A Presentation

on

Merger of Air India & Indian Airlines

By D.Pradeep Kumar

Exe-MBA, IIPM ,HYd

The Icons…!

Background of Indian Aviation

The Civil aviation in INDIA Started on Feb 18th, 1911.

The First domestic air route was between Karachi and Delhi was opened in December 1912...!

First Indian airline, was owned by Tata Sons Ltd.

Avation in India started on Oct,15 1932 , when a light single-engine plane took off.

Tata Airlines converted into a Public Limited Company on July 29,1946 and renamed AIR INDIA

In 2006 Indian Aviation Industry was positioned 9th in World…

Brief about Air India

Tata Airline was converted into a Public Limited Company on July 29th 1946 and renamed as AIR INDIA.

Air India was regd. as Air India International on March 8th 1948 and started its International operations.

Air India became one of the most, talked about airlines in the world. No other airline quite matched Air India’s flamboyance and subtle humor promoting its services.

Its code sharing arrangements with 11 airlines offered passengers a wider network of routes to fly.

Air India had been profitable largely through its Cargo operations for over a decade.

Air India Air India Limited is the National Flag carrier airline of

India.

Air India is the 16th largest airline in Asia…

Serves 28 destinations worldwide…

Serves over 100 cities , with its affiliated carriers.

Air India first introduced the wide-bodied A300 aircraft and the fly-by-wire A320 on the domestic network.

It was First to Introduce Walk-in Flights and Flexi-fares…

Air India is state-owned, and administered as part of the National Aviation Company of India Limited .

Brief about Indian Airlines / Indian

INDIAN AIRLINES was formed with the merger of eight (8) domestic airline services, while Air India International was to operate overseas services.

At the time of Nationalization in later forties, Indian airlines in herited a mixed fleet of 99 aircrafts.

The airline gradually streamlined is fleet to moderate and to gain operational efficiencies.

The domestic carrier experimented in 1981 by launching a regional airline Vayudoot , which was later reintegrated into the company.(Indian airlines)

In Dec,2005 the 53 year-old Indian Airlines turned a new leaf when it was re-branded as Indian. It was given a complete image makeover-which included redesigning its crew uniform and its Logo

The airline market share dipped to under 25%. The airline spent rs.45billion for the image makeover.

“My Vision was to form a global airline . This merger will take the mega airline straight into the top 30 airlines with the precision and reliability of Lufthansa and the passenger service standards of Singapore Airlines will be formed .”

-Aviations Minister Praful Patel.

The idea first proposed 20years ago to merge two government owned air carriers- Indian Airlines & Air India, and it became a reality in 2007.

On 22feb 2007 , a group of ministers approved the merger of state owned carriers, Air India & Indian to improve operational synergy and increase productivity.

It had created the largest airline in the country with a combined turnover of Rs.150 billion and a fleet size of around 150.

The entity arising out of the merger between Air India and Indian Airlines was called National Aviation Company Ltd. And its brand name was Air India.

The brand logo – the ‘Maharaja’ continued to be Air India’s mascot.

The logo of the new airline was a Flying Swan with the Konark Charkra placed inside it.

The Merger had also brought close to Rs.440 million of debt.

The merger was to help the new equity compete with large global airlines and set the ball rolling for further consolidation and mergers & acquisitions.

The merger was viewed as a step in the right direction because it positioned Air India well with respect to rivals Jet and Kingfisher .

Since Air India was a globally and nationally recognized brand name .

Brand building became important as most players were offering similar fares on the same sectors.

The AI-IA merger was expected to create one of the biggest airlines in the world in terms of the fleet size.

The combined fleet size placed the merged entity among the top 10 airlines in Asia, and the top 30 in the world. It would also be India's first airline with more than 130 aircraft.

Factors Motivated to Merge….!

Cont…… India was the fastest growing aviation market in the world, ahead of China, Indonesia and Thailand, as of early 2007. The number of people traveling by air had been increasing rapidly in the country. The main reason for this was thought to be the advent of low cost airlines like Air Deccan and Spice et in the country in 2003-2004, which brought air travel within reach of India's large middle class. The entry of a number of new airlines had intensified the competition in the aviation sector by 2004.

According to information posted on IA's website, the increasingly intense competition faced by AI and IA from private and global airline companies, was the main reason for the merger of the two airlines.

Accenture had identified significant potential synergies between the two airlines in the areas of sales and distribution network, fuel procurement, material procurement, passenger amenities, ground handling and parking facilities. According to a report submitted by Accenture in late 2006, the merger could result in a 3-4% reduction in costs, and lead to a revenue increase of around Rs 6 billion initially.

Air India Express

On April29th 2007 Air India launched a new subsidiary airline – AIR INDIA EXPRESS ,

Its International budget airline with attractively low fares.

Fleet of Air India

Some Players of 2006Taking Indians Across India

• Low-cost airline (LCC)• Began in May 2005• Entered with Rs. 99 fares for first 99

days • “Offering low everyday spicey fares”• Aim: Compete with Indian Railways

AC sgment• fleet of 6 Boeing 737-800 with 189

seats.

India's first low-cost carrier Started air operations in 2003 Despite a disastrous maiden flight

which caught fire, Deccan continues to grow

Connects 55 cities within India Planning a secondary hub at Chennai

International Airport. Due to stock market downturn Air Deccan's IPO barely managed to scrape through

GoAir – The People’s Airline established in June 2004 LCC promoted by The Wadia Group GoAir FreeFares Relatively small player as compared

to other LCCs Initial flights in southern & western

India with the first nine A320s Remaining 11 aircrafts being added in

2nd yr

Services started in May 05 Initially operates only on domestic

routes. Owned by United Beverages Group

under the leadership of Vijay Mallya Pushing for amendment of rule which

requires an airline to fly a min of five years on domestic routes before it can start flying overseas

Barring such an amendment, first international flights planned to start in 2010

Airline Industry Market Shares in 2006

Airline Industry Market Shares in 2007

Airline Industry Market Shares in India 2009

Market share of Airlines in 2009-10

According to sources, the airline industry has witnessed a dip of 4.9% in the number of passengers during January 2009 to July 2009. This year the total passengers stood at 2.48 crore whereas it was about 2.6 crore in the like period last year.

Private carrier Jet Airways and its low-cost carrier JetLite , with 26.3% market share, had the highest number of passengers during the period.

Kingfisher came second with 23% market share and national carrier Air India third with 16.2%. In the case of low-cost air carriers, IndiGo's lead the market share with 14% while SpiceJet and GoAir coming second and third with 12.5% and 5.7% respectively. Paramount Airlines has a share of 2%.

Industry Analysis

The number of air travelers had been increasing rapidly at an average rate of 11% per annum in India. While globally the average number of people traveling by air was growing at 5% , In Asia it was growing at a rate of 7%.

Due to the number of players also increasing rapidly , the seat capacity had grown considerably . It was noted that almost 40% of the seats were being flown empty.

Actually there was plenty room for further growth as only around 1% of India’s vast population travelled by air.

Till 2003 India airlines used to be the largest domestic airline in the country with over 50% market share. This has reduced to 20% when 11 other players entered in the market by 2006-07.

Indian ,which until 1994 had a monopoly on domestic passsenger services , now had a market share of 20-25% and falling, despite getting most government business. Indian airlines was estimated to have an accumulated loss of 5billion Rupees and Air India around 3billion Rupees in the year 2006-07.

Air India Chairman, Mr Arvind Jadhav, addressing the media in New Delhi on August 7, 2009

Fuel prices at Indian airports were about seven times higher than that in Singapore, this led to substantial additional cost for airlines.

The aviation turbine fuel (ATF) price in India was about 73% higher(Based on prices of April 07)

It means that the fuel cost formed some 30-40% of on Indian airline operating cost versus 10-15 % elsewhere .

Even government landing cost was also 28-89% higher than world standards.

The focus of the new entity during the initial stages of the merger had been the international sector and this affected the airline’s leadership position in the domestic market.

Reasons for Standoff….

Reasons for Standoff….

Fuel price hike and the current economic slowdown.

Excess capacity in a falling market.

Decline in carriage of cargo.

Huge Competition by Private Airlines.

Air India could not fully use the bilateral rights unlike foreign airlines which took maximum advantage.

Low fares with a gradual shift of passengers from legacy full service airlines to low cost airlines.

Fewer passenger number, particularly in the premium class.

Escalatory costs, ATF

Fuel costs and paying for acquired aircraft put more pressure on the cash flows and the bottom-line.

Frequent change of the chairman-cum-managing director, no directors with exposure to the global airline industry (Leadership crisis)

Way Out…. Maximization of Connectivity to destinations abroad.

Revenue generation through allied businesses like Cargo, engineering and ground handling.

Manpower agreement review- redesign of work rules and employee incentivisation scheme.

Adoption of more effective CRM practices.

Advisory support from airlines like Lufthansa, Southwest Airlines.

Instead of Maintaining Different Models of Air Crafts, it should maintain only one Model, which simplifies Scheduling, maintenance, flight operations and training activities.

Corporate tie-ups will also help in Revenue Generation.