A Report on Jet AirwAys Merger with Sahara Airlines

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INTRODUCTION: In the biggest aviation takeover in India, On 20-Apr-07, Jet Airways announced that they had struck a deal to buy Air Sahara for Rs. 1450 crore ($346 million) to create Jetlite , a move that would help the Naresh Goyal promoted carrier to become the biggest domestic carrier. They acquired 100% of the shares in Air Sahara .With this merger, the process of consolidation had begun in the country's civil aviation industry. It would emerge as the largest player in the Indian skies. The private sector Jet-Sahara combine would end the dominating role of the Indian airlines.

AVIATION INDUSTRY: The legacy of Indian aviation dates back to 1912 when Indias first air mail service was started by Tata Airlines. Tata Airlines though was started as an air mail service but soon ventured in carrying scheduled passenger traffic. Pre 2004, in the domestic markets, the number of carriers were limited which included Air Sahara, Jet Airways, Damania Airways,. A stable growth of 8-10% was maintained per year. The demand and supply were in tandem. Theer was limited access to international carriers. Post 2004, there was a sudden increase in the number of carriers which included deccan airlines, spicejet, indigo etc since the demand far exceeded the supply.In 2003-04 the international markets were opened with private carriers being allowed to fly international. Some impacts of changes post 2004 were: Low yield and high aviation fuel cost led to huge losses. Rising labour cost, shortage of skilled labour, price competition. Airport and Air traffic infrastructure under tremendous pressure with added capacity.

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Trends in Aviation Industry Consolidation in aviation sector: In aviation industries the rise in the number of alliances will help in promote the growth of aviation sector in India. The number of passengers travelling by air is on the rise: By 2025 passenger boarding expected to double and by the same time aircraft operations are expected to triple.

For the travelling public, price is paramount in choosing a carrier: Travellers are choosing the lowest price option with the help of the Internet and round-the-clock search facility. Even business travellers, who have been less price-sensitive, are resisting fare increases. Travellers are not giving preference to brand but the only premiums they are willing to pay for are time-of-day and direct flights. Capacity is growing without much constraint: The new aircrafts have been ordered by Indian carriers for delivery in the coming period, without clear plans to retire older planes. Cost structures will continue to handicap legacy carriers as they compete with newer airlines, as well as with overseas carriers: Great threats are being posed by the low cost carriers to legacy carriers, as a result of which they are reshuffling their pricing policies. Apart from this, they are also facing competition from overseas players. Oil prices are not expected to fall: Aviation Turbine Fuel (ATF) prices have increased in line with the rise in international oil prices. Because of this there is a marginal increase in airfares. Outsourcing: Private airlines are famous to hire foreign pilots or retired personnel from the Air Force or PSU (Public Sector Undertaking) airlines, in senior management positions. Airlines are also famous to take on contract employees such as cabin crew, ticketing and check-in agents.

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Parties involved in the Merger: JET AIRLINES: In 1993, Jet commenced its operations .It is owned by billionaire Naresh Goyal. Jet Airways was the second largest airline after Air India It has a fleet of 92 aircrafts. Jet started its International Operations in 2004 and carries more than 7 million passengers per annum.

SAHARA AIRLINES It started its operations on 3rd Dec 1993. It was owned by Mr Subroto Roy. On 22 March 2004 it became an international carrier with the start of flights from Chennai to Colombo. It is part of the major Sahara India Parivar Conglomerate business conglomerate.

Background of the merger : Jet Airways and the Shareholders of Sahara Airlines Limited had concluded a Share Purchase Agreement on January 18, 2006 whereby Jet Airways was to acquire the 100% shares of Sahara Airlines Limited for a Total Consideration of Rs. 2,000 crores. The original 65 day Term of the Agreement expired in March 2006. This was mutually extended to 21st June 2006, at which time Jet Airways also paid an advance of Rs. 500 Crores.

At the expiry of the extended period, disputes arose between the parties as to whether or not the agreement had terminated (for non fulfilment of some conditions). These disputes were referred for hearing to an Arbitral Tribunal. However, before the commencement of Arbitral Proceedings, the two parties successfully resolved their disputes and were able to draw up a Settlement Agreement and the Arbitral Proceedings were disposed off in terms of the same agreement.

On 20th April, 2007, Jet acquired 100% stake in Air Sahara 15 months after signing the original purchase agreement. Jet purchased its arch rival for 1,450 crores which was 35 % less than the price agreed in 2006. Jet rebranded Sahara as Jetlite and announced that the new entity would offer reduced frills but would be over and above low cost carrier (LCC) in terms of service. The private sector Jet-Sahara combine ended the dominating role of the public sector with the new corporate commanding as much as 45% of the domestic market space.

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REASONS FOR THE MERGER: For Jet: With the advent of low cost carriers, jets dominance in the Indian market had been severely challenged. Jets market had reduced from 42% to 33%. Jet had also struggled to keep pace with the industrys capacity expansion. Jet need to enter into the low cost market. A merger would lead to a decrease in the number of aviation companies, thereby achieving a pricing power in the market.

For Sahara: The mismanagement of the airlines was only increasing the losses for the company. It wanted to exit the airline industry and get in to real estate. Its aircrafts were on lease or loan and hence they wanted quick money to pay off the mounting debt. Strategic Fit: Fit Air Sahara as on 2006 has a market foothold of 12%, which will increase Jets market share to 45%. If acquired. Air Sahara had a vast parking bays at important metros, which can be used by Jet to reduce congestion time and reduce fuel burning up to a large extent. Air Sahara was mostly servicing the domestic market (24 domestic and 4 international) and this will increase the domestic share of Jet. Air Sahara had a fleet strength of 26 which if acquired will drastically increase Jets Fleet strength, without purchasing any new airplanes. Sahara had 4 international destination, Jet Airways also had international flights to those destinations from the same source. So, efficiency and monopoly could be increased. Maintenance in case of merger would be easy and effective . Analysts estimate that a cost saving of Rs. 150 crore -200 crore is achievable due to acquiring of parking bays.

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VALUATION:

January 2006: The entire business of Air Sahara was valued at Rs. 2300 by Jet Airways, whereas the valuation by E&Y for Air Sahara was done at Rs 3382 crores. The valuation has been made using the comparables method with respect to the valuations of Jet Airways. Only the assets will be acquired, liabilities were to be borne by Air Sahara. April , 2007: Air Sahara got a beating on its valuation, due to the failure of the deal. It proposed new negotiations at revised valuations. Air Saharas market share diminished to 7% Valuations made are comparable with the Jets market valuation. As Jets valuation plummeted by around 35%, so the new valuation of Air Sahara was done at 35% lower valuation of Rs. 2300 crore i.e. Rs. 1450 crore . On the day of signing the bill, INR 400 crores exchanged hands with addition of Rs. 500 crore in the ESCROW account equals 900 crores upfront. The balance of INR 550 crores were payable in four interest free annual equal instalments which was supposed to be ending in April, 2011.

STRUCTURE AND FINANCING OF THE DEAL:

Jet Airways had a debt equity ratio of 7:1 in 2005. It was already leveraged. It already had in mind an inorganic growth to capture its depleting market share It came up with an issue of equity on March, 2005, which was oversubscribed 16 times, thereby having a comfortable debt equity ratio of 1:1 post issue. The entire deal was done through debt, majority from IDFC, the companys long standing banker.

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POST MERGER CHANGES: Sahara Airlines Limited became a 100% subsidiary of the Company. From 15th May, 2007 Sahara Airlines Limited has been renamed JetLite (India) Limited. Jet Airways on a whole now had 45% of the total Airlines Market. Jet Airways and Air Sahara had an identical fleet consisting of B737. So, after the merger the Air Sahara planes were immediately brought into service. Only 20 of the 26 of Sahara are actually flying. So, Jet infused another Rs. 200 crore for refurbishing the entire fleet. Bulky insurance policies were removed to short term cost efficient policies. Released premises and office spaces not required. The ticketing costs were reduced for JetLite by moving to web platform Food and Cabin Amenities were reduced Loss making flights were discontinued. Business class services were withdrawn. Jet Airways was quick to lead the Air Sahara employees through a 90 day period training. Air Sahara was converted to JetLite , having a different philosophy from its parent, so that a low cost structure can be developed. Reduction of staffs due to synergies was made close to 50% . Jet was faced with immense criticism and opposition by various organizations and political parties for this.

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Financial Performance:

Operational Performance:

From the Operating Performance data, we see that, the number of departures have increased by 14% YOY basis . Block hours have increased by only 10%, this shows lower higher efficiency being achieved. The number of passengers has increased by 19% because of better brand management.

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