The Hindu Business Line : A year of airlines consolidation

New Delhi, Dec. 28 The year 2007 will probably be best remembered as the year when consolidation through mergers and acquisitions was witnessed in the domestic aviation industry.

The year began with the merger of Air India and Indian getting under way. Soon thereafter, the buyout of Air Sahara by Jet Airways, which had been caught in litigation for more than a year, was also completed. A few months later, Kingfisher Airlines acquired a 26 per cent stake in the low-cost airline Air Deccan and later, through an open offer, increased its stake to 46 per cent.

The year also saw Air India acquire the first Boeing 777-200 Long Range (LR) aircraft which was deployed to launch non-stop services between Mumbai and New York. With this launch, Air India became the first Indian carrier to fly non-stop between India and the US. The acquisition of the Boeing 777-200 LR was part of the 68 aircraft fleet acquisition proposal which had been approved by the Government in 2005.

At the same time, Jet Airways was successful in getting the required permission from the US Government to launch flights from various cities in India to the US. Jet Airways also opened a hub in Brussels through which the flights to the US and Canada are routed. The airline’s application for operating flights to the Gulf region was also approved, thereby ending the monopoly that Air India enjoyed as it was the only carrier which was allowed to operate flights to the region from India.

Air connectivity

To improve air connectivity to smaller cities, the Government created the concept of regional airlines which allow promoters to set up an airline with small aircraft and operate flights from any airport in the four designated regions to any other airport in the country. Most of them are, however, prohibited from operating flights to a metro airport outside their region. The exception to the rule is in South India where a regional airline is allowed to operate among Hyderabad, Chennai and Bangalore.

The biggest advantage that the operators of regional airlines have is that they are not bound by route dispersal guidelines that stipulate how many flights must be operated on which routes. The guidelines, for example, stipulate that all scheduled operators operate at least 10 per cent of what they operate on trunk routes like Delhi-Mumbai in the north-eastern region, Jammu & Kashmir, Andaman and Nicobar Islands and Lakshadweep.

Fuel price

However, the rise in prices of fuel globally also affected the profitability of the aviation industry in India. To offset the increase in aviation turbine fuel prices, domestic airlines raised fuel surcharge at least five times during the year.

Besides all these developments, the Union Cabinet gave its approval for India to accede to the Cape Town Convention, which could see not only Air India save as much Rs 264 crore on the 68 Boeing aircraft deal but also benefit other Indian airlines going for Exim financing to cut their aircraft acquisition costs.

The Cape Town Convention offers a host of benefits to lessors and those in the business of mortgage of aircraft, including providing additional security for repossession of aircraft in case of default especially when payment obligations have not been met.

The Government also did its bit to try and change global aviation policy by moving a resolution at the International Civil Aviation Organisation seeking a review of the night curfew that is imposed by airports around the globe, including those in the US and several countries in Europe.

On the level of policy, a 10-member Group of Ministers (GoM) was constituted during the year to finalise the civil aviation policy, while a three member GoM which included the Finance Minister, Mr P. Chidambaram, the Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia, and the Minister for Civil Aviation, Mr Praful Patel, finalised a new policy for greenfield airports. The greenfield airport policy is expected to be sent to the Cabinet for final approval soon.

FDI limits

The Ministry of Civil Aviation has proposed enhancing foreign direct investment limits in a number of sectors as part of the Government’s efforts to make India more investor friendly. Among the proposals are allowing 100 per cent FDI in sea planes, helicopter operations and setting up of maintenance, repair and overhaul facilities.

At another level, the Airbus A-380, the world’s largest aircraft currently in operation, visited Delhi and Mumbai as part of a world tour. Currently, Kingfisher Airline is the only Indian airline to have ordered the A-380, although Air India is evaluating the aircraft as part of a proposal to acquire more aircraft to meet passenger demand.

And finally, the end of the year saw Air India’s application being accepted for becoming a member of the 19-member global airline club, Star Alliance.