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Merge or acquire — to survive

V. Jayanth

Private airlines are doing all they can to consolidate the operations in the competitive sector.

THE TREND of mergers and acquisitions continues in the Civil Aviation sector. Last week, Kingfisher Airlines, through its holding company the United Breweries group, bought a stake in the country's first low-cost, no-frills airline — Air Deccan.

This follows the decisions of Air India and Indian to merge and Jet Airways' acquisition of Air Sahara.

In all these cases, a clear pattern is discernible. First, the airlines, after a phase of rapid expansion and birth of new carriers, want to consolidate their base and operations. Secondly, they want to synergise operations with one of the competing airlines by utilising not just the fleet but also other ground advantages and landing rights. Above all, they are trying to keep a hold on both the markets — the business class passengers and those flocking to the airlines thanks to the cheap fares.

Air India and Indian, the two national carriers, already own cheaper fare airlines — Air India Express and Alliance Air. The new entity, after it comes into being, will obviously retain the cheaper arm to woo a new generation of air passengers, and also provide greater connectivity.

When Jet Airways negotiated and decided to acquire Air Sahara, it also announced the creation of JetLite — the new name for Air Sahara, when all the formalities are completed. JetLite is expected to be the low fare partner for Jet Airways, which has established a niche for itself among tourists and business class passengers.

There was some resistance from Air Deccan when Kingfisher tried to take over the airline. Captain G.R. Gopinath did not appear keen on giving up his hold on the country's first no-frills airline, which already had a 22 per cent market share. But he was eventually persuaded to part with 26 per cent of the equity. The basic understanding seems to be that the "low cost brand name" of Air Deccan will remain; it will become the no-frills arm of the high-flying Kingfisher. Air Deccan badly needed a fresh injection of capital to offset its Rs.213-crore loss in 2006-07. The consolidation will take the combined share to one-third of the market.

Till now, low-cost airlines have been competing with the established normal-fare airlines. Even before the advent of Air Deccan, there was a triangular fight among Indian, Jet Airways, and Air Sahara to start with. Air Deccan focussed on a new segment — first time air travellers. Starting from a Rs.500-a-ticket offer, it brought it down to unbelievable one-rupee tickets. Of course, passengers had to pay a minimum tax of more than Rs.1,000 for any air ticket.

Air Deccan introduced the slab system. A certain percentage of tickets were given away at the rock bottom price of Re.1, then there was the Rs.9 ticket. Closer to the date of journey, the fare climbed up to near-normal levels. But it was always cheaper than the lowest fare the regular airlines could offer. So the passengers flocked to the airports and domestic air traffic grew by leaps and bounds over the past two years.

Then came GoAir and Spice Jet. They were neither as low as Air Deccan nor as high as the regular airlines. But they were still cheap and affordable for a new emerging middle class, which found this much better than travelling by train to Mumbai, Kolkata, and New Delhi.

In the red

But congestion was beginning to show — not just in the air and at the airports, but also in the bottom lines of the airlines. Most of them were running in the red, with some hoping to break even or show at least operational profit from 2007-08.

Not willing to be left out, and also to increase occupancy of their aircraft, the established airlines also came up with attractive fares. Some called it apex fares, others introduced a time slab. But all of them joined the fare war and attempted to boost traffic and increase occupancy. In the end, their profits got eroded, and many of them ran up losses.

The current trend of acquisitions and mergers may be their answer to this competitive environment. Airline managers say consolidation could help end the fare wars and bring in fiscal discipline. Without compromising on their business class and frequent flier passengers, the airlines can now focus on the first-time fliers and woo new passengers through their other arm — the low-cost carrier.

Asked if the passengers will lose out on fares and competitive offers, airline managers say they can cater to and cover both segments of traffic — the business class and the new fliers. Volumes will be important and so fares may have to remain competitive. But, with fewer players, it may not descend to the levels the market now offers. It remains to be seen how GoAir and Spice Jet respond to the new situation. On the other side of the fence, Paramount Airways, a business class at economy fares airline, has expressed its readiness to partner a low-cost airline but under its own brand name.

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