Merger of kingfisher Airlines and Air Deccan

MUMBAI: Of the three mega mergers that the Indian skies have witnessed over the last couple of months, the one between Kingfisher Airlines and Air Deccan seems to be the best fit, analysts say. This is despite the fact that on the face of it, both the airlines, leave alone the personalities of their promoters, differ as chalk as cheese! Early June, when Vijay Mallya, chairman UB Group, which operates Kingfisher Airlines, agreed to pick up a 26% stake in Captain Gopinath-promoted Air Deccan for Rs 550 crore, it seemed a tango between two unlikely partners. If Air Deccan was positioned for the masses, Kingfisher Airlines is unabashedly for the classes. Both cater to different segments of the society and have different models. And hence their marriage appeared to be a recipe for disaster. But hard business sense points out that it is not the case. The first obvious advantage that Kingfisher Airlines - Air Deccan have that Jet Airways-Air Sahara doesnt is commonality of fleet. With the same family of planes on both sides, there could be significant reduction of cost, since many facilities like engineering could be shared, said an analyst with a domestic brokerage. Both airlines fly similar aircraft - ATRs and Airbus A320s.And both have plans to acquire more Airbus aircraft. With a fleet strength of 72 planes, the combined entity with a 33% market share, is the second biggest domestic aviation group (after Jet-Sahara) in the country and hence can leverage economies of scale in many ways. Scarce manpower can be optimally utilised, insurance premium and lease rentals can be re-negotiated, infrastructure like engineering, ground handling, training can be combined. There exist inherent synergies between Air Deccan and Kingfisher Airlines. With commonality of fleet (Airbus) we intend sharing of resources, aircraft spares, airport infrastructure such as X-ray machines, conveyer belts, step ladders. The synergies will definitely lead to decreased costs and increased efficiencies for both airlines, said an Air Deccan spokesperson. Mallya has said the merged entity can look forward to slash up to Rs 300 crore in costs in the first full year itself. Engineering costs as a percent of sales can come down by 1.0-1.5 percentage points. Hence the combined entity can slash cost by up to Rs 50 crore on engineering alone.

The balance 250 crore could come from route rationalising and other savings, said another analyst. Kingfisher Airlines and Air Deccan can access ground infrastructure at 65 airports, of which 28 are common. On the New Delhi-Mumbai route, which accounts for over half of Indias 33 million passenger traffic per annum, the two carriers account for a total of 155 flights. The international operations, as and when both the airlines are allowed to kickstart, would bring in additional synergies. Deccan has not ordered any long haul planes while Kingfisher has. So once both begin international operations, Kingfisher would fly long haul destinations like the US, while Deccan could look at areas like the neighboring countries, South East Asia, and the Middle East. Using its wider network, Deccan could feed Kingfishers international operations, said the analyst. Although current aviation policy wouldnt allow Kingfisher to begin flying overseas for another three years, there are indications that the policy would be done away with. Air Deccan would be eligible to fly abroad from 2008. Analysts say if the policy is not changed to Kingfishers advantage, the airline, which takes the delivery of its first wide-bodied aircraft, an Airbus A340-500, in December, could use look at flying overseas using Air Deccans code, but under its own brand. Kingfisher will get faster international access through Air Deccan and may access some of Air Deccans peak metro airport slots, helping it to counter the domestic peak time dominance enjoyed by Jet Airways, Mark Webb and Eric Lin, analysts with HSBC, said in their recent report. But although managements of both the airlines have said both the entities would be run independently, insiders say some changes already have begun to surface with a brand name change for Deccan being toyed by Kingfisher. Deccan would lose its individuality and be controlled by Kingfisher. Deccans problem was execution and not model. From Deccans managements point of view, it will not have active control over the airline, with Kingfisher calling the shots. That would be a sad thing for the airline which changed the rules of Indian aviation, said an industry observer.

VISUALS

Submitted By: Debidarshini Nayak 2K11B38