Fly In Formation

Jet Set

• Jet-Sahara can benefit from synergies to cut costs
  
• The new entity will have a major presence in routes and airport infrastructure
  
• It'll allow Jet to have a subsidiary to compete with low-cost airlines
  
• Jet plans to expand its global presence

Combo Air

• Air India-India combine will rationalise global routes
  
• It'll force other competitors to lower prices
  
• The proposed entry can strike strategic alliance(s)
  
• Air India's Venkat feels there will be a string of M&As
  
• But the combined entity needs to become efficient

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n fact, the action in the next few years will be on the international routes. Air India-Indian will definitely rationalise a number of lucrative routes on the Middle East and London sectors, where both currently compete with each other. Apart from flying to cities like London, Singapore and Kuala Lumpur, Jet plans to add new ones in the US, Europe, Africa and Asia. In January this year, it announced an over $1.5 billion order for 10 Dreamliners (787-8s). "These will be used in conjunction with our 777s to expand our international operations," says Jet's Goyal.

Apart from global airlines which have increased their presence on India-specific routes, Kingfisher Airlines wants to fly international. But given the five-year minimum requirement to get Indian permission, Kingfisher's Vijay Mallya has found an alternative. Through his son, an American citizen, he's trying to get a green signal from US authorities to fly US-India routes. Sources say Kingfisher is taking delivery of white-bodied aircraft by end-2007; since these planes fly long-haul, it shows that Mallya is confident of getting the requisite permissions by then. Even the low-cost Air Deccan is lobbying for India to open the international skies for more players.

Domestically, say most experts, there's likely to be a string of M&As or strategic alliances. Venkat thinks this will happen as airlines seek economies of scale, and access to parking slots and hangars (for maintenance). Kingfisher has been talking to Air Deccan. But Capt Gopinath, MD, Air Deccan, told Outlook that while "Mr Mallya is a good friend, everything is not up for sale." And there are rumours that Jet, which was pressured to gobble up Air Sahara to prevent others from doing it, is already looking at a fresh takeover target—possibly, SpiceJet.

Such expectations made experts deem this to be a perfect time for the government to intervene to prevent near-monopolistic situations. Kapil Kaul, CEO (India and Middle East), Centre for Asia Pacific Aviation, is candid. "Air India-Indian and Jet-Sahara will own the largest fleets, have monopolistic access to airport infrastructure and also have exclusive permissions for international operations. It's a scenario that will lead to tacit cartelisation and price-fixing, or a duopoly. A policy to rein in monopolistic manoeuvres is critical."

However, Gopinath thinks differently. In fact, he says fares are unlikely to fall further in the near future. "The synergies and cost savings would have been far greater in a complete merger between Jet and Air Sahara compared to Jet supporting a new company. Globally, whenever full-service carriers (like Jet) have launched low-fare subsidiaries (like Jetlite), they've been forced to shut them down because of the latter's cannibalisation into the parent airline's own economy routes." He adds that Jetlite prices will be less than Jet, but more than Air Deccan's, as they can never match him in cost-cutting.

For Jet, there may be other problem areas. Indications are it may still have overpaid for Air Sahara. One, Jet's stock price has dropped by over 50 per cent since late 2005, which may impact its ability to finance the acquisition. Two, Sahara's marketshare has dropped considerably and its aircraft are suffering due to lack of maintenance. Three, the airlines industry is still not too profitable and incurred a combined loss of Rs 1,000 crore last year.

Finally, Jet will face competition in all its segments: international, domestic or low-fare. But so will its competitors. So, the runway is wide open for the more efficient airline. Jet is among the handful of players that have a proven record on these fronts. Experts feel that the Indian skies will be ruled by 3-4 airlines—Air India-Indian, Jet, Kingfisher and, maybe Air Deccan.