kingfisher acquisition of air deccan

7/30/2019 Kingfisher Acquisition of Air Deccan

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Kingfisher Airlines Acquires a stake in Air Deccan: The Indian AviationSector Moves towards Consolidation

On May 31, 2007, United Breweries Holdings Limited (UBH), the parent company of

Kingfisher Airlines (Kingfisher), a 'value carrier'1based in Bangalore, acquired a 26

percent stake in Deccan Aviation Private Limited (DAP), which owned Air Deccan

(Deccan), the pioneer of low-cost airline in India, also based in Bangalore. UBH paid

Rs. 5.5 billion2 to acquire the stake, which made it the largest shareholder in DAP.3

UBH said that it would subsequently make an open offer to all the shareholders of

DAP, for an additional 20 percent stake.4

Vijay Mallya (Mallya), the Chairman of UBH (and Kingfisher) who became the Vice-

Chairman of Deccan after the acquisition (Ramki Sundaram became the CEO and

Capt. G. R. Gopinath - formerly the Managing Director of Deccan - became the

Executive Chairman of Deccan after the acquisition), said that the Kingfisher-

Deccan combine would cover both low and premium fare segments. It was announced

soon after the acquisition that Deccan would continue with its low-cost business

model.5 The airline would also focus mostly on Tier II and III city routes, while

Kingfisher would operate on the high density metro routes.6

The Kingfisher-Deccan combine became the largest domestic airline in India in

terms of fleet size, with 71 aircraft.7 The combined entity offered 537 flights to

69 cities daily.8 In addition to this, the combined market share of Kingfisher-

Deccan was estimated to be about 30 percent, positioning them in the second place

after Jet Airways, a full service private airline, whose market share was estimated

to be about 34 percent in mid 2007.9

After the acquisition, both the airlines formed a team to study their operations andsuggest areas in which costs could be pruned. The team would also suggest how the

two airlines could share each other's infrastructure to achieve maximum

synergies.10

Mallya said that Kingfisher and Deccan expected to save Rs. 3 billion, through

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combined operations, in the first year.11 He said that Deccan's network was a key

asset that could be leveraged. Synergies were expected to arise in the areas of

ground staff, aircraft, operation and maintenance, ground handling, baggage

handling, increased connectivity, feeder services, and distribution penetration.

Mallya indicated that the airlines could achieve savings by sharing reservation

services, engineering services, service stations, spares, pilots, other crew, and

parking bays at airports.

Also, both Kingfisher and Deccan operated identical aircraft (the Airbus A-320

family and ATR-72-500). This was expected to save engineering and maintenance

costs for both the airlines. Earlier, Deccan had posted a loss of Rs. 2.13 billion

during the quarter ending March 31, 2007.12 Kingfisher was also reportedly losing an

average of Rs. 120 million, on average revenues of about Rs. 22 billion, every

month.13 It was expected that the synergies achieved through combined operations

would improve the financial health of both the airlines.

The alliance was also expected to allow Kingfisher to achieve its goal of operating

flights on international routes. As of mid 2007, the Indian government issued

international operations permits only to those airlines that had completed five

years of domestic operations. As Kingfisher was only two years old (it started

operations in May 2005), it would have had to wait for three more years to fly on

international routes. But acquiring a stake in Deccan, which would reach the

stipulated condition of five year of operations in 2008 (Deccan started its

operations in August 2003), could allow Kingfisher to fly to international

destinations starting in the second part of 2008. Mallya said that he would have an

internal arrangement to lease out Kingfisher aircraft to Deccan 'to maximize the

benefit of overseas routes'.14

In a report released in March 2007, the Center for Asia Pacific Aviation (CAPA), an

airline industry consultancy based in Sydney, had predicted that increasing losses

and excess capacity would result in consolidation in the Indian aviation sector.15

The Kingfisher-Deccan deal was the third alliance in the Indian aviation sector, since

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the beginning of 2007. The year saw the merger of Jet Airways and Sahara Airlines

(in April 2007), and Air India and Indian Airlines (in early May 2007). Talking about

the trend of consolidation in Indian aviation sector, Mallya said that intense

competition and the increasing number of budget carriers had led to under-pricing

of tickets, which resulted in losses to the budget carriers as well as to the entire

aviation sector. He felt that consolidation among the airlines would lead to less

competition and stable fares.

Kapil Kaul (Kaul), the CEO of CAPA (Indian subcontinent and Middle East), said that

in spite of the encouraging traffic growth projections, it was "extremely difficult

for a market to absorb so many new entrants in a short space of time."16 Kaul said

that airport infrastructure and manpower shortages would result in increasing

costs, and reduced efficiency and flexibility for the Indian aviation sector.17 There

were 13 scheduled carriers in the fragmented Indian domestic aviation sector, as

of early 2007.18 Kaul estimated that this number would fall to 8-10 by 2010.

Analysts felt that the new entrants into the aviation sector had overestimated the

number of prospective air travelers. They felt that the cost structure of airline

operations was a key cause of the problems affecting domestic airlines. In the cost

structure of airline operations, fixed costs like aircraft lease rentals, depreciation,

and staff costs could be as high as 50 per cent of sales. And even a slight decline in

traffic volume, or a nominal addition to the industry capacity due to the entry of

new players, could adversely affect the existing operators. Analysts also felt that

the operating cost for airlines was high in India because of high fuel prices,

inadequate airport infrastructure, and lack of trained manpower.19

The stabilizing of airfares due to mergers and alliances was expected to provide

respite to small airlines which had been forced to reduce their fares drastically togain market share, but were facing losses as a result. Bundeep Singh Rangar, the

Chairman of Indusview Advisors of Britain, a business advisory consultancy, said

that the remaining low cost airlines in India could also become takeover targets in

future.20 Kaul also predicted consolidation in the Indian aviation sector in the form

of strategic alliances, market exits, and buyouts of smaller airlines."21

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Additional Readings and References

1. "Now, Three-Year-Old Airlines Can Fly Abroad,"The Economic Times,

http://ibef.org, December 14, 2006.

2. "Aviation Consolidation Looming in India: Outlook 2007 Report

Released,"www.centreforaviation.com, March 7, 2007.

3. "Kingfisher Airlines Buys 26 Pct Stake in Air Deccan for 5.5 Bln

Rupees,"www.abcmoney.co.uk, May 31, 2007.

4. "Kingfisher Flies with Air Deccan,"The Indian Express, June 01, 2007.

5. "Air Deccan Fares to Go up: Mallya,"www.expressindia.com, June 01, 2007.

6. "Vijay Mallya Lands 26% Stake in Deccan Aviation,"The Hindu Business Line, June

01, 2007.

7. "Kingfisher-Air Deccan: Different, Yet Similar,"The Hindu Business Line, June

01, 2007.

8. C.H.Unnikrishnan, "'Air Deccan Helps Our Overseas Plans',"www.livemint.com,

June 04, 2007

9. Nandini Lakshman "Merger Mania Reshapes Indian Airlines,"BusinessWeek, June

11, 2007.

10. Virendra Parekh, "Indian Aviation Sector Expects M&A among Low Budget

Carriers,"Khaleej Times, June 11, 2007.11. "India's Airline Industry Faces More Consolidation,"www.livemint.com, June 14,

2007

12. Rabin Ghosh "' Kingfisher-Air Deccan Merger Best Fit',"www.dnaindia.com, July

25, 2007.

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