The Hindu Business Line : The Jet deal will unlock value

Beyond the sheer change in the underlying numbers (valued at Rs 1,450 crore), the deal will create an entity with over one-third market share. It will give rise to a new competitive dimension for the airline industry.

MR RAAJEEV BATRA, EXECUTIVE DIRECTOR, KPMG

The deal space is still fresh with what has happened in the air space: Jet-Sahara. Size is becoming an advantage in the aviation business, says Mr Raajeev Batra, Executive Director, KPMG, commenting on the deal. "The merged entity can now take on the might of the merged national carriers both on the domestic and international routes," he hopes.

Mr Batra, a chartered accountant, certified information systems auditor (CISA), and a member of the Project Management Institute, US, has nearly two decades of professional experience, and industry exposure as the Head of Internal Audit of Coca-Cola India and Vedanta Resources Plc. He currently leads the KPMG's advisory engagement with both Delhi and Mumbai airports.

Here are Mr Batra's answers to a few questions from Business Line.

Why is the deal important for M&A watchers?

Indian aviation is today flying in exciting environment. Low-cost airlines have rewritten the aviation landscape, consolidation in both public and private airline space is a reality, demand of people and infrastructure has outstripped supply and the future looks as exciting as the recent past. It is in this context that the Jet-Sahara merger assumes greater significance.

What does the transaction mean to Jet's operations, national and international?

The combined Jet-Sahara entity now becomes the only private airlines with the permission to fly overseas. As a result of this merger, Jet would acquire at least 27 of the Air Sahara aircraft (its current fleet strength is 62), in addition to the prime landing and take-off slots at major airports such as London Heathrow, Delhi and Mumbai (the fleet of the merged Air India-Indian would be around 130 aircraft). Jet would also benefit significantly from Air Sahara's existing network, serving as feeder airlines for jet routes.

This merger will help Jet to effectively deliver the classic hub-and-spoke system and better global airline positioning.

This take-over has the potential to not only boost Jet's entry into the top-500 companies in India but also provide it the edge in the Gulf, UK, and West Asia region for operation of its flights without much investment in logistics and infrastructure.

The lucrative Gulf region, which until recently was reserved for state-owned players, will have Jet as one of the private competitors providing value-add to its end-users through this merger.

What of the synergies, cost and competition?

The combined operations of Jet and Sahara complemented with low costs though economies of scale is expected to augment Jet's ability to compete on price in the domestic market.

Jet's decision to convert the Sahara fleet into a value carrier (something between full service and low-cost carrier) under the new name of Jetlite, is probably a step in that direction to take head on the competition from low-cost carriers.

However, rivals maintain that they have a robust system to reach consumers and that the merger would not have much impact on them, the decision would definitely change the Indian aviation industry's hold in the Asia-Pacific region.

Considering the current prevailing significant low fares in the domestic sector and on-going operating losses being made by most airlines, one would not expect an intensive price war.

Do you see consolidation leading to a monopolistic situation?

Although the scale of the combined airlines currently puts Jet in a more advantageous position to drive the market economies, the situation is far from being monopolistic.

With the passenger traffic growth projected at 40 per cent, there continues to be a gap in the available seat capacity.

One also needs to consider the might of the merged national carriers, which account for the other one-third share of the domestic aviation market and would provide direct competition to the merged Jet Airways.

Air Deccan, the lead player in the low-cost carrier (LCC) segment, is also gearing to add another 80 aircraft to its fleet over the next six years. These create a level playing field for all airlines and the let the market forces would drive competition.

What about the management and culture issues, post merger?

Post this merger, it will be interesting to observe how the merged airline transitions the internal staff and cultural integration issues attached to it.

These issues are critical to any successful merger, but this transaction is likely to have more pronounced cultural differences to deal and address.

The merger is likely to create availability of excess staff in certain positions and an element of uncertainty in the minds of both the airline's staff. Also, irrespective of Jet's decision on use of the Sahara fleet, economies of scale could benefit the merged entity (in terms of fleet utilisation, maintenance facilities, ground handling and staff) in near future.

On the other hand, Jet's management can infuse fresh energy into loss-making Sahara to bring it up-to-speed with existing competition from other low-cost carriers in the domestic market.

All this will bring more functional and commercial synergies between two airlines, and unlock immense value for all stakeholders concerned.

Are there legal and procedural tangles still to be sorted out?

A government policy issued in April 2006 provided that only flying time slots and parking rights were transferable in case an airline was bought over. It means that Sahara's maintenance facilities space, commercial spaces at airports such as airport counters and lounges belonging to the AAI or GMR and GVK group in Delhi and Mumbai airports would not get transferred automatically to Jet by virtue of merger. Jet will have to negotiate with all of these airport operators for these facilities. Further, in view of the huge ongoing capital expenditure by these airport operators and available flexibility to charge for commercial spaces, Jet may have to pay more than Sahara for these commercial spaces.

Any tax issues...

Regarding taxes, as per the current provisions of Section 72A of the Income-Tax Act, tax benefits would not be available for this deal as was made clear by the government while approving the similar benefits for the Air India-Indian's merger. Jet can still evaluate the possibility of applying to the Government of India for these benefits. However, all of the above are critical considerations that will involve resource of the combined entity and can have a strong bearing on the competitive landscape of the industry.

What are the takeaways from the deal?

It needs to be underlined that these partnerships are an indispensable part of strategic growth of Indian aviation sector. The success of such deals would largely depend upon business strategies for pricing, branding and management of cultural differences, and would involve considerable degree of negotiation and support from external agencies (including AAI, DGCA, etc., and the possibility of seeking favourable tax benefits). And such a success would mean more exciting times for the Indian aviation environment.

MuraliDe@gmail.com

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