore, India.
Kingfisher Red is currently the only Indian low-cost airline to provide
complimentary in-flight meals and bottled water to its passengers. Also, passengers
can earn frequent flyer miles (called King Miles) for tickets booked on Kingfisher
Red through the King Club loyalty program run by its parent Kingfisher Airlines.
In-flight reading material is limited to a special edition of Cine Blitz magazine
printed exclusively for Kingfisher Red.
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[ ] February 22, 2010
History
Formerly known as Air Deccan, the airline was previously operated by Deccan
Aviation. It was started by Captain G. R. Gopinath and its first flight took off on 23
August 2003 from Hyderabad to Vijaywada.It was known popularly as the
common man's airline, with is logo showing two palms joined together to signify a
bird flying. The tagline of the airline was "Simpli-fly," signifying that it was now
possible for the common man to fly. The dream of Captain Gopinath was to enable
"every Indian to fly at least once in his lifetime." Air Deccan was the first airline in
India to fly to second tier cities like Hubballi, Mangalore, Madurai and
Visakhapatnam from metropolitan areas like Bangalore and Chennai.
On 25 January 2006, Deccan went public by filing a red herring prospectus with
the Securities and Exchange Board of India. Deccan planned to offload 25 percent
of its stake in the initial public offering (IPO) that opened on 18 May. However,
due to the stock market downturn at that time, Air Deccan's IPO barely managed to
scrape through, even after extending the issue closing date and reducing the price
band.
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[ ] February 22, 2010
Air Deccan logo
Simplifly Deccan logo
On 27 February 2007, Air Deccan switched to US-based airline reservations
hosting service provider Radixx International, becoming the second major
domestic Indian carrier after GoAir to switch to the Radixx Air Enterprise
reservation system. Before moving to the Radixx reservation system, Air Deccan
was using a reservation system provided by the Delhi-based Interglobe
Technologies.
Less than expected growth in the Indian aviation sector coupled with overcrowding
and the resultant severe competition between airlines resulted in almost all the
Indian carriers, including Air Deccan, running into heavy losses. After initially
trying to get in fresh capital for running the airline, Captain Gopinath eventually
succumbed to pressures for consolidation. On 19 December 2007, it was
announced that Air Deccan would merge with Kingfisher Airlines. Since Indian
aviation regulations prohibited domestic airlines from flying on international routes
until they had operated in the domestic market for five years, it was decided to
instead merge Kingfisher Airlines into Deccan Aviation, following which Deccan
Aviation would be renamed Kingfisher Airlines. This was because Air Deccan was
the older of the two airlines, and therefore would be the first to qualify for flying
on international routes. The merger became effective April 2008, with Vijay
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[ ] February 22, 2010
Mallya becoming the Chairman and CEO of the new company, while G. R.
Gopinath became its Vice-Chairman.
Destinations
Air Deccan had an inauspicious start to its operations on 24 September 2003, with
its very first flight from Hyderabad to Vijaywada catching fire on the runway when
it was taxiing before take-off. That flight was carrying several dignitaries such as
the then Bharatiya Janata Party (BJP) president, M. Venkaiah Naidu, the then
Minister of State for Civil Aviation, Rajiv Pratap Rudy, and Telugu Desam Party
leader K. Yerran Naidu. This was an ATR 42 aircraft.
Again, on 29 March 2004, another Air Deccan flight from Goa to Bangalore had to
return back half an hour after take off as smoke filled the cabin. This aircraft was
also an ATR 42.
On 11 March 2006, an Air Deccan flight travelling from Coimbatore to Bangalore
made a heavy landing on the runway at Bangalore's HAL Airport and skidded off
the runway. The aircraft was carrying 44 people (40 passengers and 4 crew).
Although there were no fatalities, the aircraft, an ATR 72, was severely damaged.
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Competitors
Air Deccan's phenomenal growth spurred the entry of more than half a dozen low-
cost air carriers in India. In its present avatar as Kingfisher Red, the airline faces
stiff competition from SpiceJet, IndiGo Airlines and GoAir. The growth of these
low-cost air carriers has also forced mainstream domestic Indian airlines to lower
their fares.
Revenue
In a statement to the National Stock Exchange of India, Air Deccan reported a net
loss of Rs 3.4 billion ($74 million) for the 15-month period between 1 April 2005
and 30 June 2006. It originally hoped to break even in the current financial year
but executives are quoted in the local media as saying it now does not expect to
post profits until 2008 as a result of intense competition following the launch of
several other new airlines. Air Deccan has now turned profitable on the back of a
strong October-December 2006 quarter, posting a profit of Rs. 9.64 crores (a little
more than US$ 2 million).
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Acquisition by Kingfisher Airlines
Kingfisher Airlines' parent company United Breweries Group acquired a 26
percent stake in Air Deccan's parent company Deccan Aviation. The combined
fleet of 71 Airbus A320 family and ATR aircraft will operate 537 flights to 69
Indian cities, "whilst taking advantage of unparalleled synergy benefits arising
from a common fleet of aircraft," according to Kingfisher. "For the near future,
Kingfisher will continue to serve the corporate and business travel segment, while
Air Deccan will focus on serving the low-fare segment, but with improved
financial prospects for both carriers," Kingfisher added. Speaking to reporters
yesterday, UB Group head Vijay Mallya said there were no plans to launch an IPO
"at this stage" and that UB Group would have no problem funding the acquisition.
Rebranding
In October 2007], after the acquisition by Kingfisher Airlines, Air Deccan was
renamed "Simplifly Deccan" with its new tagline being "The choice is simple".
The old logo was replaced by the Kingfisher logo and the same font of Kingfisher
Airlines was also used on Simplifly Deccan. The old yellow and blue colors of Air
Deccan were replaced by Kingfisher Airlines's red and white, supposedly to give
the same premium look and feel to Deccan as well.The check-in counters at
airports as well as the crew uniforms now had the same red and white colors as
those for Kingfisher Airlines. The new look airline also promised excellent on-time
performance, a wider network and "little delights all the way". Check-in staff
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[ ] February 22, 2010
would no longer be outsourced, but managed by the airline's own employees,
thereby "increasing accountability and improving service delivery," said Mr
Mallya. He also announced that the new airline would slowly phase out the ageing
ATR 42 and A320 planes and replace them with entirely new aircraft.Changes
were also made in the flight schedule of Simplifly Deccan airlines to better align
with that of Kingfisher Airlines. According to agencies, the re-branding was
expected to cost around Rs 15 crore (approximately $3.8m).
In [August 2008, it was announced the airline will further change its branding to
Kingfisher Red and will begin operating under Kingfisher's IATA code IT
Air Deccan airlines merged with Kingfisher Airlines and decided to operate as a
single entity from April, 2008. It would be known by a different name-Kingfisher
Aviation. The merger is based on recommendations of Accenture, the global
consulting firm. KPMG was asked to do the valuation and the swap ratio was
decided accordingly. The merger came through on as Vijay Mallya from
Kingfisher airlines bought 26% of the stake in Air Deccan. The unification of the
two carriers had to be sanctioned not only by the two panels, but also by the
institutional investors, independent directors, and other shareholders. Air Deccan
had four independent directors-which included prominent persons like IIM Prof
Thiru Naraya, Tennis player Vijay Amritraj, and A K Ganguly, Former MD
Nabisco Malaysia.
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After the merger, the company has a combined fleet of 71 aircrafts, connects 70
destinations and operates 550 flights in a day. The combined entity has a market
share of 33%. Gopinath would continue as the Executive Chairman and Malay
would take charge as Vice Chairman.
The charter service of the respective airlines would be hived off and operate as a
separate entity. Post merger, KingFisher would operate as a single largest (private)
airline in the sub-continent. Besides, operational synergies (engineering, inventory
management and ground handling services, maintenance and overhaul), the
management and staff of both the airlines would be integrated. They would be
stronger vis-a vis lessors, aircraft manufacturers (Airbus in this case), and will also
spend less on training and employees. Costs would also reduce which is associated
with maintenance of aircraft. The savings in cost would be lower by about 4-5%
(Rs 300 crores) (Business Standard, June 3, 2007, p- 4) which is a large sum. It
would result in a saving of 3 billion in the first year itself through the sharing of
aircraft and workers. (Business Standard, June 13, 2007, p-13.) Further, by
devising a more optimal routing strategy it could help in rationalizing the fares.
Before the merger Air Deccan recorded a net loss of Rs 213.17 crores on revenue
of Rs 437.82 crores for 2006-07. The company had also raised Rs 400 crores
through an IPO in May 2006.
The merger will create a more competitive business in scale and scope to emerge
as market leader.
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Air Deccan began its operations with one aircraft and with one flight but after the
alignment with Kingfisher 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.
After the merger, it is expected that Kingfisher will focus more on the international
routes while Air Deccan will give it a wider domestic reach. Also Air Deccan plans
to continue as a low cost carrier while Kingfisher will function as a full-service
carrier. There will be immense synergies as both operate Airbus. The average age
of the Air Deccan fleet is 6.1 years as of Apr 2006.* Air Deccan operates a fleet of
43 aircraft comprising 20 brand new Airbus A320 aircraft and 23 ATR aircraft.
The Airbus aircraft serve metro routes while ATR are utilized for Tier II and III
cites and also for small airports. The newly formed company plans to revisit their
fleet plan in coordination with each other to rationalize the fleet structure. Working
on these lines the company has already placed orders from the European aircraft
major, Airbus Industries for about 90 aircrafts. These include five of the largest
aircraft-A380, the first of which is slated to be delivered to Kingfisher by 2011.
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It is also India’s largest private sector helicopter charter company, which pioneered
helitourism in India. It offers point to point service. It has a secondary hub at
Chennai.*Deccan Aviation is the largest private sector helicopter charter company
in India. It has a fleet of 12 helicopters and small aircraft deployed in 8 bases
across India.These bases are at Bangalore, Mumbai, Delhi, Ranchi, Hyderabad,
Surat, Katra and Colombo (Sri Lanka).
There are many changes that have taken place. This period of consolidation in the
sky gives a good signal to the airlines industry. It may lead to reducing the over-
capacity existing in the market and thereby stabilizing prices, increasing yields and
bringing down costs. The era of cheap fares might also come to an end.
Limited Air Infrastructure: In the developed countries, growth in infrastructure
kept pace with growth in airline industry. These countries had built various
secondary airports. For instance, the city of London itself has more than one
airport. These countries also have a seamless ATC (air traffic control) system
because of which it is able to handle the growing passenger number. In India no
metropolitan city yet has a second airport. These secondary airports have a lower
access, landing charges allowing for the cost rationalization. The LCCs in US and
Europe have been successful also because of these reasons. In India, demand has
been created in the aviation sector and now it is trying to create the needed
infrastructure (supply side) to meet the increased demand. The modernisation of
airports may ease the situation to a large extent. So would the creation of
secondary airports.
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Cost Structure of an Airline:
The airline industry is most sensitive about the cost of aviation turbine fuel (ATF).
This contributes to 40-45% of an airline’s operating costs. According to the
Federation of Indian Airlines (FIA), the average domestic price of ATF is 60-70%
higher than that at regional aviation hubs in Singapore and Dubai. Even the
discounted price of ATF for international operations is 40% higher than prices
elsewhere. ATF prices consider not only central duties but also state sales tax. Air
travel is expected to become more costly as per the directions given by the civil
aviation ministry (which plans to impose cess on air travel to fund development of
economically unviable airports and air routes).
Air Deccan’s Ticketing System:
Air Deccan has been innovating with new schemes. It was the first to introduce the
concept of booking tickets online. This is done to avoid travel agency costs. Infact
Air Deccan that pioneered the concept of e-ticketing in India and its schedules,
fares, and availability of tickets online are published on their website www.
airdeccan.net. It also operates an All India 24*7 multi-lingual call centre for
booking of tickets. Facility for booking its tickets are also provided at its call
centre, travel agents, airport counter, Reliance Webstores in 104 cities, HPCL
outlets in select states. Air Deccan’s passengers can print out their tickets and
exchange them for a boarding pass when they check in. Infact the use of the
internet for booking tickets is something the airline companies encourage
considering this allows them to evade the middle-men and travel agents et
alagency commission is a big drain airlines as 10-15 % of the ticket cost is given
back to the agents as commission.
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Innovation in Pricing:
Air Deccan introduced the concept of dynamic pricing which means selling at a
higher price during high season (tourist season) and selling cheap during the off-
seasons. Therefore, everyday the price would change depending upon the kind of
competition and also the load factor. Also it introduced various schemes under
which tickets were offered at Re 1 also.
Innovative Promotion at Air Deccan:
Air Deccan has also been very innovative in its promotion efforts. It puts its
advertisement on OOH (out-of-home) signposts and print advertisements too. It
offered 3 lakh seats at the rate of Rs 3 per seat for a certain period. Air Deccan had
also initiated special offers targeted at families. Value Flier package, Value Flier
Plus, and Super Flier and Super Flier Plus. These are focused on single individual
or a family of four. It also promoted a fly for free programme.
Financing Air Deccan:
To meet its financial needs, Deccan Aviation Ltd had secured $100 million funding
from European funds Investec Ltd and HSN Nordbank AG by pledging the right to
buy 60 planes it has ordered with Airbus Industries. Deccan Aviation has given the
right to purchase 60 Airbus A-320 planes worth over $2 billion at the list price, to
South West Aircraft Trading Limited-a company set up in Cayman Islands by
Investec Ltd and HSH Nordbank AG. Deccan Aviation will lease or purchase the
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[ ] February 22, 2010
aircraft from this leasing company. It will acquire the aircraft from the leasing
company at the prevailing market price, allowing the leasing company to book a
profit. Deccan Aviation had placed the order with Airbus at a price lower than the
present market price.
MRO Facilities:
Maintenance, repair and overhaul facilities are lacking in India. Airlines have been
dependent on its foreign counterparts’ for such services and as such fly their planes
abroad for such services. Air Deccan is setting up its own MRO facility in India.
India is also a great hub of outsourcing and given our cost competitiveness, skilled
manpower and abundant scope for growth there is reason to make India a BPO hub
for the global aviation industry.
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Indian Airlines and air india merger
Indian Airlines
Indian Airlines or Indian (Hindi: इं�डि�यन एयरलाइं�स or इं�डि�यन) is an airline based in
Mumbai, India, and focuses primarily on domestic routes, along with several
international services to neighbouring countries in Asia. Indian Airlines is state-
owned, and is administered by the Ministry of Civil Aviation. It is one of the two
flag carriers of India, the other being Air India.
Though the company that owns and operates the airline continues to be named
Indian Airlines Limited, on 7 December 2005, the airline was rebranded as Indian
or for advertising purposes as a part of a program to revamp its image in
preparation for an initial public offering (IPO). The airline operates closely with
Air India, India's national carrier. Alliance Air, a fully-owned subsidiary of Indian
Airlines, was renamed Air India Regional.
In February 2007, the Government of India approved plans to merge Indian
Airlines with Air India. In May 2007, India's Ministry of Civil Aviation announced
that Air India Limited (AI), India's national flag carrier and Indian Airlines Limited
(IA), the government owned domestic airline, would merge with effect from July
15, 2007. The new airline formed by the merger was to be called "Air India", and
would operate in both the domestic and international sectors
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Air india
Air India Limited (Hindi: एअर इं�डि�य) is the national airline of India based in
Mumbai, flying a worldwide network of passenger and cargo services. The
National Aviation Company of India Limited administers the state-owned Air
India and Indian Airlines merger.
Air India is the 16th largest airline in Asia, serving 24 destinations worldwide, and,
with its affiliated carriers, serves over 100 cities. Air India has codeshare
agreements with 13 other international airlines. In 2010, Air India is expected to
join Star Alliance, the world's largest airline alliance.
History
Air India was founded by J. R. D. Tata in 1932 as Tata Airlines, a division of Tata
Sons Ltd. (now Tata Group). On 15 October 1932, J. R. D. Tata flew a single-
engined De Havilland Puss Moth carrying air mail (postal mail of Imperial
Airways) from Karachi's Drigh Road Aerodrome to Bombay's Juhu Airstrip via
Ahmedabad. The aircraft continued to Madras via Bellary piloted by former Royal
Air Force pilot Nevill Vintcent.
Following the end of World War II, regular commercial service was restored in
India and Tata Airlines became a public limited company on 29 July 1946 under
the name Air India. In 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 operate international services from
India as the designated flag carrier under the name Air India International. On 8
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June 1948, a Lockheed Constellation L-749A named Malabar Princess (registered
VT-CQP) took off from Bombay bound for London via Cairo and Geneva. This
marked the airline's first long-haul international flight, soon followed by service in
1950 to Nairobi via Aden.
On 1 August 1953, the Government of India exercised its option to purchase a
majority stake in the carrier and Air India International Limited was born as one of
the fruits of the Air Corporations Act that nationalised the air transportation
industry. At the same time all domestic services were transferred to Indian
Airlines. In 1954, the airline took delivery of its first L-1049 Super Constellations
and inaugurated services to Bangkok, Hong Kong, Tokyo and Singapore.
Air India International entered the jet age in 1960 when its first Boeing 707-420,
named Gauri Shankar (registered VT-DJJ), was delivered. Jet services to New
York City via London were inaugurated that same year on 14 May 1960. On 8
June 1962, the airline's name was officially truncated to Air India. On 11 June
1962, Air India became the world's first all-jet airline.
On 8 March 2004, International Women's Day, the airline operated an "All Women
Flight" from Mumbai to Singapore. Captain Rashmi Miranda, who became Air-
India's first female Commander in November 2003, and Captain Kshmata Bajpai
piloted the flight, an Airbus A310-300 aircraft. The flight dispatch activities
relating to this flight were coordinated by a female Flight Dispatcher, Vasanti
Kolnad. The Safety Audit on board was also conducted by another woman,
Harpreet A De Singh. The airline has seventeen female pilots, including five
trainee pilots.
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Expansion
In 1970, Air India moved its offices to downtown Bombay. The next year, the
airline took delivery of its first Boeing 747-200B named Emperor Ashoka
(registered VT-EBD). This coincided with the introduction of the 'Palace In The
Sky' livery and branding. A feature of this livery is the paintwork around each
aircraft window, in the cusped arch style of windows in Indian palaces. In 1986 Air
India took delivery of the Airbus A310-300; the airline is the largest operator of
this type in passenger service. In 1988, Air India took delivery of two Boeing 747-
300Ms in mixed passenger-cargo configuration. In 1989, to supplement its "Flying
Palace" livery, Air India introduced a new "sun" livery that was mostly white with
a golden sun on a red tail. Only applied to around a half of Air India's fleet, the
new livery did not succeed, as the Indian flying public complained about the
phasing out of the classic colours. The livery was dropped after two years and the
old scheme was returned.
In 1993, Air India took delivery of the flagship of its fleet when the first Boeing
747-400 named Konark (registered VT-ESM) made history by operating the first
non-stop flight between New York City and Delhi. In 1994 the airline was
registered as Air India Ltd. In 1996, the airline inaugurated service to its second
US gateway at O'Hare International Airport in Chicago. In 1999, the airline opened
its dedicated Terminal 2-C at the renamed Chhatrapati Shivaji International Airport
in Mumbai.
In 2000, Air India introduced services to Shanghai and to its third US gateway at
Newark Liberty International Airport in Newark. On May 2004, Air India launched
a wholly-owned low cost airline called Air-India Express. Air India Express
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[ ] February 22, 2010
connecting cities in India with the Middle East, Southeast Asia and the
Subcontinent. In 2004 Air India launched flights to its fourth US gateway at Los
Angeles International Airport in Los Angeles (which has since been terminated)
and expanded its international routes to include flights from Ahmedabad, Amritsar,
Bangalore and Hyderabad.
On 1 March 2009, Air India made Frankfurt Airport its European Hub for its
Trans-Atlantic North American Operations.
On 1 December 2009, Air India introduced services to its fifth US gateway at
Washington Dulles International Airport in Washington, D.C..
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Re-privatisation plans
In 2001, Air India was put up for sale by the then NDA government. One of the
bids was by a consortium of Tata Group-Singapore Airlines. However the re-
privatisation plans were shelved after Singapore Airlines pulled out and the global
economy slumped.
In 2007, the Government of India announced that Air India would be merged with
Indian Airlines. As part of the merger process, a new company called the National
Aviation Company of India Limited (NACIL) was established, into which both Air
India (along with Air India Express) and Indian Airlines (along with Alliance Air)
will be merged. Once the merger is complete, the airline - which will continue to
be called Air India - will continue to be headquartered in Mumbai.
Star Alliance announced on 13 December 2007 that it had invited Air India to join
as a member. Air India is set to become a full Star Alliance member in 2010.
India has the world's fastest growing airline industry. However, increasing fuel
prices resulted in a 4% decline in air traffic in June 2008. Increasing competition of
other major Indian carriers like Jet Airways and Kingfisher Airlines has pushed Air
India to third place in India in terms of market share. In July 2008, it was reported
that Air India was seeking Rs 2,300 crores (US$ 534 million) in aid from the
Indian government to cover its losses. In the wake of rising fuel prices, the airline
decided to hike its air fare in June 2008.
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Financial crisis
Around 2006-2007, the airlines began showing signs of financial distress. The
combined losses for Air India and Indian Airlines in 2006-07 were Rs 770 crores.
After the merger of the airlines, this went up to Rs 7,200 crores by March 2009.
This was followed by restructuring plans which are still in progress.. In July 2009,
SBI Capital Markets Ltd was appointed to prepare a road map for the recovery of
the airline. The carrier sold three Airbus A300 and one Boeing 747-300M in
March 2009 for $ 18.75 million to survive the financial crunch.
Merger
In May 2007, India's Ministry of Civil Aviation announced that Air India Limited
(AI), India's national flag carrier and Indian Airlines Limited (IA), the government
owned domestic airline, would merge with effect from July 15, 2007. The new
airline formed by the merger was to be called 'Air India,' and would operate in both
the domestic and international sectors. The proposal to merge AI and IA had been
first mooted in the 1990s.In February 1999, a Parliamentary Standing Committee
on Transport and Tourism had recommended the merger of AI and IA in its report
on the 'Functioning of Air India'
However, the process had formally been initiated only in September 2006, when
the Indian government assigned the duty of preparing the roadmap for the merger
to Accenture Inc., a management consulting, technology services and outsourcing
company After being endorsed at various levels of the administrative hierarchy, the
plan for the merger was finally approved by the Union Cabinet in March 2007
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A new company called the National Aviation Company of India Ltd. (NACIL) was
incorporated on March 30, 2007 under Sections 391 and 394 of the Indian
Companies Act, 1956 to facilitate the merger. Under the terms of the merger, all
the undertakings, properties, and liabilities of AI and IA were to be transferred to
NACIL.
The AI-IA merger was expected to create one of the biggest airlines in the world in
terms of the fleet size. As of May 2007, the two airlines had a combined fleet of
122 aircraft and 34,000 employees including 1,315 pilots. The combined fleet size
placed the merged entity among the top 10 airlines in Asia, and the top 30 in the
world. It would also be India's first airline with more than 100 aircraft.
The motives for the merger were widely discussed in the media. India was the
fastest growing aviation market in the world, ahead of China, Indonesia and
Thailand, as of early 2007. The number of people traveling by air had been
increasing rapidly in the country. The main reason for this was thought to be the
advent of low cost airlines like Air Deccan and SpiceJet in the country in 2003-
2004, which brought air travel within reach of India's large middle class. The entry
of a number of new airlines had intensified the competition in the aviation sector
by 2004.
According to information posted on IA's website, the increasingly intense
competition faced by AI and IA from private and global airline companies, was the
main reason for the merger of the two airlines. In addition to helping AI and IA
tackle competition, the merger was expected to result in considerable synergies by
integrating routes and streamlining overlapping facilities and infrastructure.
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Accenture had identified significant potential synergies between the two airlines in
the areas of sales and distribution network, fuel procurement, material
procurement, passenger amenities, ground handling and parking facilities.
According to a report submitted by Accenture in late 2006, the merger could result
in a 3-4% reduction in costs, and lead to a revenue increase of around Rs 6 billion
initially.
However, the proposed merger was not without its share of critics. Initially there
was opposition from the employees of the two airlines as they feared that the
merger would result in job cuts. The Aviation Minister, Praful Patel, had allayed
their fears and assured the employees unions of the two airlines that employment
conditions, wages, seniority and career progression, would largely remain
unchanged. He also said that a grievance redressal mechanism would be set up to
protect employee interests. The government also indicated that there would be no
layoffs.
Despite this, analysts warned that the merger might pose a serious challenge in
terms of integrating the employees of the two airlines, especially as they had
followed completely different operational methods, before the merger. The two
airlines also had different fleet compositions, which might create complications in
inventory management, maintenance and repair establishments, and pilot training.
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Analysts also felt that the merger should be followed by a thorough overhaul of the
operations of the airline. Kapil Kaul, Chief Executive (South Asia) of the Centre
for Asia Pacific Aviation, an airline industry consultancy, had suggested "a partial
sale of equity through an initial public offer to begin with to help induce
professionalism and market dynamics, followed by privatization over the next five
years or so."
The Indian aviation industry was headed towards consolidation in 2006-2007. Jet
Airways had already acquired Air Sahara in April 2007. This had been followed by
Kingfisher Airlines acquiring a 26 % stake in Air Deccan in June 2007. The
merger of AI and IA following these was expected to bring about more changes in
the dynamics of the industry.
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Conclusion
Merger between kingfisher and air deccan is one of the successful and working
very smoothly and the future of this merger seems very good and safe because of
the strong base of the companies .future of this merger is shining and in future it
will be achieving its targets .But the companies like air india and indian airlines are
not going to survive in the future .This merger between this company will not be
going for the long term .Due to the regular intervention of the government .
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Findings
Reason behind the M&A
Economy of scale: This refers to the fact that the combined company can often
reduce its fixed costs by removing duplicate departments or operations, lowering
the costs of the company relative to the same revenue stream, thus increasing profit
margins.
Economy of scope: This refers to the efficiencies primarily associated with
demand-side changes, such as increasing or decreasing the scope of marketing and
distribution, of different types of products.
Increased revenue or market share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by capturing
increased market share) to set prices.
Cross-selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up the
bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell
complementary products.
Synergy: For example, managerial economies such as the increased opportunity of
managerial specialization. Another example are purchasing economies due to
increased order size and associated bulk-buying discounts.
Taxation: A profitable company can buy a loss maker to use the target's loss as
their advantage by reducing their tax liability. In the United States and many other
countries, rules are in place to limit the ability of profitable companies to "shop"
for loss making companies, limiting the tax motive of an acquiring company.
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Reasons for failure
Reasons for frequent failure of M&A were analyzed by Thomas Straub in
"Reasons for frequent failure in mergers and acquisitions - a comprehensive
analysis", DUV Gabler Edition, 2007. Despite the goal of performance
improvement, results from mergers and acquisitions (M&A) are often
disappointing. Numerous empirical studies show high failure rates of M&A deals.
The effect of M&A evolution in a transition economy, especially where the
presence of rent-seeking and relationship-based transactions is significant, may
cause destructive entrepreneurship. From a socio-economic and cultural views, the
degree of positive impacts it may result in for domestic entrepreneurship will
perhaps be the single most important indicator. Studies are mostly focused on
individual determinants. The literature therefore lacks a more comprehensive
framework that includes different perspectives.Using four statistical methods,
Thomas Straub shows that M&A performance is a multi-dimensional function
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[ ] February 22, 2010
Bibliography
1.Google.com
2.scrbd.com
3. Times of India
Date:12 may 2007
4.business week
Month:may 2007
