2012

MERGERS AND ACQUISITIONS IN INDIAN CIVIL AVIATION: A CRITICAL ANALYSIS

Hamsathul Haris K
NALSAR
3/24/2012 1

INDEX
1. INTRODUCTION 2. MERGERS AND ACQUISITIONS
2.1 MERGERS 2.2 ACQUISITIONS 2.3 DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS 2.4 TYPES OF MERGERS 2.5 ADVANTAGE OF MERGERS AND ACQUISITIONS 2.6 DISADVANTAGES OF MERGERS AND ACQUISITIONS

3. MERGERS AND ACQUISITIONS IN INDIAN CIVIL AVIATION 4. MERGER BETWEEN KINGFISHER AIRLINES AND AIR DECCAN
4.1 CRITICAL ANALYSIS

5. MERGER BETWEEN JETAIRWAYS AND AIR SAHARA

5.1 CRITICAL ANALYSIS

6. MERGER BETWEEN AIR INDIA AND INDIAN AIRLINES

6.1 POST MERGER SCENAREO 6.2 CRITICAL ANALYSIS

7. CONCLUSION 8. REFERENCE/BIBLIOGRAPHY

1. INTRODUCTION Indian civil aviation sector has completed 100 years in 2011. Tata airlines promoted by J.R.D. Tata, father of civil aviation in India, was the first airline in India. The first flight of the airline was on 15th October 1932 from Karachi to Mumbai via Ahmadabad. At that time, there were a few transport companies operating within and also beyond the frontiers of the country, carrying both air cargo and passengers. Some of these were Tata Airlines, Indian National Airways, Air Service of India, Deccan Airways, Ambica Airways, Bharat Airways and Mistry Airways. On 29 June 1946 Tata airlines was converted into a public company under the name of air India. 1948, after the independence of India, 49% of the airline was acquired by the Government of India, with an option to purchase an additional 2%. In return, the airline was granted status to operate international services from India as the designated flag carrier under the name Air India International. On 8 June 1948, a Lockheed Constellation L-749A named Malabar Princess (registered VT-CQP) took off from Bombay bound for London Heathrow via Cairo and Geneva. This marked the airline's first long-haul international flight, soon followed by service in 1950 to Nairobi via Aden. On 25 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 nationalized the air transportation industry. Indian airlines also came into existence in 1953 with the enactment of the air corporations act 1953. It was formed with the merger of eight domestic airlines and was entrusted with the responsibility of providing air transportation within the country as well as to the neighboring countries in Asia. Indian airlines flight free run over the Indian skies ended with the entry of private carriers after the liberalization of the Indian economy in the early 1990s when many private airlines like jet airways, air Sahara, east-west airlines and ModiLuft entered the fray. The entry of low cost airlines like air Deccan, indigo and spice jet has revolutionized the Indian aviation scenario. During the year 2006-07 overall the passenger traffic grew by more than 27% and cargo traffic grew by a modest 11%. Similarly aircraft movement has also grown by almost 27% in India with over 19 million passengers flying in 2008 when compared to 2007 which was 17 million. As per the latest data by the Directorate General of Civil Aviation passengers carried by domestic airlines in 2011 is 60.663 million as against 52.021 million in 2010 thereby registering a growth of 16.6%.
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2. MERGERS AND ACQUISITIONS 2.1 MERGERS Mergers involve the mutual decision of two companies to combine & become one entity. The combined business can cut cost of operation & increase profit which will boost shareholders value for both groups of shareholders. In Merger of two corporations, shareholders usually have their shares in the old organization & are exchanged for an equal numbers of shares in the merged entity. According to the Oxford Dictionary merger means combining of two companies into one. Merger is a fusion between two or more enterprises, whereby the identity of one or more is lost and the result is a single enterprise. In merger the assets and liabilities of the companies get vested in another company, the company that is merged losing its identity and its shareholders becoming shareholders of the other company. All assets, liabilities and the stock of one company are transferred to Transferee Company in consideration of payment in the form of: Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes.

In the pure sense, a merger happens when two firms, often of about the same size, agree to 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." For Example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, Daimler Chrysler, was created. 2.2 ACQUISITIONS Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. On the other hand, Acquisition means the purchase of a smaller company by much larger one. A larger company can initiate an Acquisition of smaller firm which essentially amounts to buy the company in the face of resistance from smaller companys management. Unlike Mergers in an Acquisition the acquiring firm usually offers a
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cash price per share to target firms shareholders. Acquisition means an attempt by one firm to gain majority interest in the another firm called target firm &dispose-off its assets or to take the target firm private by small group of investors. A company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. An acquisition may be affected by; (a) Agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; (b) Purchase of shares in open market; (c) To make takeover offer to the general body of shareholders; (d) Purchase of new shares by private treaty; (e) Acquisition of share capital through the following forms of considerations viz. means of cash, issuance of loan capital, or insurance of share capital. There are broadly two kinds of strategies that can be employed in corporate acquisitions. These include: Friendly Takeover:The acquiring firm makes a financial proposal to the target firms management and board. This proposal might involve the merger of the two firms, the consolidation of two firms, or the creation of parent/subsidiary relationship. Hostile Takeover:A hostile takeover may not follow a preliminary attempt at a friendly takeover. For example, it is not uncommon for an acquiring firm to embrace the target firms management in what is colloquially called a bear hug. 2.3 DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS:Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
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In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, 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's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in 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. 2.4 TYPES OF MERGERS:There are three main types of mergers which are Horizontal merger, Vertical merger & Conglomerate merger. These types are explained as follows; 1. Horizontal Merger:This type of merger involves two firms that operate & compete in a similar kind of a business. Horizontal merger is based on the assumptions that it will provide economies of scale from the larger combined unit. The economies of scale are obtained by the elimination of duplication of facilities, broadening the product line, reduction in the advertising cost. Horizontal mergers also have potentials to create monopoly power on the part of the combined firm enabling it to engage in anticompetitive practices. Examples: -

Mumbai - Glaxo India Limited and Smith Kline Beecham Pharmaceuticals (India) Limited have legally merged to form GlaxoSmithKline Pharmaceuticals Limited in India (GSK). A merger would let them pool their research & development funds and would give the merged company a bigger sales and marketing force.

Merger of Centurion Bank & Bank of Punjab. Merger between Holicim & Gujarat Ambuja Cement ltd

2. Vertical Merger:A vertical Merger involves merger between firms that are in different stages of production or value chain. A company involved in vertical merger usually seeks to merge with another company or would like to take over another company mainly to expand its operations by backward or forward integration. The acquiring company through merger of another units attempt to reduce inventory of raw materials and finished goods. The basic purpose of vertical merger is to eliminate cost of searching raw materials. Vertical merger takes place when both firm plan to integrate the production process and capitalize on the demand for the product. A company decides to get merged with another company when it is not in a position to get strong position in a market because of imperfect market of intermediary product, scarcity of resources. Example: - Among the Indian corporate that have emerged as big international players is the Videocon group. The group became the third largest colour picture tube manufacturer in the world when it announced the purchase of the colour picture tube business of France-based Thomson SA, which includes units in Mexico, Poland and China, for about Rs 1260 crore. 3. Conglomerate merger:Conglomerate mergers means mergers between firms engaged in unrelated types of business activity. The basic purpose of such combination is utilization of financial resources. Such type of merger enhances the overall stability of the acquirer company and creates balance in the companys total portfolio of diverse products and production processes and thereby reduces the risk of instability in the firms cash flows. Conglomerate mergers can be distinguished into three types: I. Product extension mergers these are mergers between firms in related business activities and may also be called concentric mergers. These mergers broaden the product lines of the firms.

II. Geographic market extension mergers: These involve a merger between two firms operating in two different geographic areas. III. Pure conglomerates mergers: These involve mergers between two firms with unrelated business activities. They do not come under product extension or market extension. 2.5 ADVANTAGES OF MERGERS & ACQUISITIONS: Mergers and acquisitions is the permanent combination of the business which vest management in complete control of the business of merged firm. Shareholders in the selling company gain from the mergers and acquisitions as the premium offered to induce acceptance of the merger or acquisitions. It offers much more price than the book value of shares. Shareholders in the buying company gain premium in the long run with the growth of the company. Mergers and acquisitions are caused with the support of shareholders, managers and promoters of the combing companies. The advantages, which motivate the shareholders and managers to give their support to these combinations and the resulting consequences they have to bear, are briefly noted below. From shareholders point of view: - Shareholders are the owners of the company so they must get be benefited from the mergers and acquisitions. Mergers and acquisitions can affect fortune of shareholders. Shareholders expect that investment made by them in the combining companies should enhance when firms are merging. The sale of shares from one companys shareholders to another and holding investment in shares should give rise to greater values. Following are the advantages that would be generally available in each merger and acquisition from the point of view of shareholders; 1. Face value of the share is increased. 2. Shareholders will get more returns on the investments made by them in the combining companies. 3. Sale of shares from one companys shareholder to another is possible. 4. Shareholders get better investment opportunities in mergers and acquisitions. From managers point of view: - Managers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from the managers.
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From Promoters point of view: 1. Mergers offer companys promoters advantages of increase in the size of their company, financial structure and financial strength. 2. Mergers can convert closely held and private limited company into public limited company without contributing much wealth and losing control of promoters over the company. From Consumers point of view: - Consumers are the king of the market so they must get some benefits from mergers and acquisitions. Benefits in favor of the consumer will depend upon the fact whether or not mergers increase or decrease competitive economic and productive activity which directly affects the degree of welfare of the consumers through changes in the price level, quality of the products and after sales service etc. Following are the benefits that consumers may derive from mergers and acquisitions transactions; 1. Low price & better quality goods: - The economic gains realized from mergers and acquisitions are passed on to consumers in the form of low priced and better quality goods. 2. Improve standard of living of the consumers: - Low priced and better quality products directly improves standard of living of the consumers. 2.6 DISADVANTAGES OF MERGERS & ACQUISITIONS: Merger or acquisition of two companies in the same field or in diverse field may involve reduction in the number of competing firms in an industry and tend to dilute competition in the market. They generally contribute directly to the concentration of economic power and are likely to lead the merger entities to a dominant position of market power. It may Result in lesser substitutes in the market, which would affect consumers welfare. Yet another disadvantage may surface, if a large undertaking after merger because of resulting dominance becomes complacent and suffers from deterioration over the years in its performance. Following are some disadvantages of mergers and acquisitions; Creates monopoly- when two firms merged together they get dominating position in the market which may lead to create monopoly in the market.

Leads to unemployment-Raiders shouldnt have the right to buy up firms they have no idea how to run the employees who have spent their lives building up the firm should be making the decisions.

Raiders become filthy rich without producing anything, at the expense of hardworking people who do produce something. M&A damages the morale and productivity of firms. Corporate debt levels have risen to dangerous levels. Managers pressured to forego long-term investment in favor of short-term profit. Shareholders may be payed lesser dividend if the firm is not making profits. There may be a possibility that shareholders would be paid less returns on investment if the company is not earning enough profit.

Corporate raiders use their control to strip assets from the target, make a quick profit, destroying the company in the process, throwing people out of work.

3. MERGERS AND ACQUISITIONS IN INDIAN CIVIL AVIATION: Mergers and acquisitions in the Indian civil aviation dates back to the 1950s when the government of India through the air corporations act 1953 nationalized all airline industry to form Air India and Indian airlines. Tata Airlines became Air India and former freedom domestic airlines, Deccan Airways, Airways India, Bharat Airways, Himalayan Aviation, Kalinga Airlines, Indian National Airways and Air Services of India, were merged to form the new domestic national carrier Indian airlines. In the 1990s after the economic liberalization many private airlines sprang up and competition also increased. The biggest merger year in the Indian aviation industry was 2007 where 6 of the major airlines of India merged into three. Each airline had its own reason for merger which is discussed below. 4. MERGER BETWEEN KINGFISHER AIRLINES AND AIR DECCAN Air Deccan was 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 Vijayawada. 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
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once in his lifetime." Air Deccan was the first airline in India to fly to second tier cities like Hubli, 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. Kingfisher Airlines was established in 2003. It is owned by the Bengaluru based United Breweries Group. The airline started commercial operations in 9 May 2005 with a fleet of four new Airbus A320-200s operating a flight from Mumbai to Delhi. It started its international operations on 3 September 2008 by connecting Bengaluru with London. 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 Mallya becoming the Chairman and CEO of the new company, while G. R. Gopinath became its Vice-Chairman. 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. Before Air Deccan arrived on the scene in 2003, a flight from Bangalore to Delhi cost Rs 12,000. The arrival of Deccan led to this falling to Rs 2,500. As LCCs like SpiceJet, Indigo and others sprouted and followed Air Deccans lead, even full service airlines were forced to cut fares to stay in the business. Result:
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domestic air travel really took off; the number of passengers flying within the country jumped from 29.2 million in 2003 to 44.38 million in 2006. After the merger, it was expected that Kingfisher will focus more on the international routes while Air Deccan will give it a wider domestic reach. Also Air Deccan was to continue as a low cost carrier while Kingfisher will function as a full-service carrier. There was 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 had revisited 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. The merger was to benefit the entity by offering operational synergies like inventory management, maintenance, engineering and overhaul which would reduce the overall cost by 4% to 5% i.e around Rs. 300 million. Further the company would be able to rationalize its routes in a better way by changing its fare structure which will attract more passengers. On operational grounds the merger was expected to help kingfisher expand its international base as it finishes a 5 year mandatory period to fly domestic before getting an international license. Secondly on financial grounds it would mean a lot to kingfisher because of savings on operational cost. Other reasons for the merger were that both the companies had the maintenance contract with Lufthansa tecknik, both the companies have airbus fleet and same type of engines and brakes.
4.1 CRITICAL ANALYSIS

Any Indian airline requires five years of domestic flying experience and a fleet of 20 aircraft to get permission to fly international. Kingfisher Airlines was only two years old in 2007, when it acquired over four-year-old Air Deccan. The objective of the acquisitions made by Indian carriers has been just to acquire market share and not to create a big merged entity that could share each other abilities to expand further. Kingfisher Airlines acquired Air Deccan in 2007 and despite many changes in logo and name ran it as an LCC division of the airline. Removing Air Deccan as an independent operator took out the airline that was most responsible for the
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irrational fares in the market place and, to this extent, it restored some pricing discipline which advantaged the entire industry. However, integrating such different carriers (one, a classic low cost airline and the other a 5 star carrier), has proven to be extremely difficult. The huge combined network and distinct inflight products of the two carriers, has created duplication and confusion about the brand. This has been damaging to Kingfisher, with repercussions for its financial performance. The combined entity has a large network and diverse operations that are proving to be hard to manage and consequently in 2011, kingfisher announced to call off its lowcost operations. 5. MERGER BETWEEN JET AIRWAYS AND AIR SAHARA Jet Airways, which commenced operations on May 5, 1993, has within a short span of 14 years established its position as a market leader. The airline has had the distinction of being repeatedly adjudged India's 'Best Domestic Airline' and has won several national and international awards. Jet Airways currently operates more than 365 flights daily with a fleet of 80 aircraft, which includes 10 Boeing 777-300 ER aircraft, 8 Airbus A330-200 aircraft, 53 classic and next generation Boeing 737-400/700/800/900 aircraft and 9 modern ATR 72-500 turboprop aircraft. With an average fleet age of 4.3 years, it is the operator of the youngest aircraft fleet in Asia. Air Sahara was established on 20 September 1991 and began operations on 3 December 1993 with two Boeing 737-200 aircraft as Sahara Airlines. Initially services were primarily concentrated in the northern sectors of India, keeping Delhi as its base, and then operations were extended to cover all the country. Sahara Airlines was rebranded as Air Sahara on 2 October 2000, although Sahara Airlines remains the carrier's registered name. On 22 March 2004 it became an international carrier with the start of flights from Chennai to Colombo. Jet Airways announced its first takeover attempt on 19 January 2006, offering US$500 million (2000 crore rupees) in cash for the airline. Market reaction to the deal was mixed, with many analysts suggesting that Jet Airways was paying too much for Air Sahara. The Indian Civil Aviation Ministry gave approval in principle, but the deal was eventually called off over disagreements over price and the appointment of Jet chairman Naresh Goyal to the Air Sahara board. Following the failure of the deal, the companies filed lawsuits seeking damages from each other. A second, eventually successful attempt was made on 12 April 2007 with Jet Airways agreeing to pay 1,450 crore ($340 million). The deal gave Jet a combined domestic market
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share of about 32%. On 16 April Jet Airways announced that Air Sahara will be renamed as JetLite. The takeover was officially completed on 20 April, when Jet Airways paid 400 crore. The deal would give Jet more than 32 per cent share of the domestic aviation market at that time and add at least 27 aircraft to its 62-aircraft fleet, in addition to prime landing and take-off slots at major airports such as London Heathrow, New Delhi and Mumbai. It would become the only privately owned Indian airline with permission to fly overseas. More than in the capital or asset value, it is in the entrepreneurial advantages and the rights Air Sahara holds in the various domestic sectors and airports, as well as the license to fly a few international routes, that was where its true value lie. Although others in the aviation industry, including rival Kingfisher, were also interested in the acquisition, the price tag apparently kept them out. Jet Airways has taken its own time to work out the deal, under which it says it will not take on the liabilities of Sahara. The deal has distinct advantages for both the parties it can make Jet the major player in the domestic sector, with a market share of about 32 per cent in traffic, and bale Air Sahara out of its mounting liabilities. Going by market reports, much of the amount would go towards settlements of dues and debts. Further, the deal marks the first major step towards consolidation in the Indian aviation industry which has witnessed unplanned and unbridled growth over the past few years. The two airlines were among the first to enter the field when it was opened to the private sector. This combination was expected to dominate the Indian airline market for the near term as Jet will have a larger scale and scope than any other Indian carrier. It was expected to help Jets new business model to align market shifts with products (network, aircraft size, and frequency), cost structure and financial resources. It also helped to leverage its domestic size to develop a stronger international presence. Moreover, in international operations, Jet had bought time, by reducing competition, to put its house in order. Another important benefit that Jet Airways derived from the acquisition of Sahara Airlines was that their order for the additional 10 B737NG aircraft which were scheduled for delivery between June 2009 and August 2011 thereby enabled Jet Airways to have access to additional aircraft to expand its fleet. This represented substantial additional intangible assets for Jet Airways since it had no aircraft on order and delivery positions were not available before 2011 or only available at a premium.

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5.1 CRITICAL ANALYSIS

As per the Centre for Asia Pacific Aviation, the acquisition of Air Sahara by Jet Airways was maybe the carriers first major strategic error. Allowing Sahara to exit from the market would have resulted in a market correction that would have been to the benefit of all players. Jet incurred a high acquisition price and has been funding operating losses ever since. The process of integration has been difficult and costly and continues to negatively impact Jet Airways. It is reported that Jet Airways has yet to settle the full purchase price for the carrier, reflecting the state of its financial situation. Jet Airways bottom line has been further impacted by an aggressive international expansion which stretched the carriers resources and damaged investor confidence. The airline has since been forced to cut a number of existing routes and halt new services as it consolidates its overseas network. To address the overcapacity in its long haul fleet, Jet Airways has leased a number of wide body aircraft to Gulf Air and Oman Air. 6. MERGER BETWEEN AIR INDIA AND INDIAN AIRLINES The government of India on 1 march 2007 approved the merger of Air India and Indian airlines. Consequent to the above a new company called national aviation company of India limited was incorporated under the companies act 1956 on 30 march 2007 with its registered office at new Delhi. The merger of the two airlines would enable them to leverage their combined assets and capital better and build a strong and sustainable business. The potential synergies were expected to enhance the new combined airlines profitability by over US$133 million per annum, or about four per cent, of their current combined assets. By 2010-11, when all the new aircraft ordered by the two carriers are inducted into the fleet, the merged entitys employee-aircraft ratio would come be about 200:1, comparable with any major global airline. While Air-India has ordered 68 Boeing planes, Indian has finalized the acquisition of 43 Airbus aircraft. According to the report submitted by Accenture, there will be no manpower rationalization as the consultancy has suggested careful integration of manpower at various levels. It has also suggested a top-to bottom integration of the employees. It is proposed that the pay-scales be revised to bring parity in promotion procedures. The aim of the merger was to

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Create the largest airline in India and comparable to other airlines in Asia. The merger between the two state-run carriers will see the beginning of the process of consolidation in the Indian aviation space - the fastest growing in the world followed by China, Indonesia and Thailand.

Provide an Integrated international/ domestic footprint which will significantly enhance customer proposition and allow easy entry into one of the three global airline alliances, mostly Star Alliance with global consortium of 21 airlines.

Enable optimal utilization of existing resources through improvement in load factors and yields on commonly serviced routes as well as deploy freed up aircraft capacity on alternate routes. The merger had created a mega company with combined revenue of Rs 150 billion ($3.7billion) and an estimated fleet size of 150. It had a diverse mix of aircraft for short and long haul resulting in better fleet utilization.

Provide an opportunity to fully leverage strong assets, capabilities and infrastructure. Provide an opportunity to leverage skilled and experienced manpower available with both the Transferor Companies to the optimum potential. Provide a larger and growth oriented company for the people and the same shall be in larger public interest. Potential to launch high growth & profitability businesses (Ground Handling Services, Maintenance Repair and Overhaul etc.) Provide maximum flexibility to achieve financial and capital restructuring through revaluation of assets. Provide an increased thrust and focus on airline support businesses. Economies of scale enabled routes rationalization and elimination of route duplication. This resulted in a saving of Rs1.86 billion, ($0.04 billion) and the new airlines will be offering more competitive fares, flying seven different types of aircraft and thus being more versatile and utilizing assets like real estate, human resources and aircraft better. However the merger had also brought close to $10 billion (Rs 440 billion) of debt.

The new entity was in a better position to bargain while buying fuel, spares and other materials. There were also major operational benefits as between the two they occupied a large number of parking bays and hangers, facilities which were usually in acute short

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supply, at several large airports in the country. This worked out to be a major advantage to plan new flights at most convenient times. Traffic rights - The protectionism enjoyed by the national carriers with regard to the traffic right entitlements is likely to continue even after the merger. This will ensure that the merged Airlines will have enough scope for continued expansion, necessitated due to their combined fleet strength. The protectionism on traffic rights have another angle, which is aimed at ensuring higher intrinsic value , since the Government is likely to divest certain percentage of its holding in the near future.
6.1 POST MERGER SCENAREO

NACIL's employee-to-aircraft ratio, a gauge of efficiency, is the highest among its peers at 222:1 (the global average is 150:1), resulting in a surplus employee strength of almost 10,000. The wage bill of the merged company, which was 23 per cent of total expenditure at the time of incorporation, is expected to rise sharply due to a grade realignment.

Fleet Expansion NACIL's fleet expansion seems out of sync with the times, as most airlines are actually rounding their fleet and cancelling orders for new planes. While other Indian airlines have withdrawn over a third of their aircraft orders slated for delivery in 2009, NACIL plans to induct 30 aircraft in this fiscal and another 45 by March-end 2012. This means NACIL would face a wall of debt going forward.

Mutual Distrust and strong unions The distrust between the two sides of Air India and Indian Airlines is almost palpable. For sure, many jobs will become redundant when functions are unified. Many of those appointed are from Indian Airlines, fuelling resentment among Air India employees. Integration has become a tightrope walk for the management. Strong opposition from unions against managements cost-cutting decisions through their salaries have led to strikes by the employees.

Increased Competition The flux at the top has led to delays in decision-making at a time when demand for air travel has dropped around 8-10% over the last year and competition has heated up in the sector. The national carriers domestic market share has been under pressure ever since budget carriers and new private airlines took wing. Air Indias

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domestic market share dropped from 19.8% in August 2007, when the merger took place, to 13.9% in January 2008 before rising to 17.2% in February 2009. Lower load factor Though the overall operating performance has been steady, Air India passenger load factor of 63.2%, which was the companys record, lags the industry average of 75% in 2006-07.The load factor difference is even greater when compared to other low fares carriers such as Air Deccan. The companys load factor is decreasing year by year, in 2005- 06 load factor is 66.2% which is more than present load factor. Air India load factor is likely to be low because of the much higher frequency operated on each route. Lower load factor could decrease the companys margins.
6.2 CRITICAL ANALYSIS:

The merger between Air India and Indian Airlines made perfect sense on paper for over a decade. Their complementary networks, common ownership and need to generate greater efficiencies all pointed to the benefits of a merged entity. As it was, the merger coincided with a flurry of increased domestic and international competition, placing great pressure on management. Successful implementation required robust guidance and a capable execution team to handle such a complex undertaking. Instead, the process moved ahead without first strengthening the management and organization structure. More attention was devoted to discussion around non-core issues such as long term fleet acquisitions and establishing subsidiaries for ground handling and maintenance, than to addressing the state of the flying business. Air India has continued to see its domestic market share decline. The situation was compounded by the cultural chasm between Air India and Indian Airlines, leading to an increase in internal politics, a potentially messy situation in an entity with 35,000 employees. A bloated workforce, unproductive work practices and political impediments to shedding staff made the creation of a viable business model extremely challenging. The situation calls for a depth of leadership across the organization which still does not exist. There appears to be no clear business plan to revive the carrier and effecting a turnaround now appears to be a herculean task. 7. CONCLUSION Kingfisher Airlines announcement to discontinue with Red, its low-cost wing formed after merging with Air Deccan, raises the question on the success of mergers of aviation companies in the country. Analysts say mergers by India's airlines have not been successful so far because of
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their objectives: it's to either kill competition or acquire flying rights to fly international. Some also say the Indian aviation did not see any mergers, it was outright acquisitions and the company that was acquired lost its identity. The aviation industry in India is growing at 20 per cent per annum, making it one of the largest in the world. Six major Indian carriers with around 400 aircraft catered to 143 million passengers, including 38 million international, in 2010-11. Out of the 38 million international passengers, Indian carriers flew 35 per cent of them in 2010-11. Attempts by full-service carriers to run two different kinds of services (both full service and low cost) within the same airline also created serious problems, as there is a lot of difference in the costs, the turnaround time of aircraft, the training modules and the distribution models. But this consolidation, aimed at creating a more viable business model, took place against the background of an industry that was beginning to exhibit the first signs of distress. The bullish fleet orders placed by Indian carriers saw capacity being introduced at the rate of 6 to 6.5 aircraft a month, whereas the actual growth in demand was closer to 3 aircraft equivalents. Aside from the mis-match between supply and demand, the rate of growth was simply too great for the industry to handle from a management and capital perspective. In a fragmented market, with multiple start-ups chasing market share, loss-leader pricing was widespread and Air Deccan in particular was responsible for setting fares well below cost as it fought to retain its first mover market share. The rapid increase in capacity at a time when the airport modernization program was yet to deliver upgraded infrastructure, meant that airports and airways were highly congested, increasing airline operating costs. With the inadequate surface access and airport (and airways) infrastructure, airlines were unable to secure a significant competitive edge over other means of travel, thereby excluding huge parts of the still-untapped leisure market. In a period of global boom, demand for skilled personnel such as pilots and engineers also outstripped supply leading to a sharp escalation in wages, and in some cases grounding of aircraft due a shortage of staff. Balance sheets were stretched as a result of the aggressive fleet induction programs, combined with the mounting operational losses. These early signs of growing pains were largely ignored and airlines continued to pursue aggressive but unachievable growth strategies. The flaws in this approach were exposed by the astronomical fuel prices in 2008 which created an impossible operating environment, not only for Indian airlines, but for the entire global industry.

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8. REFERENCE/BIBLIOGRAPHY
1. www.wikipedia.org 2. Mergers & Acquisitions in Aviation Sector esha tyagi 3. www.rediff.com 4. www.investopedia.com 5. Consolidation In The Sky- A Case Study On The Quest For Supremacy Between Jetlite And Kingfisher Airlines Dr Salma ahmed & Yasser Mahfooz, Aligrah Muslim University 6. Indian Airlines prepare for consolidation round II Centre for Asia Pacific Aviation

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