The Hindu Business Line : Consolidation in the air

THE buyout of Sahara Airlines by Jet Airways signifies the beginning of a consolidation phase in the country's domestic aviation industry, putting behind the virtual frenzy over the past couple of years that saw the number of airlines doubling from four to eight, more aircraft taking to the skies, a greater choice of flights being offered to and from many more cities and, most important of them all, lower fares. For passengers, everything seemed to run their way. The competitive pressure among airlines was so overbearing that even increases in the price of aviation fuel or the high cost of retaining pilots could not persuade them to reverse the downward drift in fares. But when free markets let in new producers or service providers, they also offer opportunities for consolidation.

When the heat of competition begins to singe bottomlines, consolidation becomes the imperative. For Air Sahara, the weakest of them all, giving up was the only alternative to going under, and one has to compliment its promoters for reading the writing on the wall. There would have been much blood and gore from a failed airline had they waited any longer. For Jet Airways, this is an opportunity to claw back to the 44 per cent share of the domestic passenger market it had in 2003-04. In just a decade of open competition, it had used the advantage of a young fleet to overtake its competitor, Indian Airlines that had once ruled the skies. Yet over the past several months the on-rush of competition from new, low-fare and no-frills airlines has been a rude setback to the full-service carrier with many of its clients drifting to the penny-pinching Air Deccan and Spice Jet, to glitzy Kingfisher or to the less expensive business seats on Paramount Airways.

A pertinent question here is whether Jet Airways would have been better off expanding in its own way, investing in new aircraft as it was wont to do, rather than buying into a fleet and a staff that represented a culture that was uniquely Sahara's. In the short run the buyout presents certain tactical possibilities to the acquirer. It is apparent that the price Jet has paid reflects not just the value of Sahara's assets, but also a premium paid to alter the dynamics in what had become clearly a market of over-capacity. Any reduction in the competitive heat that this deal can bring about will provide Jet Airways the chance to fill more seats on its aircraft and, with luck, the muscle to push fares up selectively. But regulators need not get overly concerned at this. For neither option can be taken for granted, as the capacity expansion plans of the new carriers are substantial enough to bring to nought any attempts Jet Airways may make to re-work flight schedules and sponge out the excess capacity in many routes. The next few months should see the energies of a free market playing out to the fullest.