Airline struggles in troubled skies

There was certainly relief all around in 1990, when the aviation sector was opened up to private investors and the monopoly of the State owned airlines (don't forget Pawan Hans) came to an end. Most of the initial start-ups, such as East West, Damania and Modiluft were short lived, only Sahara endured and survived. The entry of Air Deccan witnessed the launch of a new model in Indian skies, that of a low cost airline, to make air travel affordable for the common man, without "coffee and kebabs". But even the man with a mission had no recourse but to sell out because of working capital issues.
Globally, the aerospace market remains one of the fastest growing, notwithstanding recessionary trends. It must be kept in mind that mergers allow airlines an option of survival and diversion from insolvency or bankruptcy which the Damanias faced and should be encouraged as long as they are in consumer interest.
Investors are either Private Equity (PE) or other airlines. In India, in spite of FDI by foreign airlines being prohibited, there have been three major M&A activities since private entry was permitted.
The first of such acquisitions was of Air Sahara by Jet Airways, to take its market share to 50 per cent, and gaining entry into international routes to become the largest airline in India. The deal was in the danger of being aborted with Jet alleging that the Sahara aircrafts were in poor condition. Several hidden losses emerged on due diligence. Sahara alleged breach of contract and the parties were locked in arbitration and before courts, but finally settled and the rest is history.
United Breweries (UB) Kingfisher's parent company acquired 40 per cent of Air Deccan's parent Deccan Aviation, holding 52 per cent of the target company. The reverse merger with Deccan became effective in April, 2008 and Deccan Aviation was renamed Kingfisher Airlines. Its low cost fleet was rebranded as Kingfisher Red in 2007-08. Did KFA require the value addition of a law cost airline? Not really, but the deal carried some major benefits - fast forwarding KFA's entry in the international sector riding on Deccan's five year experience, savings on operating costs, and the right to operate charter flights, as well as Deccan's own market share. What also came on board were debts.
Unlike Jet, which retained / absorbed and continues the Sahara business in a separate entity, with a dedicated work force, and operating the flights as 'S2'even now.
The post merger integration failed, which is not unusual, as historically integration of low cost and high cost carriers have worked as exceptions. Perhaps the Deccan brand was abandoned too soon.
21/11/11 Kumkum Sen/Business Standard

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Categories: Indian Aviation- In General Nov 2011