Title

The Jet-Sahara Merger

Author

Deepika Minocha and Pratibha Singh

Source

Forthright

References

1. Business World 2. Business Standard

Document Type Secondary Analysis

Source

Strategy

Date

April 1, 2006

Abstract The article covers the emergence of a trend of consolidation in the Indian aviation industry. In the biggest aviation takeover in India, Jet Airways struck a deal to buy Air Sahara, a move that would help the Naresh Goyal promoted carrier to become the biggest domestic carrier. Heres a look at how the takeover would change the aviation industry in India and what exactly it would spell for both Jet Airways and Air Sahara.

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Exposition:

In the biggest aviation takeover in India, Jet Airways has struck a deal to buy Air Sahara for Rs 2,300 crore (Rs 23 billion), a move that would help the Naresh Goyal promoted carrier to become the biggest domestic carrier. Heres a look at how the takeover will change the aviation industry in India and what exactly it spells for both Jet Airways and Air Sahara.

Aviation industry in India Till two years ago the aviation sector was growing at a sluggish pace with the three major traditional airlines competing mainly on loyalty programmes, flight schedules, return fares and comfortable service. After 9/11, airlines all over the world saw a fall in the number of passengers and Jet Airways & Air Sahara were no exceptions. As a result its passenger load factor (the percentage of capacity being utilised) fell below 60% in 200203, before gradually recovering to 63%. The market shares in 2003 had Jet leading the way with 44% of the market followed by Indian Airlines with 42% and Air Sahara with 12% of the 12 million domestic market. Then came Air Deccan which in its first nine months grew from one aircraft and one flight to seven aircraft and 46 flights a day. There has been no looking back for low cost/fare airlines and the aviation sector since then. Last year we have seen the launch of three more low cost / value carriers Spice Jet, Kingfisher Airways and Go Air. Indigo, Yamuna Air, Magic Air, and Visa are gearing up to launch in the next few months. Also in the pipeline is the launch of niche service providers like Paramount Airways and Air One.

Jet Airways Jet Airways is one of Indias premium domestic airlines and arguably the most successful. The airline, which was set up in 1993 after the central government opened civil aviation to private investment, overtook Indias national airline, Indian Airlines, in the early 2000s in terms of passengers carried. By 2005, Jet Airways had been listed on

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Indias main stock exchanges and had obtained permission to operate international flights.

''We don't fly aircraft, we fly people' is the motto of this private owned airline. They have chosen the yellow rose as their motif as it symbolizes friendship, warmth and caring. Jet Airways was set up with the objective of providing high quality and reliable air travel in India. Since a very high percentage of the Indian domestic air traffic comprised of business travelers, their focus from the very beginning was to emerge as the "Businessman's Preferred Airline". This led to a product and service design that aimed at world class norms in professional service and efficiency, beginning with the choice of aircraft itself.

Their operations commenced with a fleet of four Modern Generation Boeing 737-300 aircraft. These aircraft were the first to fly the Indian skies. For training and conversion of their pilots and engineers, they utilized the training facilities of Ansett (Australia). For world class norms in service, they were aided by Speedwing (a British Airways subsidiary) to conduct a program on Customer Service Excellence for staff across functions at all levels. To ensure accurate and efficient reservation systems, they tied up with and are co-hosted with SABRE - one of the world's best reservations systems.

Jet Airways' current fleet consists of 33 B737 new and next generation aircraft and 8 modern turbo-prop ATR72-500 aircraft. CFM 56 engines power all the Boeing aircraft while the ATR aircraft are powered by Pratt and Whitney 127 engines. The average age of the fleet is 3 years making Jet Airways the operator of the youngest aircraft fleet in Asia.

Jet Airways operates over 250 flights daily to 42 destinations across the country. Jet Airways is one of the few airlines in the world to receive the ISO 9001 certification for its in-flight services. They pride themselves, on having an unbeatable record of on-time flights and providing world-class frequent flyer benefits to our customers, through their alliances with British Airways, KLM Royal Dutch Airlines and Northwest Airlines.

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In the recent past, however, Jets dominance in the Indian market has been severely challenged. The large number of low cost carriers that have entered the industry has led to an explosive 20 to 25 per cent growth for the industry. Amid the rush of new players, Jets market share has declined to 37 per cent from 42 per cent at the beginning of the fiscal. Jet has also struggled to keep pace with the industrys capacity expansion. In the Delhi-Mumbai sector which accounts for 50 per cent of the countrys air traffic the industrys capacity has increased by 70 per cent in the past year. But Jets grew by a mere 7 per cent. Moreover, rivals also poached Jets pilots and other airline staff. Last October and November, Jet had to cancel or combine almost 1,000 flights due to acute pilot shortage. This led to a loss of Rs 21.9 crore. The market leader was obviously taking a beating.

Strategy The Jet Airways mission is to make it the best airline in the world in customer service and efficiency. From being an agent for a Lebanese carrier in the early 1970s to running India's largest airline, it has been an eventful journey for Naresh Goyal who unveiled the biggest acquisition in the country's civil aviation history, on January 19, 2006. The airline bought out rival Air Sahara for $500 million to make the carrier India's largest - even larger than state-owned Indian Airlines - with a fleet of 90 aircraft.

With a combined fleet strength of nearly 80 aircraft and a market share of almost 50 per cent in passenger traffic, Jet Airways clearly wants to emerge as the lead player in the domestic sector and get a fair share of the regional/international routes that are now in private operation. These include destinations in South East Asia, South Asia and Europe. While Jet has rights for London and an understanding with British Airways, it has not been able to get clearance for the U.S. At a time when international airlines have gone in for global alliances to leverage the regional strengths of partner airlines, the move by Jet to acquire Sahara may trigger a process of consolidation in the domestic sector. It remains to be seen how the Centre and the public sector Indian (formerly Indian Airlines)

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respond to it. Now that the Government has cleared the fleet acquisition scheme, Indian has to pull up its socks and prepare itself for the competition from private airlines.

Jet Airways also plans to start operations to the US this year subject to the government nod. The airline will also acquire a large fleet of Boeing aircraft for some $2.53 billion, with deliveries set to commence from mid-2007.

Jet Airways successful IPO In March 2005, Jet Airways Limited became the first Indian airline to issue shares to the public, when it made a successful debut on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) simultaneously. The much awaited Initial Public Offering (IPO) raised Rs. 1899 crore, through the sale of 1.72 crore shares (20 percent of the company's equity) of Rs.10 each. The issue price was set at Rs. 1100, but the lowest price the shares were traded for on either of the bourses was Rs. 1155. At the end of the first day of trading, the closing price of the shares exceeded Rs. 1300, which was a gain of around 18 percent over the issue price.

A part of the amount raised through the IPO was expected to be used to retire some of Jet Airways' high cost debts (primarily to the International Finance Corporation and the Infrastructure Development Finance Company), and the rest to fund the airline's ambitious expansion plans.

Analysts said that retiring its high cost debts would bring down Jet Airways' debt-equity ratio from around 5.4:1 before the IPO to 1:1, which would prove to be advantageous to the airline in securing further loans on favorable terms and in negotiating lease agreements for new aircraft. Naresh Goyal said there was a possibility of the airline looking at an international shares listing in future if such a move was found to be feasible.

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Jet Airways' tremendously successful IPO further consolidated the airline's position in the Indian aviation industry. It also proved that the large number of low cost airlines (LCA) being set up in the country found it difficult to affect Jet Airways' popularity with passengers.

Jet Airways and Air Sahara In the biggest aviation takeover in India, Jet Airways has struck a deal to buy Air Sahara for Rs 2,300 crore (Rs 23 billion), a move that would help the Naresh Goyal promoted carrier to become the biggest domestic carrier. As part of the deal, Sahara 's assets

including infrastructure and parking slot facilities in the country would now be owned by Jet.

What Jet will get from the Air Sahara merger

Complete dominance of parking bays and airport infrastructure Analysts estimate that a cost saving of Rs. 150 crore -200 crore is achievable Jet will now be the only private Indian carrier to fly international with not competition for 3 years

If Jet can bring Sahara up to its own standards and charge its own fares, there is a revenue upside

A dominant market share of about 48 per cent. Jet can increase its capacity without expanding supply.

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 its true value lies. 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.

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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 48 per cent in traffic, and bale Air Sahara out of its mounting liabilities. Going by market reports, much of the Rs. 2300

crore may 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. It remains to be seen what lessons the more recent entrants will draw from the Jet-Sahara deal they will have to decide if it will be advantageous to remain separate or go in for consolidation through mergers and acquisitions.

Jet Airways decision to acquire Sahara is very significant from a larger perspective, both in the Indian and Asian context. The competitive landscape has been altered. This combination will dominate the Indian airline market for the near term as Jet will have a larger scale and scope than any other Indian carrier. The next biggest competitor (Indian) will be unable to offer effective competition in the present circumstances.

Jet Airways has been able to arrest the development of an emerging hyper-competitive environment. It will help Jets new business model to align market shifts with products (network, aircraft size, and frequency), cost structure and financial resources. It will also be able to leverage its domestic size to develop a stronger international presence.

Moreover, in international operations, Jet has bought time, by reducing competition, to put its house in order. Its no secret that Jets international operations need some serious attention considering that last year (April-December), the airline incurred losses worth $8 million on international routes, out of which $6 million were on account of the DelhiLondon and Chennai-Singapore sectors. Its passenger load factor is 52.4 per cent (average) on international routes much lower than the break-even level of over 70 per cent.

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Jet has appointed its vice-president (marketing) Gaurang Shetty to lead the integration process from its end. Jet plans to address four key issues again rationalization of routes, renegotiating Sahara s leases, replacing a part of its fleet, and improving asset utilization.

How the deal could impact Jets financials Jet also has to ensure that the integration happens quickly enough. Any delays will create openings for rivals. Its biggest threat is likely to come from the public sector Indian with a market share of around 30 per cent and maybe, even national carrier Air India. Indian officials believe that Jet may not be able to capture all of clientele after the merger. They expect that Saharas existing

Saharas passengers may choose low-cost

carriers, as they are far more price-sensitive than Jet loyalists. Indian hopes to exploit this chunk. Both Indian and Air India have just ordered 111 aircrafts.

Jet has ordered 30 new aircraft for $2.5 billion to expand international routes. Interestingly, Saharas airport infrastructure could help Jet get better returns. Jet is also keen to expand capacity on domestic routes by 15 per cent.

The competitive scenario Indian. It could be the biggest competition for the Jet- Sahara combine. Has ordered 111 aircrafts along with Air India Air India. Seriously considering a full-fledged entry into the domestic market either on its own or through a merger with Indian Air Deccan. Has stayed away from joining the lobby group that hopes to take on Jet. Likely to tie up with Jet for an interline deal. Kingfisher. A former bidder for Sahara . Likely to be most hurt by this merger. Has questioned the price of this deal and raised questions about monopolistic practices SpiceJet. Has plans to expand fleet rapidly. May survive purely as a low cost carrier player

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Go Air. May continue to depend on low cost carrier advantage. Plans to set up for an entry into the cargo business as well as an aircraft engineering company Major areas of concern preventing the deal from taking off: The government has expressed concern regarding the deal and has opposed it on a number of fronts.

Firstly, the provision to award Saharas entitlements to the Jet Airways has been raised by the CPI (M). The point that an entitlement to airport infrastructure were awarded to an entity, but if the entity (Sahara) ceased to exist, entitlements couldnt be transferred was strongly supported by the party.

Secondly, reservations about how Jet got the money for the acquisition are strongly expressed

Thirdly, delays in securing regulatory clearances have forced the two airlines to extend the timeline for the culmination of the deal.

However last month the airport panel cleared the Jet- Sahara deal transferring all of Air Saharas assets to Jet Airways. It was also decided that the government would have nothing to do in the Jet- Sahara deal on whether they would merge or set up a separate company.

With the clearance issues done with and non interference on part of the government, the Jet- Sahara merger looks promising for the Indian aviation sector. With competition rising and many small players entering, perhaps mergers and acquisitions have finally caught on this sector of the industry too...with the Indian and Air India next in queue.

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