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A STUDY OF MERGERS BETWEEN KINGFISHER

AIRLINES AND DECCAN AIRLINES


Is kingfisher is still the King of Good times?

The Merger/Acquisition Summary


Sco pe : in-fill

Rela te dness : Related

Ge og raphi c coverage : Local

Style : Friendly

Com pa ny St at us : Public

In tent io n: Opportunistic

Pu rp ose : Defensive

Pre dic ta bili ty o f Value : Calculative

Str at eg ic M ode : Development

Man ag ement Cha nge : Incremental evolution.

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.

En ter prise value : Rs 2,115 Cr when Mallya acquired 26%

Mar ket Sh are of Ai r Decc an : 18%

Flee t w it h Air Decc an : 43

Com bine d ma rk et share : 29%

Share bought at 2007 was RS.155/share

CMP=Rs48/share (2009)

Value Created/Destroyed (48/155) =-31%

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.

Com pet it iv e l ands ca pe

The air transport services offered are the:

• Schedule d Air Trans po rt Se rvices ( Passenge r)


• Non - Sche dule d Air Transp or t Serv ices (P assen ger )
• Air Transp or t Serv ices ( Car go
• Non-Sche dule d Air Transp or t Servi ces (Cha rt er Ope rati on )
Kingfisher Airlines- A Review
Kingfisher Airlines is a private airline based in Bangalore, India. Currently, it holds the status of India's
largest domestic airline, providing world-class facilities to its customers. Owned by Vijay Mallya of United
Beverages Group, Kingfisher Airlines started its operations on May 9, 2005, with a fleet of 4 brand new
Airbus - A320, a flight from Mumbai to Delhi to start with. The airline currently operates on domestic as
well as international routes, covering a number of major cities, both in and outside India. In a short span
of time, Kingfisher Airlines has carved a niche for itself in the civil aviation industry.

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.

Kingfisher was engaged earlier in the following businesses:


Scheduled Air Transport Services
Scheduled Air Transport Services Ground handling services Training academy
Commercial Airline Business

Deccan Aviation Limited – A Review


Deccan Aviation, promoted by Capt. G.R. Gopinath, Capt. K.J. Samuel and Capt. Vishnu Singh Rawal, was
initially incorporated as a private limited company on June 15, 1995 in Karnataka with the main object of
pursuing chartered aviation services both for commercial and non commercial purposes in India and to
provide all aviation related services. It was converted into a public limited company in 2005. The
company’s vision was “To empower every Indian to Fly” and its mission “To demystify air travel in India
by providing reliable low cost and safe travel to the common man by constantly driving down the air fares
as an ongoing mission”. As is evident from their mission statement, the strategy was to garner market
penetration through cost reduction.

Deccan was engaged earlier in the following businesses:


Scheduled Air Transport Services Non -Scheduled Air Transport Services
Scheduled Air Transport Services Scheduled Air Transport Services
Commercial Airline Business Charter Services Operations

Mar ket Sh are Da ta


Market share Data of Oct 2005

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%

Kin gfisher & Air Dec ca n Merger – Key Fea tures


• On 1st June 2007, the Board of Air Deccan approved the allotment of equity share of 26% to UB
group & its nominees. The shares were allotted at Rs.155 per share approximately a 10%
premium for the current market price (CMP). The UB group made the money in two phases:
Rs.150 Crore as initial investment & Rs396 Crore at the on or before the end of June.
• Once the investment process is complete, the UB group will become the single largest share
holder in the Deccan Aviation ltd.
• UB group will make an open offer to acquire minimum 20% to all shareholders of Deccan aviation
at a price of Rs.155.
• The Kingfisher-Air Deccan group will be the largest domestic airline with a fleet of 71 aircraft
including 41 Airbus aircraft and 30 ATR aircraft. This combined airline powerhouse will cover all
segments of air travel from low fares to premium fares and offer the maximum number of 537
daily flights covering the single largest network in India connecting 69 cities whilst taking
advantage of unparallel synergy benefits arising from a common fleet of aircraft.
• For the near future, Kingfisher will continue to serve the corporate and business travel segment
while Air Deccan will focus on serving the low fare segment but with improved financial prospects
for both carriers.
• Kingfisher Airlines and Air Deccan will, henceforth, work very closely together to exploit the
significant synergies that exist in the areas of operations and maintenance, ground handling,
vastly increased connectivity, feeder services, distribution penetration etc.

Kin gfisher & Air Dec ca n- Mer ger Ad vant ag e

• 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.

Kin gfisher & Air Dec ca n- S ynergies


Ope ratio na l Synerg ies
• Kingfisher and Air Deccan have exactly the same fleet of aircraft, the same equipment in terms of
engine, in terms of brakes and in terms of avionics. This provides a huge opportunity on saving in
engineering and maintenance cost.
• The airlines will achieve perfect synergies in the backend (operations and maintenance, ground
handling, vastly increased connectivity, feeder services, distribution penetration) while preserving
the front-end and that will enable both Deccan and Kingfisher to be profitable.
• Apart from ground handling synergies, there is a whole host of items where duplication is
completely unnecessary and can now be avoided.

Infr as tru ct ure Synerg y


• Kingfisher and Air Deccan will now be able to access ground infrastructure at 65 airports, of
which more than 28 are common to both the set ups.
• The new entity will have over 71 aircraft.
Rou te Synergy
• On the most lucrative of routes, New Delhi-Mumbai, that on its own accounts for more than half
of India's 33 million passenger traffic, the two carriers will now account for a total of 155 flights.
• According to Dr.Mallya kingfisher is considering swapping or switching in coordination with each
other to rationalize the fleet structure.

Inv est ment synergy


• Both airlines have orders for about 90 aircraft currently placed with European aircraft major,
Airbus Industries.
• Kingfisher has placed orders for new aircrafts at higher prices as compared to Air Deccan. The
alliance with Air Deccan may provide it the opportunity to renegotiate its rates with the
manufactures thereby saving substantially.
• Reduce undercutting and associated price wars.

Are these Airlines Mergers working?


The answer is probably NO.

For two simple reasons:

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.

Ob jec ti vity: Pri cing Pressure

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.

Airline industry is like the banana business. ... "We sell a


perishable product, and it's like the last banana in the
store: You can either get a penny for it or you can get
nothing for it, so you sell it for a penny," says John
Dasburg, chief executive of Northwest Airlines.

Unde rst an din g the C om pet it iv e L ands ca pe o f Airl ine Indus try

The fundamental characteristics of competition in the airline market:


1. It’s a capital intensive industry,
2. With few scale efficiencies,
3. Delivering a highly perishable product,
4. Within a partly regulated infrastructure,
5. Driven by powerful unions,
6. Price elastic demand and
7. Free market entry.

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.

Then How to create the shareholder value?


In this environment shareholder value can best be created organically.
By maximizing the satisfaction of employees, passengers, suppliers, partners and
Here is the corollary to that
other stakeholders.
fundamental principle:
In airlines, building market share through mergers
short-circuits the creation of satisfied
stakeholders.
Reference:
Why ai rlines C an’ t merge ? By Vic to r J . C oo k, Jr., Ph.D .

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