Merger of AI & IA

The Government of India, on 1 March 2007, approved the merger of Air India and Indian Airlines. Consequent to the above, a new Company named National Aviation Company of India Limited (NACIL) was incorporated under the Companies Act, 1956 on 30 March 2007. We will discuss the reasons behind the need to go for a merger & we will see why the merger was bound to fail like it eventually did. Lets see some of the opinions by the industry experts just before the merger. We may now analyse the opinions of the industry experts regarding the merger: Andrew Miller, CEO of the Centre for Asia Pacific Aviation (CAPA), predicted the Indian Government would succeed in creating an internationally competitive carrier by merging Air India and Indian Airlines, but warned that several challenges lie ahead. The ideal outcome for any merger is that revenue is maximized through built-in synergies and costs lowered through economies of scale. However, many airlines don t manage to achieve this. The Indian Government s advantage is that it can learn from previous mistakes in other countries, stated Miller. Mergers are not new and it is important to learn from international precedents, but the Government must remain conscious of the difficulty of resolving important operational issues. The time taken to complete a successful merger is also often underestimated, warned Miller in his much-anticipated presentation. Aside from the serious infrastructure constraints faced by Indian carriers across the board, Air India and Indian Airlines will face increased competition in an environment of rising costs. This is not a formula for financial success and the creation of shareholder value, stated, Mr. Miller. On March 19, 2007, Union Minister of State for Civil Aviation, Praful Patel announced his mega plan of being a game changer in the Indian skies by merging the state-owned Indian Airlines (then a profitable venture) and the perennially loss making Air India.

The idea, based on a recommendation to the Centre by consulting firm Accenture, was to create a monolith and spread its dragnet under the cloak of the ubiquitous Maharajah, the mascot of a hospitable Indian king, across the nation and the world. Accenture had highlighted two factors as being responsible for the sub-optimal performance; i.e., the aging fleet and the disparate operations of the respective entities. The report had stated that the merger and the said replacement would result in the profit of 1000 crores in the first year itself.

Merger of AI & IA
But after three years ironically on the same date a parliamentary panel declared the merger a big failure, saying it had only messed the state carriers. It added that it would be difficult to sustain the controlling company NACIL (National Aviation Company of India Limited). NACIL s balance sheet made for disturbing reading. Losses for Air India stood at a whopping Rs 7,200 crores in 2009-10, more than double the Rs 2,226 crores for 2007-08.

The Committee on Public Undertakings (COPU) of Parliament which studied the failure of the merger put forth the following major reasons for the failure: y y y y y y Amalgamation ill-conceived & whimsical, not well thought out Lack of built-in synergy between the two merged entities The government never learned from the international precedents of airlines mergers The cost never lowered through the economy of scales The operational inefficiency due to overlapping of resources between the merged companies Biggest reason- funding of a 2005 commitment for a 111-aircraft order worth $15 billion placed with Boeing and Airbus on the back of global recession, high prices of aviation turbine fuel (ATF), increased competition because of India s open sky policy and declining passenger revenue. Delay in the completion of merger(2007-2009). The merger has not worked in areas like manpower, properties and facilities integration, crossutilization of resources, IT augmentation and launching new subsidiaries such as maintenance, repair, and operations (MRO) and ground handling

y y

Merger of AI & IA
y y Poor aircraft & manpower maintenance Disparity in the wages of employees ;i.e. the erstwhile Air India employees had to forswear their hefty international flying allowances while operating in the domestic sector, leading to employee dissatisfaction and reduction in the efficiency.

The challenges for the merger estimated by Andrew Miller soon turned out to be insurmountable and the merger badly collapsed.

Factors in favor of the merger

Factors against the merger

Economies of scale in a whole series of areas: maintenance, ground operations, the use of landing slots and parking rights. The merger was done to emulate the success of the foreign players like the Emirates (U.A.E ), Lufthansa in Frankfurt and Munich; British Airways in London , Delta in Atlanta

The merger could not synchronize the disparate work ethics of the two companies. The pay structures could not be successfully leveraged. The operations in several Indian cities for both the entities were overlapping ; i.e., AI and Indian operated in several Indian cities. NACIL had excessive workforce of which a substantial part was not appropriately utilized to the hilt. The size of the labour union increased with the merger. Every attempt to reduce the staff would thereon be in vain. The employees of Indian were entitled to receive huge international allowances for foreign operations but the employees of AI had to forswear their international allowance while operating in the domestic sector, causing dissatisfaction.

The merger was expected to mitigate Jet s increasing market share in the domestic and the international air network. It was expected that air India and Indian would complement each other.

THE MERGER AND THE STAR ALLIANCE :

Merger of AI & IA

The Star Alliance was established in 1997 by Air Canada, Lufthansa, Scandinavian Airlines, Thai Airways International and United Airlines as the initial members. The objective was to amalgamate the operations of the member airlines and to provide the passengers with a broad international network and enhanced customer service. The 5 point star symbol of the alliance is a cornucopia of the 5 initial member airlines. The symbol is illustrated as follows:

The Alliance has proliferated over the last decade and has added several new members over the last few years. Currently, the Alliance comprises of 27 members from different countries, the Shenzhen Airlines being the newest entrant (accepted as a future member on 6/7/2011). The following points elucidate why Air India s amalgamation into the Alliance had to be temporarily suspended:  Over the last 2 years, AI s domestic share reduced from 3rd to the 5th position.  Employees were dissatisfied and went on strike on several occasions. This severally inconvenienced the passengers and contributed to the downfall of the airline.

Merger of AI & IA
 The airline's total accumulated losses on March 31, 2010 stood at Rs 13,326.86 crore with the loss before tax during 2010-11 expected to be Rs 6,994 crore (provisional). The financial health of the airline is precarious with current monthly revenue collections being around Rs 1,100 crore, while the expenditure is about Rs 1,700 crore, thereby leaving a gap of Rs 600 crore a month, as a loss. By joining the Alliance, Air India would have gained the following: y y An estimated annual 5 per cent rise in domestic and international passengers. A fruitful merger between Ai and Indian would have augmented the number of passengers by another 5%. Air India would have been able to widen its international network as a part of the alliance.

The most significant factor in AI losing out on the membership has to do with the operations of the airline. They could not develop a sound passenger service system over the last 3 years, illustrating the failure of the merger between AI and Indian. As a result, the airline could not complete the minimum joining requirements before the deadline; i.e., 31/7/2011. Thus, the incorporation of the Air India with the Star Alliance was temporarily suspended