Professional Documents
Culture Documents
Style : Friendly
Com pa ny St at us : Public
In tent io n: Opportunistic
Pu rp ose : Defensive
The Deal : Vijay Mallya paid Rs 550 Cr to acquire 26% equity in Deccan. Subsequently, he paid an
additional Rs 418 Cr for a further 20% stake through an open offer.
CMP=Rs48/share (2009)
Merger Motive
Vijay Mallaya had a vision. His successful Kingfisher Airlines had completed a merger agreement with low
cost carrier airlines Deccan Aviation on May, 2007. With this deal he planned to become the do min an t
low cost carrier in the country.
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INT RODUC TI ON- Ab out Avia ti on Ind ust ry
India is one of the fastest growing aviation markets in the world. The Airport Authority of India (AAI)
manages a total of 127 airports in the country, which include 13 international airports, 7 custom airports,
80 domestic airports and 28 civil enclaves. There are over 450 airports and 1091 registered aircrafts in
the country. The genesis of civil aviation in India goes back to December 1912 when the first domestic air
route between Karachi and Delhi became operational. In the early fifties, all airlines operating in the
country were merged into either Indian Airlines or Air India. And, by virtue of the Air Corporations Act
1953, this monopoly continued for the next forty years.
The Directorate General of Civil Aviation(DGCA) controlled every aspect of aviation, including granting
flying licenses, pilots, certifying aircrafts for flight and issuing all rules and procedures governing Indian
airports and airspace. Finally, the Airports Authority of India (AAI) was assigned the responsibility of
managing all national and international airports and administering every aspect of air transport operation
through the Air Traffic Control.
His to ry
Kingfisher Airlines proved to be a stiff competition for other domestic airlines of India, with its brand new
aircraft, stylish red interiors, stylishly dressed cabin crew and ground staff. The airline introduced in-flight
entertainment (IFE) systems, for the first time to Indian consumers. The IFE systems were provided on
every seat, even on the domestic flights. The airline offers attractive services to its on board passengers.
Years following its inception proved to be beneficial for the airline, in terms of its booming business, with
a good track record of customer satisfaction. However, it faced a worsening economic scenario in 2008.
Airline Percentage
Indian Airlines 28%
Jet Airways 35%
Air Sahara 12%
Air Deccan 11%
King Fisher 6%
Spice Jet 5%
Others 3%
Total 100%
Mar ket D at a of com bined enti ty was 25% at 2007
Mar ket d ata of Kin gfishe r on July 2009 is 22%
• The fresh equity capital will allow the Deccan to pay the loans & to fund various infrastructure
projects.
• Reduction of cost by sharing infrastructure
• The merger ensures that Kingfisher does not need to invest more in infrastructure or in spare
planes, thereby reducing costs and increasing profitability.
• The combined share of the two carriers will increase the Market share.
• As pe r the exist ing la ws King fisher Ai rlines w oul d no t be able t o o per ate on
in tern at io na l rout es unti l 2010. Ho wev er Air Dec ca n wou ld be eli gi ble from the
sec on d hal f of next y ear a s its fiv e- year cei ling is c om ing t o a n end.
Fi rst Rea son is Sub jec tiv ity: T he business inv est or c an ’t resis t such a gla mor ous
bus iness.
The secon d R eas on is ob jec tiv ity: p ri cing pressure ex ert ed by o the r lo w ca st c ar riers
(LCC )
Su bje cti vity: The business in vest or ca n’ t resist such a gla mo rous b usiness.
Gl am our o f the a irli nes : No industry other than film-making industry is as glamorous as the airlines.
Airline tycoons from the last century, like J. R. D. Tata and Howard Hughes, and Sir Richard Branson and
Dr. Vijaya Mallya today, have been idolized. Airlines have an aura of glamour around them, and high net
worth individuals can always toy with the idea of owning an airline. All the above factors seem to have
resulted in a "me too" rush to launch domestic airlines in India.
Dec linin g yields : LCCs and other entrants together now command a market share of around 46%.
Legacy carriers are being forced to match LCC fares, during a time of escalating costs. Increasing growth
prospects have attracted & are likely to attract more players, which will lead to more competition. All this
has resulted in lower returns for all operators.
Unde rst an din g the C om pet it iv e L ands ca pe o f Airl ine Indus try
In the New York Times story Roger Lowenstein explained the problem:
One reason the major airlines find themselves in this
predicament is that they use huge amounts of fixed capital
-- wide-body jets go for $100 million each and can't be
readily liquidated. They also depend on a skilled labor
force. The two problems exacerbate each other. Since
airlines cannot afford to let planes sit idle, they can ill
suffer strikes. That makes their unions unusually powerful.
Consider some other businesses for a moment: Microsoft
has highly skilled programmers but little invested capital.
Merrill Lynch has both, but its assets -- stocks and bonds
mostly -- could be liquidated overnight. Steel has high
fixed capital, but it can replace its workers more easily.