JET AIRWAYS ATTEMPTED ACQUISITION OF AIR SAHARA

ABSTRACT-The case discusses the attempted acquisition of the third largest airline company in India, Air Sahara by its rival airline company, Jet Airways. It describes why Jet Airways, a leader in the Indian airline company agreed to pay $500 million to acquire Air Sahara. The case further talks about the benefits that Jet Airways expected to have from the acquisition. It also throws light on the changes brought in by the new low cost carriers in the Indian aviation scene. Finally, the case ends with a discussion on the future prospects of Jet Airways and Air Sahara in the highly competitive airline industry both within and outside India, in light of the failure of the proposed acquisition

JET AIRWAYS SPREADS ITS WINGS-On January 19, 2006, Jet Airways (India) Ltd. (JA) announced its decision to acquire Air Sahara (AS), the third largest airline company in India. It was to be the first acquisition in the history of Indian aviation industry. The deal valued at Rs.22.5 billion approx. ($500 million) was expected to enable JA, a leader in the airline industry, to further strengthen its position in the market. With this acquisition, the company would have close to a 50 percent share of the Indian aviation market. In addition, the company would add aircraft; acquire more parking slots, more airline staff, and more international routes. The announcement of the deal received a mixed response. Some of JA's competitors complained about the possible monopoly that JA would have on the limited infrastructure available at most Indian airports. Some analysts believed that the Indian airline industry as a whole would benefit from the deal, as it would reduce duplication of routes and lead to less fragmentation of the full service segment. Others believed that the price paid was too high, considering the fact that AS was a loss-making airline company (Refer to Table I for financials of both the companies). The deal was also opposed by some members of the Indian Parliament, who believed that the acquisition could lead to the creation of a 'monopoly entity' in the Indian airline industry. Naresh Goyal, chairman, JA, responding to some of these concerns, said, "The deal has been done after doing thorough due diligence. The acquisition will give us economies of scale and will help improve revenues

INDIAN AVIATION INDUSTRY-The domestic aviation sector in India was thrown open to private players in the early 1990s with the implementation of the open skies policy by the Government of India (GoI). Until then, the air transport services in India had been provided by the state-owned air carriers, Indian Airlines Limited (IA) and Air India Limited (AI). After the aviation sector was liberalized, a number of private carriers such as East West Airlines (EWA), ModiLuft, Damania Airways (DA), NEPC, AS, and JA entered the industry. By the end of the 1990s, of the original entrants, only two private carriers - AS and JA - remained in the industry. These two airlines provided formidable competition to IA throughout the 1990s. IA, which had once held a monopoly position in the Indian skies, steadily lost market share. Of the two private airlines, JA became more popular among air passengers for its on-time performance and efficient services, and by the early 2000s it had replaced IA as the leader in the Indian airline industry. Although AS was not as successful as JA, its services too were considered to be superior to those of IA. By 2003-04, IA, JA, and AS were facing more competition, this time from low cost carriers (LCCs)5 led by Air Deccan. As LCCs did not offer any frills their fares were considerably lower than those of full

service airlines. The full service carriers responded by cutting fares and offering discounts. However, their fares still remained higher. Initially, Air Deccan was the only LCC in India. However, by 2005, three more LCCs namely, SpiceJet, GoAir, and Paramount Air and Kingfisher Airlines, a value carrier had entered the industry. In addition, a host of new airlines such as IndiGo, Visa Air, and others were getting ready to take off in 2006. The LCCs were popular due to their low fares and hence were gaining market share from the full service airline companies. In early 2006, the market share of LCCs stood at 27 percent. According to an estimate by the Center for Asia Pacific Aviation6 (CAPA) this was expected to increase to as much as 50 percent by 2010. The study also made a forecast that around 20 new LCCs would be launched in India by 2006. This number was more than the total number of LCCs operating in West Asia and the Asia-Pacific regions in 2004. Thus, the full service airlines in India were faced with the difficult task of finding new ways to retain their positions in the industry

BACK GROUNG OF THE COMPANY

JET AIRWAYS-Jet Airways was incorporated as an air taxi operator on 1 April 1992. It started Indian commercial airline operations on 5 May 1993 with a fleet of four leased Boeing 737-300 aircraft. In January 1994, a change in the law enabled Jet Airways to apply for scheduled airline status, which was granted on 4 January 1995. It began international operations to Sri Lanka in March 2004. While the company is listed on the Bombay Stock Exchange, 80% of its stock is controlled by Naresh Goyal (through his ownership of Jet’s parent company, Tailwinds, and has 10,017 employees (at March 2007). Naresh Goyal, who already owned Jetair (Private) Limited, which provided sales and marketing for foreign airlines in India, set up Jet Airways as a full-service scheduled airline to compete against state-owned Indian Airlines. Indian Airlines had enjoyed a monopoly in the domestic market between 1953, when all major Indian air transport providers were nationalised under the Air Corporations Act (1953), and January 1994, when the Air Corporations Act was repealed, following which Jet Airways received scheduled airline status. Jet Airways and Air Sahara were the only private airlines to survive the Indian business downturn of the early 1990s. In January 2006, Jet Airways announced that it would buy Air Sahara for US$500 million in an all-cash deal, making it the biggest takeover in Indian aviation history. The resulting airline would have been the country's largest but the deal fell through in June 2006. On 12 April 2007, Jet Airways agreed to buy out Air Sahara for 14.5 billion rupees (US$340 million). Air Sahara was renamed JetLite, and was marketed between a low-cost carrier and a full service airline. In August 2008, Jet Airways announced its plans to completely integrate JetLite into Jet Airways. In October 2008, Jet Airways laid off 1900 of its employees, resulting in the largest lay-off in the history of Indian aviation. However, later, the employees have been asked to return to work. Civil Aviation Minister Praful Patel said that the management reviewed its decision after he analyzed the decision with them.

AIR SAHARA One of India's leading private carriers, JETLITE, until recently known as Air Sahara, was established on September 20, 1991. A part of the Sahara India Pariwar which has interests in Public Deposit Mobilization, Media & Entertainment, Housing & Infrastructure, Tourism, Consumer Products and Information Technology, Air Sahara Airlines started its operations on December 3, 1993, with a fleet of two Boeing 737-200 aircraft. Sahara Airlines was rechristened as Air Sahara on October 2, 2000. It started its international operations on March 22, 2004, with its maiden flight from Chennai to Colombo. Jetlite currently flies to 29 destinations including 5 international destinations with 134 daily direct flights and offers 16,500 seats per day. It flies to major Indian cities like Ahmedabad, Allahabad, Bangalore, Bhubaneswar, Chennai, Coimbatore, New Delhi, Dibrugarh, Goa, Gorakhpur, Guwahati, Hyderabad, Indore, Jaipur, Kochi, Kolkata, Lucknow, Mumbai, Nagpur, Patna, Port Blair, Pune, Ranchi, Srinagar, Thiruvananthapuram, Varanasi and

Visakhapatnam besides foreign destinations like Colombo, Karachi, Kathmandu, Kuala Lumpur, Maldives, and Singapore. Jetlite currently has a fleet of 27 aircrafts that include Boeing 767, Boeing 737-800, Boeing 737-700, Boeing 737-400, Boeing 737-300 and CRJ -200. Jetlite also has chartered helicopter flights from metropolitan Delhi & Mumbai. Main base of Jetlite (Air Sahara) is Indira Gandhi International Airport, New Delhi, with hubs at Begumpet Airport, Hyderabad; Chatrapati Shivaji International Airport, Mumbai; Chennai International Airport, Chennai; and Netaji Subhash Chandra Bose International Airport, Kolkata.

JET ACQUIRE SAHARA-When AS announced that it was exploring opportunities for private placement of its equity, airline companies such as SpiceJet showed an interest in acquiring a stake in the company. At this time, however, JA did not express any interest in acquiring a stake in AS. Instead, Kingfisher Airlines, an airline owned by Vijay Mallya, chairman of the UB group, was considered a serious contender for AS. Mallya intended to speed up his growth plan in the aviation industry and believed that a merger with AS would help him achieve this objective. He negotiated with the company for a while but ultimately pulled out saying that the price set for AS was too high. Said Malaya, "I valued Sahara less as I can't pay for parking slots that belong to the state." By this time, price had become the main concern for most of the potential acquirers. Analysts too opined that a valuation of around US$1 billion for an airline that was in debt was a bit too much.Een if the kingfisher air Sahara deal failed to materialize, there were reports that JA had started negotiation with AS to acquire the entire share holding in the company . How ever, JA repeatedly denied all such reports

THE CHALLENGES Some industry observers believed that JA had overvalued AS and hence overpaid for acquiring the company. According to analysts, AS was not a profitable airline and hence the price paid was more than what the airline was actually worth. Alok Dalal (Dalal), research analyst, India Infoline, commented, "The deal is favorable to Jet in terms of operational efficiencies but it is not so in terms of financials, as Jet has paid a much higher price." He added, "Sahara's financials are not as strong as compared to Jet." Defending the deal, Goyal said, "We've done serious valuation after studying similar deals done abroad. We've analyzed what happened when TWA sold to American Airlines or when Pan Am sold to United Airlines. We know what we are doing." It was also believed that although JA had gained certain synergies from the acquisition, it also had the difficult task of turning around the loss-making AS. Analysts expressed concern that JA would concentrate on making AS profitable at the cost of its own performance

THE MONOPLY CONCERNS-After JA's announcement of its decision to acquire AS, a member of the Rajya Sabha (the Upper House of the Indian Parliament) complained that JA would create a monopoly in the domestic airline industry by controlling almost half the market. This would not be in the best interests of consumers and investors, the member said. The deal between JA and AS also faced opposition from airlines like Kingfisher Airlines and GoAir. In fact, four airlines, Kingfisher Airlines, GoAir, Air Deccan, and IndiGo formed an alliance called Indian Airline Operators' Association (IAOA) before the formal announcement of the JA and AS deal was made. The purpose of the alliance was to appeal to the government for equitable allotment of parking slots and prime-time departure slots. Later, however, Air Deccan backed out of the alliance. Capt. Gopinath, CEO of Air Deccan, said, "I am not part of (Mallya's) alliance. I don't want to be a part of an airline group to take on Jet. What I am not looking at is an association which includes only a segment of the industry, as that would not represent the larger interest of the industry."

OUTLOOK- Analysts opined that though JA had acquired a dominant position in the Indian airline industry, it would need to work hard to sustain this position in the long run.

This was because several new private carriers were expected to enter the industry in the next few years. Observed Alok Sharma, vice president, AS, "Traffic is booming, but as we see it, capacity growth will overtake traffic growth in the next few years. Last year, traffic grew by 20 percent to 25 percent, but load factors of full service carriers were still 70 percent or so.” Also, IA and AI were taking steps to improve their operations. IA, which had been making losses since 2000-01, had become profitable in 2004. The airline also undertook a major re-branding exercise in December 2005 with a view to enhancing its image. IA and AI were also expected to go in for Initial Public Offerings by mid-2006. Reportedly, the GoI intended to sell around 20-25 percent of the stakes in these companies