By Sushma Ramachandran
India’s leading private airline Jet Airways finally announced a takeover of the much smaller Air Sahara at a cost of Rs. 1450 crore ($346 million) last week, ending prolonged speculation over the deal which had been announced originally in January 2006. With this merger, the process of consolidation has begun in the country’s civil aviation industry. It will emerge as the largest player in the Indian skies.
The private sector Jet-Sahara combine will end the dominating role of the public sector with the new corporate commanding as much as 32 percent of the domestic market space. The scene may change after a few years with the proposed merger of Air India and Indian Airlines, but Jet-Sahara will be the leader for some time to come.
The merger is not likely to impact domestic fares for the time being, in view of the stiff competition between the numerous players in the civil aviation sector. This is despite the fact that Jet-Sahara along with the public sector Indian Airlines will hold a commanding 55 percent of market share. Besides Jet Airways has now decided to transform Air Sahara into a low cost carrier, to be known as Jetlite though officially maintaining that it will be positioned somewhere between a low cost carrier and a normal one.
The merger of the two airlines will give Jet Airways access to the entire leased fleet of about 27 aircraft of Air Sahara as well as to the infrastructure and logistics of the smaller airline. It will also give Jet a pan-India presence as Sahara is operating in many areas where Jet is not present. Even in the international arena, Sahara becomes complementary to the larger airline. While Jet has a presence in long-haul routes to the US and Europe, Air Sahara is operating to neighbouring countries like Sri Lanka, Nepal and Thailand. Currently Jet Airways has about 62 aircraft and operates 320 flights to 44 destinations within the country and six in foreign countries.
One of the gains for Jet in the deal is access to Sahara’s parking slots in London’s Heathrow airports as well as in Delhi and Mumbai. Besides, with the huge shortage of airline pilots, it can now draw upon the bank of Air Sahara’s pilots. Other maintenance facilities of the smaller carrier will also be available within the country. The company, however, owns none of Air Sahara’s 27 aircraft. With all the aircraft being leased from other companies, Jet does not really gain much in terms of tangible assets especially since Sahara will not be transferring its real estate or helicopters. In contrast, when the deal was initially unveiled in January 2006, the plan was for takeover of all of Air Sahara’s assets at a price of Rs. 2300 crore ($545 million).
The timing of the deal could not be better, aviation experts say, as it comes well ahead Air India and Indian Airlines merger that will undoubtedly create a huge behemoth. But this gives Jet Airways sufficient time to position itself as an effective competitor to the public sector giant. Air India and Indian Airlines will take some time to carry out route rationalization, which is expected to improve revenue generation and profitability considerably for the combined entity. The other players in the market currently are much smaller including the fast-growing Kingfisher Airlines, the leading low-cost carrier, Air Deccan and the minnows like SpiceJet, IndiGo and GoAir.
Analysts have consistently been describing the deal as over-priced but Jet Airways chief Naresh Goyal is clearly keen to expand quickly to become the dominant player in the Indian market. The Lucknow-based Sahara group of Subroto Roy had been hunting for a buyer for its ailing airline for quite some time and at one stage had almost concluded a deal for sale to Kingfisher Airlines of Vijay Mallya’s UB group.
Significantly, the take over of Air Sahara comes at a time when Jet’s market share is much lower than it was a few years ago. It had at one stage commanded a 40 percent share but is now at about 27 percent. With growing competition, profits have lost their sheen though the company was in the black in the third quarter of last year. There has also been an exodus of several of the company’s top executives recently, with reports citing poor management practices for the their exit.
The Jet Airways-Air Sahara deal was actually announced as far back as January 2006. Jet Airways then disclosed that it had reached an agreement to buy Air Sahara for $500 million in an all-cash deal. The deadline to conclude the sale was set at June 21, 2006. This deadline could not be met because of the Directorate General of Civil Aviation (DGCA) failed to clear the appointment of Jet chairman Naresh Goyal on the Air Sahara board by that date. The issue ultimately reached the law courts and arbitration proceedings began last year on the directive of the Supreme Court. The arbitration panel valued Air Sahara at Rs. 2000 crore ($476 million) and the acquisition is being carried out at a price of Rs. 1450 crore ($346 million).
The Jet initiative to buy out Sahara has begun a new phase in the domestic civil aviation sector. The liberalization of the economy had earlier virtually led to a thousand flowers blooming in the country’s skies with numerous airlines being launched and dying fairly rapidly. These included the erstwhile East West Airlines, Modiluft and Damania that created a stir as the first wave of private airlines. Jet Airways survived that phase, only to be met with a whole host of newer players like Air Deccan, Kingfisher and Spicejet. Other airlines like Kingfisher are also looking to take the same route to quick expansion. The coming years may thus well see a shakeout in the industry, ultimately leading to a few large players commanding the market rather than a host of smaller ones. Till then, however, the consumer is going to remain spoiled for choice in the airline business.
(Sushma Ramachandran is an economic and corporate analyst. She can be reached at [email protected])