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The Kingfisher-Deccan deal was the third alliance in the Indian
aviation sector, since 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.
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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 to gain 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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16] Between 2003 and 2007, 10 new airlines have entered the
Indian domestic aviation market.
17] "Aviation Consolidation Looming in India: Outlook 2007
Report Released," March 7, 2007, www.centreforaviation.com.
18] As of May 10, 2007, 13 airline companies were listed on
the Directorate General of Civil Aviation's (DGCA) list of Scheduled Operators
Permit Holders (www.dgca.nic.in./operator/sch-ind.htm).
19] Virendra Parekh, "Indian Aviation Sector Expects M&A among
Low Budget Carriers," Khaleej Times, June 11, 2007.
20] Nandini Lakshman "Merger Mania Reshapes Indian Airlines,"
BusinessWeek, June 11, 2007.
21] "India's Airline Industry Faces More Consolidation,"
www.livemint.com, June 14, 2007.
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