April 16, 2007
Competition prompting airline mergers
By Anand Kumar
FINANCIAL year 2007-08 â which began on April 1 â has taken off on a significant note for the Indian aviation sector, with the acquisition by the countryâs leading private airline, Jet Airways, of its smaller rival, Air Sahara. The two state-owned airlines, Air India and Indian, are also set to merge their operations over the coming weeks.
The consolidation in the Indian aviation sector â which grew at over 50 per cent last year â will see the emergence of two powerful new airlines that will dominate the market, the Air India led public airline (which besides Indian, includes Air India Express, a low-cost international carrier, and Alliance Air, which flies to smaller cities), and the Jet Airways-Air Sahara combine.
The two major airlines are expected to control 90 per cent of the domestic full-service market, 70 per cent of total capacity, and about 50 per cent of the total aviation market in India. The move will act like a brake on the growth of low-cost carriers (LCCs), which have been steadily expanding their market share in recent months.
Air Deccan, the countryâs first low-cost carrier, has in a span of four years emerged as the second largest carrier, accounting for a nearly 20 per cent market share. Jet Airways is the largest domestic carrier (with a 25-plus per cent share), while Indian (formerly Indian Airlines) has been pushed to the third position, with less than 20 per cent share. Air Sahara has a mere seven per cent share of the domestic market.
Jet Airways last week agreed to pay over $330 million to acquire Air Sahara. Last year, it had promised to pay $500 million for Air Sahara â part of the Lucknow-based Sahara group â but backed off a few months later when it realised that it had over-valued the smaller airline. Jetâs chairman Naresh Goyal cited delays in government approvals for backing out of the deal.
However, Subroto Roy, the chairman of the $10 billion-plus Sahara group, dragged Jet Airways to court, and got a direction asking both sides to go in for arbitration. A three-judge panel (including a British judge and two Indian Supreme Court judges) then helped the two airlines to hammer out an acceptable solution.
Both the airline bosses are well-connected. Roy is extremely close to Uttar Pradesh Chief Minister Mulayam Singh Yadav, and consequently not in the good books of the Congress. His airline has also not been doing too well off late, and the group was looking for an injection of cash.
Roy is likely to use the funds, raised by the sale of his airline, in diversifying into the real estate sector. His group has ambitious plans to develop over 200 âcitiesâ across the country. The group is also active in finance and media, and runs a slew of television channels. It also produces Bollywood films.
THE new Jet-Sahara combine would have a fleet of nearly 90 aircraft. Though both began in 1993 as domestic carriers, the opening up of international routes to private airlines â only those with a minimum of five years domestic flying experience are allowed to operate international routes â has ensured their expansion into overseas markets.
Jet Airways flies to nearly half a dozen international destinations, including the UK, South East Asia and South Asia. It plans to launch operations to the US in July, operating flights to New York. Air Sahara, which was the other private airline that had got permission to fly to Europe and the US, however, discontinued its services last year.
According to industry observers, Jet might retain Air Sahara as a separate low-cost carrier, flying mainly domestic routes.
Though the Indian government had allowed domestic carriers to open on international routes, it had not opened up the lucrative Gulf sector. But the next few months will see the government allow private airlines to also operate on this route. While only two Indian airlines â Air India Express and Indian â operate flights to the Gulf, there are nearly a dozen international airlines operating on the busy India-Gulf route.
International airports, including the new one at Stansted in London, and Frankfurt, are believed to have approached some of the private Indian operators, urging them to launch services. The international sector is booming, as millions of Indians travel abroad on work and leisure, and millions of NRIs and foreign visitors come to India.
A new aviation industry lobby, the Federation of Indian Airlines (FIA), is pushing the government to allow all private carriers â including LCCs â to operate on lucrative international routes. Liquor baron Vijay Mallya, who owns Kingfisher Airlines, is keen to start international operations, but is bound by the current regulations.
Mallya, who is also a Member of Parliament, has been lobbying with the government to allow newer airlines like his to launch international services. He has, however, said that if the government refused to allow him to do so, he would start an airline in the US and operate services to India. He has already registered a company in the US for this purpose.
Last year, Mallya had also shown interest in acquiring Air Sahara, but had found the $500 million price tag to be too expensive. Critics of last yearâs deal had ridiculed Jet for over-valuing Air Sahara; last weekâs signing of the deal confirms their view, and many in the industry feel that Air Sahara is worth less than $350 million.
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THOUGH Indiaâs civil aviation sector is booming, most carriers continue to be in the red. According to the Center for Asia Pacific Aviation (CAPA), the Indian aviation sector is likely to pile up losses of around $500 million for fiscal 2006-07.
Airlines like Jet, which had come out with Initial Public Offerings (IPOs), have seen their stock market valuations drop sharply in recent months. Jetâs shares are trading at a nearly 60 per cent discount to its issue price. While Jet suffered hefty losses in the first three quarters of last year, it has turned a small net profit in the last quarter.
Domestic carriers are engaged in cut-throat competition, offering seats at ridiculously low prices. LCCs like Air Deccan and SpiceJet have been constantly eating into the market share of the major carriers. According to CAPA, LCCs are likely to control nearly 70 per cent of the domestic market in just about three years.
Airlines are taking hits on several other fronts. While air fares are declining rapidly, costs are soaring. Fuel costs have escalated sharply over the last two years, and employee costs are also expanding. India is facing an acute shortage of pilots, and airlines have had to poach pilots from their rivals, offering huge salaries.
Even Indian Air Force (IAF) is facing a squeeze, as many pilots are eyeing lucrative deals in civil aviation. Last week, Indiaâs air force chief Fali Homi Major said the government would release 15 to 20 air force pilots on a regular basis, allowing them to join Air India. The countryâs international carrier is negotiating a deal with the IAF, as it is worried over the crunch in fliers. Air India, which is acquiring a record 68 aircraft from Boeing â for almost $12 billion â plans to launch non-stop flights from India to the US shortly.
The airline has nearly 700 pilots, but is still short of nearly 120. Other airlines also keep poaching on its pilots. India needs about 500 commercial pilots every year, though the training schools are able to produce just around 200. Most airlines now also have foreign pilots in the cockpit.
http://www.dawn.com/2007/04/16/ebr10.htm
