Financial Daily from THE HINDU group of publications
Wednesday, Apr 12, 2006
Logistics - Mergers & Acquisitions
A long-haul solution
They must fly in formation.
The idea of merging Air India and Indian Airlines has come full circle. In 1994-95, when Mr Russi Mody was appointed Joint Chairman of Air India and Indian Airlines by the Narasimha Rao government, it was widely believed that, pending a full merger, the state-owned airlines would synergise their routes so that their fleets can be optimally deployed. What happened was a classic case of the two airlines competing with each other even more vigorously and eating into each other's market share. The growing competitiveness of international carriers delivered a severe blow to Air India while the rising fortunes of private domestic carriers put paid to Indian Airlines' fortunes.
About four years ago, an official sub-committee of the Boards of Air India and Indian Airlines was constituted to work out the details of route synergy between the two carriers. For reasons best known to the Ministry of Civil Aviation the proposal remained in the hangar and the two were back cutting each other's throat. But those were the days when Air India was unwilling to give up routes to Indian Airlines. Maharaja felt that in the absence of increased and extended domestic presence it would only shrink its size even more.
The December 2004 Cabinet decision allowing private domestic carriers such as Jet Airways and Air Sahara to fly international routes dealt a body-blow to not only Air India on South-East Asia, UK and other European routes but also to Indian Airlines notwithstanding the three-year ban on Gulf operations by the private carriers. Further, the liberal open skies policy that granted additional rights to the mega carriers from Asean, as also British Airways, Lufthansa, Air France, etc., shrank Air India's presence even more.
Indeed Air India and Indian Airlines are afloat because of the profits they are making from the Gulf region. But already 15 months of the 36-month time bar on private Indian carriers flying the India-Gulf route are past.
This was not the scene when the route rationalisation committee made its recommendations. It has, therefore, now become imperative to, first, ensure synergies between the two state-owned carriers followed by a complete merger. The suggestion in some quarters of setting up a holding company will at best help protect some jobs in Air India and Indian Airlines without actually delivering the benefits of a . With the Indian economy booming, incomes rising rapidly, Indian travellers now have numerous options to fly. And people are simply looking for value for money.
The common destinations that Air India and Indian Airlines fly today include Bahrain, Dubai, Doha, Bangkok, Kuala Lumpur, Singapore, Kuwait, Muscat, and Sharjah. Take Kuala Lumpur. While Indian Airlines flies 16 times a week to Kuala Lumpur, Air India operates seven flights a week. To Singapore, Indian Airlines flies 30 services a week and Air India 22. While Indian Airlines deploys Airbus A-320 with 148 seats in a two-class configuration, Air India operates its old Airbus A-310 with 201 seats in a two-class configuration.
In some cases, Indian Airlines and Air India flights depart within minutes of each other. So, often, one flight goes full while the other goes with much lower load. The average load factor on Singapore and Kuala Lumpur flights of Air India and Indian Airlines is around 65 per cent. Statistically, this means one out of three seats offered by both is vacant, which translates to 17 flights of the two carriers having zero load factor. While this may not happen in reality, low loads do mean money lost.
On the other hand, if the two carriers spaced their departures by, say, three hours under common flight numbers that would not only offer a wide choice to the travellers but also fill up the aircraft. This would also give the airlines an opportunity to withdraw excess capacity and redeploy in other sectors.
This will be the first major gain of integrating the schedules of the two carriers. Without actually increasing the fleet size, it would be possible to generate surplus capacity. A beginning on these lines would become possible once Air India's low-cost carrier Air India Express begins to deploy its Boeing 737-800s on the Gulf and South-East Asia routes, from May.
Arising out of this, the administrative cost incurred by the two carriers on maintaining separate establishments, expenditure on catering, engineering and maintenance, GSA, staffing, etc., can be cut sharply. It is well known that higher volumes fetch better discounts. Why should Air India position an aircraft in Mumbai for Chennai-Singapore service when the Mumbai leg yields no business?
The same logic would apply to the training of cabin crew and pilots. While the basic training is common for both airlines, aircraft specific training can be done subsequently on simulators. Today, both Air India and Indian Airlines are sending their flying crew for simulator training to London and Toulouse. This can be avoided by offering the same in India once the simulators are in position.
FALLING MARKET SHARES
As per the 2004-05 financial results of the two carriers, the combined revenue of Air India and Indian Airlines without any synergy or merger was Rs 13,040 crore, net profit Rs 162 crore, fleet size 111, market share 30 per cent, passenger carried 13.1 million, world rank 35, and Asia-Pacific rank of 12. Indian Airlines' market share dropped from 100 per cent in 1990 to less than 28 per cent while that of Air India fell from 24.5 per cent to 19.5 per cent. Interestingly, Indian Airlines' market share on international operations over the same period rose from 6 per cent in 1990 (starting with the Gulf evacuation following Iraq-Kuwait war) to 10.1 per cent in 2005. This was because of multiple domestic destinations it offered for its flights from the Gulf and South-East Asia. With mega carriers from Asean and Gulf getting rights to fly multiple destinations in India, the combined market share of Air India and Indian Airlines will face even big a threat.
The unnecessary competition between the two state owned carriers and their failure to get their act together and translate it into a membership of one of the two global alliance has affected their load factors by 5-10 per cent. Alliance members such as United Airlines, Air France-KLM, British Airways, Singapore Airlines, and Lufthansa registered average passenger load factors of 74-79.2 per cent.
SUB-OPTIMAL FLEET USE
As a senior aviation industry official put it, the times are different today as competition has completely changed the scene. What is the point in sub-optimally utilising the existing and the to-be-expanded fleet? Even though aircraft acquisition decision was taken before the merger idea, this in itself should not prevent the merger. Anyway, all narrow-body aircraft can be used on domestic and short-haul international routes while the wide-bodied planes can be used for medium/long-haul sectors.However, critics of the merger theory, particularly those in Indian Airlines, wonder why this idea should be based on the "one strong national carrier" argument. If this is the idea what was the point in Air India itself starting a low-cost carrier Air India Express? At a time when more and more private domestic carriers are getting ready to go international, why should Indian Airlines be restricted after it doing a wonderful job in the Gulf and South-East Asia sectors? What is needed is route rationalisation and synergy between the two carriers in the short-to-medium term. Merger can only be a long-term solution.
It is now 13 years since Vayudoot was merged into Indian Airlines but only last month did a Division Bench of the Delhi High Court upheld the merger as both Vayudoot and Indian Airlines were wholly government-owned and being a policy decision, it could not be questioned. Indian Airlines officials feel the whole exercise is only to save Air India and that there is nothing in the merger for the domestic carrier, which has valiantly faced competition. But, in that case, why has Indian Airlines not been able to take away even one passenger from the world class Jet Airways? Perhaps, the theory of "United We Stand, Divided We Fall" fits the Air India-Indian Airlines merger today more than ever in the past though it cannot be denied that merger is the only long-term solution.
(The author is a New Delhi-based journalist.)
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