16-10-2012, 03:21 PM
Merger between Air India and Indian Airlines
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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.
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 airline’s 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 entity’s 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
• 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 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.
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 re-alignment.
• 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 management’s 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 carrier’s domestic market share has been under pressure ever since budget carriers and new private airlines took wing. Air India’s 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.