Merger of Air India and Indian Airlines Advantages of and justification for merger

1. Will lend competitive strength: The combined revenue (2004-05) of the two airlines would be Rs. 13040 crore that would place the merged entity at 35 in the world ranking as against the present ranking of 48 in case of Air India and 70 in case of India Airlines. The ranking would further improve to 20 with induction of new fleet. The market power that would accrue from the financial muscle would fortify the ability of the merged unit to take on competition even in the international market, which has been witnessing increasing dominance of global airlines alliances.
2. Will make acquisition of cutting edge technologies possible: To compete successfully it is not enough to have a sound financial backing the crucial edges to surge ahead of competition and stay there is provided by continuous upgrading of service through, among other things, acquisition of newer and better technologies. These technologies are invariably expensive which only major, financially strong airlines can afford.
3. Will help in controlling cost: A characteristic of airline business is high operating cost that smaller and/or inefficient airlines often find difficult to control. One of the consequences of merger would be the possibility to eliminate a number of common items of expenses, like marketing, advertisement etc.; that will help in controlling operating cost and stay competitive.
4. Will help in improving market share: Market share of both Air India and Indian Airlines has witnessed a secular fall since 1990 (from 24.5% and 100% respectively in 1990 to 19.5% and 31% in 2005). Understandably competition has affected Indian Airline much more than Air India. The two airlines have been competing with each other in some of the sectors and eroding market share. Merger would eliminate this kind of unproductive competition and help in improving combined market share.
5. Size of the airline is a crucial factor: As in many other things in aviation too size of the airline makes a difference not so much to profitability but to marketing strategy. In public perception size of a company is often associated with reliability. A customer tends to have greater confidence on bigger airlines for delivering service of acceptable quality. Thus most airlines take great care to add lines like, ‘largest airline in the world/country/particular part of the country’, etc.; even those who are fourth or fifth insert the number in their advertisements. Moreover, it is also true that it takes a long time for a big airline to go out of business but small airlines can vanish from one day to the next.
6. Will provide large network: In recent years Indian aviation has been witnessing rapid development in several fields. After years of low growth the sector has been recording unprecedented growth. With almost doubling of capacity and more routes opening up yields are dropping, in this situation value of large network is critical for full service carriers like Air India and Indian Airlines.
7. Competition will only harden: In past five years as a result of open skies with the USA, near open skies with UK/ASEAN/SAARC along with liberal bilateral agreement with Germany, France and China there has been huge increase in entitlements/new routes for foreign airlines. Domestic airlines have been allowed to fly overseas, forge partnerships with foreign carriers while foreign carriers in their turn have been interlining with domestic airlines to access secondary destinations. Whereas, some private airlines have already developed large networks and are in a position to fill international flights with ease some more domestic airlines will qualify for international operations in next 3-4 years and by then they too will have large network. In short, all these developments point towards competition getting more tough in the coming years, a situation that a bigger airline would be in a better position to face and negotiate.
8. Attractive partner for global alliance: Globally the trend in the aviation sector is towards alliances. Individually Air India and Indian Airlines bring negligible value to any global alliance, but together with integrated domestic/international networks they become very attractive.

Matters that need attention The above presents a strong argument for merger. There is little doubt that taking a broader perspective and a long-term view merger of the two airlines would be beneficial. However, it is necessary to bear in mind that on its own merger will not necessarily lead to improvement in performance; merger can be termed as a necessary condition for success but not the sufficient condition. Successfully merging two airlines and capturing the theoretical value of that merger is a major management challenge. One needs to lay the groundwork for effective integration, taking into account the host of questions involved in airline merger. Some of the issues that need to be addressed to ensure that merger produces the desired results are discussed below.

1. Market share: There is no a priori reason to believe that merger will lead to an improvement in market share of the merged entity. Since the two airlines are operating in two different markets it is incorrect to add the present market share of the two airlines and show it as post merger total market share; the old argument of not adding apples and eggs apply in this case too. There is only a small segment in the international and domestic market that the two airlines compete against each other and in this case too merger through realignment of flight schedules is most likely to result in redistribution of market share and not to a net addition, from the point of the owner, redistribution of market share is immaterial as it does not bring any additional benefit. It is also important to remember that if Air India does not pick up passengers on the domestic segments of its flight then those seats are likely to remain vacant which would be to no ones benefit. For merger to be successful a marketing strategy will have to be worked out and it would also be necessary to put together a post merger perspective plan and a corporate plan. While the perspective plan would be in the nature of a ‘wish list’; the corporate plan would lay down steps to be taken to make these wishes come true. The two airlines should start working on these plans immediately after the decision to merge is approved by the government and not wait for the actual process of merger to be completed. This way the new enterprise would be ready with a plan of action from day one. Anyway, the most important thing is to bear in mind that merger will not automatically lead to an increase in market share.
2. Combined balance sheet: How the combined balance sheet of Air India and Indian Airlines would look like is an extremely important issue. The issue assumes importance in the light of the decision by both airlines to go in for IPO. Even if the airlines decide to float IPO prior to merger, the investors, particularly the large investors and institutional investors will necessarily carry out their own analysis of a combined balance sheet to arrive at their investment decision. Therefore a careful analysis not only of the individual balance sheet but that of the combined balance sheet should be undertaken and necessary steps taken to make the respective IPO attractive. From the point of view of the owner an analysis of combined balance sheet is necessary to establish whether merger would create shareholder value over and above that of the sum of the two companies. An incidental offshoot of combined balance sheet analysis would be that it would identify the efficiency gains likely to flow from merger.
3. People related issues: There are two kinds of people related issues that will arise as a result of merger. The first set will be with respect to personnel related like common cadre, combined seniority, pay and perks, transfer and postings, etc. The issue that bothers the employees, whether unionised or nor, most is what is in it for them, starting with basic questions: Do I still have a job? How are my work rules affected? The earlier these concerns are addressed the better is the chance for success of the merger.

The other set will be with respect to reconfiguration of business operations There will be many areas where both organisations would be having identical set up performing identical tasks, post merger it may not be necessary to maintain separate set up. In fact, much of post merger cost savings would come from this kind of reorganisation. In some cases this may require reassessment of staff requirement in which case a careful appraisal will have to be made whether or not the remaining personnel can be absorbed elsewhere in the organisation. A clear policy will have to be spelt out in this regard; it may also be advisable to take into confidence beforehand the staff of the two organisations. There are a number of studies that highlight the fact that mergers and acquisitions often fail completely or fail to meet expectations because people-related issues are not addressed. At all cost the temptation to adopt the easy way out of letting the existing organisational set up continue indefinitely should be avoided as it is sure to nullify all the potential benefits of merger.

1. Alliance Air and Air India Express: Much of Alliance Air’s problems can be associated with its lack of brand identity. At the time of its launch the concept of low cost airline had not gained currency nor was there any successful model to follow thus the main purpose of creation of the airline was to serve feeder routes. The airline shares practically everything with Indian Airlines and in public perception (aided to a great extent by the lack of any conscious efforts to develop a separate identity for Alliance Air) it is seen as an extension of Indian Airline. When low cost airlines finally arrived in India the crisis of identity continued and though the airline was in an ideal position to move into the slot of low cost airline no such effort was made as a result Alliance has continued to remain a burden for Indian Airlines. Merger would provide Alliance with a second opportunity and it would be best to merge its services with that of Air India Express and the new entity should operate as a subsidiary of the merged Air India-Indian Airlines.
2. Impact on competition: While the likely merger of Jet and Sahara has the potential to adversely affect consumer’s interest, no such possibility exists in the case of Air India-Indian Airlines merger. As stated earlier, the two airlines primarily operate in two different segments of the market and their merger will not result in curtailment of competition or creation of a monopoly monolith. Their combined financial strength and fleet composition would in all likelihood put them a little ahead of their competitors in the domestic sector but they will not acquire the status of dominant entity in the market and nor be in a position to dictate prices. On the contrary, post merger there is likely to be further addition to seat availability both in the domestic and international sector that would offer more options to the consumer. Overall, the impact of merger on competition is likely to be positive in this case.