Mergers in Aviation Sector in India

Mergers & Acquisition Assignment Mergers in Aviation Sector Table of Content Indian Aviation Industry:3 Market size4 Aviation - Market Players5 Aerospace on a High6 Jet–Sahara deal:7 Viewpoint of Jet Airways:7 SWOT ANALYSIS:8 Viewpoint of Air Sahara:9 Beneficial to both10 References:11 Indian Aviation Industry: The history of the aviation industry in India can be traced back to the year 1912 when the first air flight between Karachi and Delhi was started by the Indian State Air Services in collaboration with the UK based Imperial Airways.

The Government of India nationalized nine airline companies wide the Air Corporations Act, 1953. Accordingly it established the Indian Airlines Corporation (IAC) to cater to domestic air travel passengers and Air India International (AI) for international air travel passengers. The assets of the existing airline companies were transferred to these two corporations. This Act ensured that IAC and AI had a monopoly over the Indian skies. In 1994, IAC was renamed Indian Airlines (IA).In the same year, the Indian Government, as part of its “open skies” policy, ended the monopoly of IA and AI in the air transport services by repealing the Air Corporations Act of 1953 and replacing it with the Air Corporations (Transfer of Undertaking and Repeal) Act, 1994.

Private operators were allowed to provide air transport services. Foreign direct investment (FDI) of up to 49 percent equity stake and NRI (Non Resident Indian) investment of up to 100 percent equity stake were permitted through the automatic FDI oute in the domestic air transport services sector. However, no foreign airline could directly or indirectly hold equity in a domestic airline company. By 1995, six private airlines accounted for more than 10 percent of the domestic air traffic.

But in the next couple of years, only Jet Airways and Sahara managed to survive the competition; NEPC Airlines, East West Airlines, ModiLuft Airlines, Jagsons Airlines, Continental Aviation, and Damania Airways lost out.IA, which had dominated the Indian air travel industry, began to lose market share to Jet Airways and Sahara, which provided better services India is one of the fastest growing aviation markets in the world. With the liberalization of the Indian aviation sector, the industry had witnessed a transformation with the entry of the privately owned full service airlines and low cost carriers. As of Dec.

2009, private carriers accounted for around 80% share of the domestic aviation market. The sector has also seen a significant increase in number of domestic air travel passengers.Some of the factors that have resulted in higher demand for air transport in India include the growing middle class and its purchasing power, low airfares offered by low cost carriers, the growth of the tourism industry in India, increasing outbound travel from India, and the overall economic growth of India. Market size India's domestic aviation market expansion has been the strongest in the world - tripling in the past five years, according to the International Air Transport Association’s (IATA) report.India is currently the ninth largest aviation market in the world, according to a RNCOS report “Indian Aerospace Industry Analysis”.

The Government's open sky policy has attracted many foreign players to enter the market and the industry is growing in terms of both players and the number of aircrafts. Given the strong market fundamentals, it is expected that the aviation market will register a compound annual growth rate (CAGR) of more than 16 per cent during 2010-2013. India's domestic air traffic grew at a rate, which is the second highest after Brazil, according to global figures for June 2011, compiled byIATA. The country's domestic traffic grew by 14 per cent in the same period as against Brazil's 15. 1 per cent. Indian airlines reported a continuous growth trend and a strong domestic passenger growth rate of 22.

3 per cent in July 2011. Passenger traffic has grown at 18 per cent year on year (y-o-y) basis and the year 2010 closed at 90 million passengers both domestic and international. India is the fastest growing aviation market and expected to be within 4-5 big aviation markets by 2020 and 3rd in terms of domestic market after US and China.In July 2011, airlines in India handled 5 million domestic passengers, according to data released by the Directorate General Civil Aviation (DGCA) on September 12, 2011, marking the 11th consecutive month of double-digit growth. India’s domestic market has witnessed passenger growth for 26 consecutive months now.

In July 2011, India’s airlines handled 1. 3 million international passengers, an increase of 8. 5 per cent y-o-y, according to DGCA. Passengers carried by domestic airlines during Jan-Aug 2011 were 39. 63 million as against 33. 1 million during the corresponding period of previous year thereby registering a growth of 18.

6 per cent, according to data released by DGCA. India is expected to cross the 450 million mark of domestic passengers by 2020. During the last two decades from a fleet of only about 100, the scheduled operators now have reached 435 aircrafts connecting the nation and the world. Private carriers are anticipated to post a combined profit of US$ 350–US$ 400 million for the fiscal years 2011-12, as reported by Centre for Asia Pacific Aviation (CAPA) India, in its 2011-12 - Aviation Industry outlook.Domestic capacity is also projected to grow by 12-14 per cent for the assessment period. Aviation - Market Players * During July 2011, Vijay Mallya-promoted Kingfisher was the largest domestic standalone carrier with around 1.

1 million passengers, based on CAPA calculations. Jet Airways/JetLite had a combined passenger level of 1. 2 million passengers, or around 26 per cent of the market * IndiGo started its international air services from September 1, 2011 after completing the mandatory five years of wholly domestic operations.The low cost carrier (LCC), the largest in the domestic Indian market, marks the start of its foray into international markets with direct services to Dubai, followed by Singapore and Bangkok in the first phase – connecting all key global business hubs * Dubai's first low cost airline, flydubai, will start flights to the city of Ahmedabad in Gujarat from August 27, 2011. Ahmedabad is the world's third fastest growing city in the world and it will become the third Indian city on flydubai's rapidly expanding network. The airline will offer seats from Ahmedabad to Dubai beginning at Rs 7,500 (US$ 156.

5) inclusive of taxes and seven kilograms of hand baggage. The flights will operate once in a week on Saturdays only * Hyderabad-based GVK Power & Infrastructure would be paying Rs 114 (US$ 2. 37) for each equity share to Siemens Project Ventures to buy the latter's 14 per cent stake in Bengaluru International Airport Ltd (BIAL) Aerospace on a High * The Indian commercial aerospace market is estimated to absorb about 1,100 commercial jets worth US$ 130 billion over the next 20 years, making it one of the most lucrative markets for the global aviation majors, according to a new Deloitte Touche Tohmatsu report.Mentioning the recent orders placed by IndiGo (180 Airbus A-320 aircrafts) and GoAir (72 A-320neo aircrafts), the report declared India as the fastest growing commercial aviation market in the world * An investment proposal worth Rs 11,700 crore (US$ 2. 44 billion) from European Aerospace and Defence Systems (EADS) is among the many aerospace projects received and approved by the State Government for its aerospace special economic zone (SEZ) in Bengaluru.They plan to develop a 250 acre SEZ at Devanahalli, north of the city, at an investment of around Rs 14,500 crore (US$ 3.

02 billion), according to Ms Manjula Geetha, Deputy Secretary, Infrastructure Development Department. “There is a huge growth in Karnataka, which is the preferred investment destination in this sector for components and MRO projects”, she added * Low-cost carrier, IndiGo, has signed a US$ 16 billion dollar deal with Airbus to acquire 180 single-aisle aircraft.The firming-up of the order for 150 A320neo and 30 A320 planes follows the memorandum of understanding (MoU) the carrier had signed with the European aircraft manufacturer in January 2011 * SpiceJet has acquired a new fleet of Q400 aircraft from Bombardier and it will use these aircrafts in its new regional service, scheduled to start on September 21, 2011. Under the deal, SpiceJet also has the option of ordering 15 more Q400 NextGen aircraft Jet–Sahara deal: Jet Airways at first attempted to buyout Air Sahara on 19th January, 2006 offering them around $500 million in cash. Most people were thinking that the deal is highly overvalued.

Indian Aviation industry also gave its approval. But somehow this deal was cancelled due to disagreements over price. Also other major reason for its failure was the appointment of Jet airways chairman Mr. Naresh Goyal to the Air Sahara board. After the failure it became a pride issue for both the companies and they both filed lawsuits over each other seeking damages occurred to the reputations of both. This would further delay the return of Rs.

500 crores which it had advanced to Air Sahara. Second major attempt to acquire Air Sahara was made on 12th April, 2007 and Air Sahara accepted it.It was a cut price deal and an out of court settlement which was around 40% cheaper than the earlier one. Reason for it was earlier a share price purchase agreement was to take place and all the assets of Air Sahara would have been part of Jet.

Hence as a result of finalization of this deal Jet will pay Air Sahara Rs 400 crore on or before 20th April and Rs. 550 crore in four equal interest free installments between march 2008 and march 2011. Also Sahara will keep Rs. 500 crore paid by Jet at the time of earlier agreement as part of deal. All the shares of Air Sahara will be transferred to Jet Airways.

This price was significantly lower than the valuation estimated by Ernst and Young hired by Air Sahara. They valuated Air Sahara at around $1 billion. Air Sahara at the time of acquisition carried around Rs. 150 crores of liabilities but Mr. Naresh Goyal at a press conference stated Jet is not accountable for all these liabilities and thus it won’t be transferred to its balance sheet. But cricket sponsorship of Air Sahara would remain with Sahara only.

Viewpoint of Jet Airways: Jet airways even though was largest in terms of market capitalization but its market share was beginning to erode.Its profit margins were going down due to high expenses and lack of synergies. It still couldn’t enter into the booming low cost carriers business as its fleet was not that large. So main options in front of them were either to increase its infrastructure or go into merger and acquisitions. Later of these was looking more feasible at that time.

SWOT ANALYSIS: Strengths - * Market share of Air Sahara was around 12. 5 % and of Jet Airways was 35-40 %. Thus this deal would further increase market share of Jet Airways. Expectations were around 50%. * Jet’s current fleet strength is 63 and Air Sahara’s is 27.

Hence it would increase the fleet strength of Jet Airways and then they could widen their network. * Also it would help in creating economies of scale. Since business would expand. * Air Sahara has a strong presence in neighboring countries to India such as Srilanka, Nepal, Bangladesh and Thailand. * Availability of the parking slots in major national as well international airports which is very costly.

* Availability of skilled workforce of Air Sahara i. e. pilots, air hostesses, crew members and other personnel. Weaknesses – * Air Sahara was constantly losing its market share, thus how would they retain its market share under a new brand. Many employees were not happy with this acquisition and hence question of their loyalty will arise.

* Jet’s profits were down by 53% in 2005-06. So difficulty in arranging the funds was a big deal. Opportunities – * Enter into low cost carrier market by completely or partially diverting the resources gained from purchase of Air Sahara to form a low cost carrier brand. * Create more synergies through cross-utilization of staff and infrastructure. Threats – * Potential merger of Air India and Indian airlines and thus competition from public sector in aviation industry * Price warfare. Also Jet won’t be able to concentrate more on international market due to shortage of funds as most was spent on the deal with Air-Sahara.

* Workforce would go up to 10,000 which is difficult to maintain and thus downsizing is certainly needed which could create a negative impact on employees. Viewpoint of Air Sahara: Air Sahara was surely among the weaker players in the Indian Aviation industry with a market share of only 12. 5%. Also balance sheet of Air Sahara was not looking very good as it was constantly making huge losses and unless a big step is taken it would go down further.Also its shares were not performing very brightly either. There were huge long and short term liabilities and its aircrafts were also on lease or on loan.

Not much option was left for them other than a merger. Hence, it was an attractive and an easy bailout for Air Sahara from the aviation industry. Conclusion: After considering the present state of both Jet airways and Air Sahara and also keeping in mind the current scenario in Indian Aviation industry this acquisition was a good decision ,taken at the right time.This move will further strengthen the position of Jet in Indian Aviation industry and also provides opportunities to new market segments.

For Air Sahara also it’s an easy bailout option. They can recover their money and invest it in other businesses of Sahara India. Thus, this deal is good for Aviation Industry as a whole also. References: www. google.

com www. jetairways. com www. jetlite. com www. economywatch.

com http://www. ibef. org/artdispview. aspx? in=5;art_id=29909;cat_id=503;page=1