토토사이트 썸’S AIRLINE INDUSTRY CONSOLIDATES, BUT CHANGE IS STILL IN THE AIR
A version of this article was originally published by Knowledge at Wharton
Economic reality is reshaping 토토사이트 썸's airline industry. Just a few years into a third wave of private operators, the high cost of fuel has led to a number of mergers, including a high-profile agreement to combine 토토사이트 썸n Airlines with Air 토토사이트 썸. Other issues, including infrastructure constraints, increased competition and wage inflation, have left low-cost carriers, such as Sahara and Air Deccan, with no alternative but to merge with larger airlines.
A new crop of airlines has sprung up in the last few years. Deccan Aviation, 토토사이트 썸's first low-cost carrier (LCC), began operations in 2003. SpiceJet, also an economy carrier, took wing in 2005. Kingfisher Airlines, headed by the flamboyant liquor baron Vijay Mallya, started the same year. Other newcomers include GoAir and Paramount, while East West and another old-timer, ModiLuft, have returned.
It didn't take long for the shakeout to begin. In April 2007, Jet Airways took over Air Sahara for Rs. 1,450 crore. Kingfisher acquired an initial 26 percent stake in Air Deccan for Rs. 550 crore. And in the mother of all mergers, the government-owned Air 토토사이트 썸 and 토토사이트 썸n Airlines have joined to form the National Aviation Corporation of 토토사이트 썸 Ltd. (NACIL).
The main reason for the consolidation is economic. Both Deccan and Sahara were low cost carriers, and with the rising cost of fuel there was no way they could make a profit. Mergers with full-service carriers such as Kingfisher and Jet 토토사이트 썸ways were the alternative to closing shop.
The merger gives Kingfisher obvious economies of scale. It also provides an advantage peculiar to the 토토사이트 썸n environment. Airlines must complete five years in the domestic market before they can fly the more lucrative overseas routes. Through the Deccan merger, Mallya hopes to get permission for international flights earlier than he would for a standalone Kingfisher.
Kingfisher says the merger has helped in many ways. Synergies have helped cut costs. Greater passenger volume has allowed for the 토토사이트 썸line to renegotiate agreements. Schedule integrity has improved.
The story is the same at Jet Airways, which was 토토사이트 썸's largest domestic airline by far before the Kingfisher-Deccan combination. It still is, but by a slim margin.
While the Jet takeover of Sahara set the consolidation ball rolling, the 토토사이트 썸n Airlines-Air 토토사이트 썸 merger attracts the most attention. The combination was inevitable considering that domestic carrier 토토사이트 썸n Airlines was losing market share year after year.
Raghu Menon took over as chairman and managing director of Air 토토사이트 썸 on April 1. To Menon falls the job of seeing through the two national carriers' integration process.
His first challenge is to put the organization's financial house in order. In 2006-07, Air 토토사이트 썸 lost Rs. 448 crore and 토토사이트 썸n Airlines Rs. 240 crore. The results for 2007-08 are not yet ready, but Menon acknowledges that the losses could be higher.
The other big burden on Air 토토사이트 썸 is the high price of air turbine fuel. "ATF accounts for 40 percent of our costs," Menon said.
Plans to take Air 토토사이트 썸 public have fallen through. "Our balance sheet won't allow it," Menon said. Instead, the company will turn to the government. Whether it will seek an equity infusion or debt has not been decided. Jet Airways, meanwhile, postponed a Rs. 1,600 crore rights issue last month for the third time and is looking for other funding options.
"The success of any merger depends entirely on the sens토토사이트 썸iv토토사이트 썸y and the matur토토사이트 썸y w토토사이트 썸h which the management handles 토토사이트 썸," Deccan's CEO G.R. Gopinath said. "Mergers will succeed when the managements know what to synergize and what to leave alone. 토토사이트 썸 has to be done w토토사이트 썸h sens토토사이트 썸iv토토사이트 썸y, intelligence and comm토토사이트 썸ment."
"The merger does have a lot of inherent challenges because the business models of Deccan and Kingfisher are completely different and, therefore, have distinctly different cultures," Gopinath says. "Kingfisher has the mindset of a premium service provider, whereas we have a low-cost culture. As the two brands cater to very different segments, 토토사이트 썸 is essential to have very distinct, separate ident토토사이트 썸ies for both. At the same time, one needs to create a certain emotional bonding between the employees for them to feel part of one organization."
At Jet-Sahara, a first merger attempt was aborted with both sides threatening to sue. When the deal was finally signed, Sahara ended up as the "lite" version of Jet in more ways than one: Little of the old 토토사이트 썸line remains.
At Air 토토사이트 썸, Menon agrees that integration is a priority. But some things simply cannot be done. For instance, pilots and ground engineers of one airline cannot move freely to the other. They get licenses for specific aircraft and cannot jump to another without extensive training. "토토사이트 썸n Airlines' biggest aircraft is smaller than Air 토토사이트 썸's smallest aircraft," Air 토토사이트 썸 executive director Jitendra Bhargava pointed out.
Menon and Bhargava are banking on the infusion of new aircraft into the fleet. "We have suffered from an image problem because our planes were very old," Menon said. "Today, some of our flights have only new aircraft. Ask anybody who has traveled by them. This is the real Maharaja service." The image revamp is also being aided by the new, private airports coming up in 토토사이트 썸.
Menon expects the new organization to benefit from a hub-and-spoke system being put in place. 토토사이트 썸n Airlines will carry passengers from various parts of 토토사이트 썸 to Mumbai, where they will be transferred to Air 토토사이트 썸's international flights. Air 토토사이트 썸 is also joining the Star Alliance, a network of international airlines.
Joint ventures are being set up for maintenance, rep토토사이트 썸 and overhaul, and ground handling facilities. These will be offered to other 토토사이트 썸lines and bring in some revenue.
Another big issue is external to the company: the growing compet토토사이트 썸ion in the skies, which sparked the consolidation and shows no sign of abating.
"I am not afraid of competition -- I welcome it," Menon said, adding that it will help Air 토토사이트 썸 become more efficient. Meanwhile, new airlines are springing up in the domestic arena to compensate for the reduced number of players that consolidation has brought about. The older companies are foraying abroad, even to the West Asian routes that have been so profitable for Air 토토사이트 썸. And foreign airlines are landing in the country in ever-increasing numbers. Every industry faces competition. What's so different about civil aviation? "The glamour quotient of the industry does attract entrepreneurs and investments," says Gopinath. "But that alone cannot create a successful business."
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