Jet Airways' Attempted Acquisition of Air Sahara
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Case Code: BSTR219 Case Length: 19 Pages Period: 2005-2006 Pub Date: 2006 Teaching Note: Not Available |
Price: Rs.300 Organization: Jet Airways (India) Ltd, Sahara Airlines Ltd Industry: Aviation Countries: India Themes: - |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Jet Acquires Sahara
When AS announced that it was exploring opportunities for private placement of its equity, airline companies such as SpiceJet showed an interest in acquiring a stake in the company.
At this time, however, JA did not express any interest in acquiring a stake in AS. Instead, Kingfisher Airlines, an airline owned by Vijay Mallya, chairman of the UB group, was considered a serious contender for AS. Mallya intended to speed up his growth plan in the aviation industry and believed that a merger with AS would help him achieve this objective. He negotiated with the company for a while but ultimately pulled out saying that the price set for AS was too high. Said Mallya, "I valued Sahara less as I can't pay for parking slots that belong to the state." By this time, price had become the main concern for most of the potential acquirers. Analysts too opined that a valuation of around US$1 billion for an airline that was in debt was a bit too much...
The Challenges
Some industry observers believed that JA had overvalued AS and hence overpaid for acquiring the company. According to analysts, AS was not a profitable airline and hence the price paid was more than what the airline was actually worth.
Alok Dalal (Dalal), research analyst, India Infoline, commented, "The deal is favorable to Jet in terms of operational efficiencies but it is not so in terms of financials, as Jet has paid a much higher price." He added, "Sahara's financials are not as strong as compared to Jet." Defending the deal, Goyal said, "We've done serious valuation after studying similar deals done abroad. We've analyzed what happened when TWA sold to American Airlines or when Pan Am sold to United Airlines. We know what we are doing." It was also believed that although JA had gained certain synergies from the acquisition, it also had the difficult task of turning around the loss-making AS. Analysts expressed concern that JA would concentrate on making AS profitable at the cost of its own performance...
Monopoly Concerns
After JA's announcement of its decision to acquire AS, a member of the Rajya Sabha (the Upper House of the Indian Parliament) complained that JA would create a monopoly in the domestic airline industry by controlling almost half the market. This would not be in the best interests of consumers and investors, the member said. The deal between JA and AS also faced opposition from airlines like Kingfisher Airlines and GoAir. In fact, four airlines, Kingfisher Airlines, GoAir, Air Deccan, and IndiGo formed an alliance called Indian Airline Operators' Association (IAOA) before the formal announcement of the JA and AS deal was made. The purpose of the alliance was to appeal to the government for equitable allotment of parking slots and prime-time departure slots. Later, however, Air Deccan backed out of the alliance.
Capt. Gopinath, CEO of Air Deccan, said, "I am not part of (Mallya's) alliance. I don't want to be a part of an airline group to take on Jet. What I am not looking at is an association which includes only a segment of the industry, as that would not represent the larger interest of the industry..."
Outlook
Analysts opined that though JA had acquired a dominant position in the Indian airline industry, it would need to work hard to sustain this position in the long run. This was because several new private carriers were expected to enter the industry in the next few years.
Observed Alok Sharma, vice president, AS, "Traffic is booming, but as we see it, capacity growth will overtake traffic growth in the next few years. Last year, traffic grew by 20 percent to 25 percent, but load factors of full service carriers were still 70 percent or so."Also, IA and AI were taking steps to improve their operations. IA, which had been making losses since 2000-01, had become profitable in 2004. The airline also undertook a major re-branding exercise in December 2005 with a view to enhancing its image. IA and AI were also expected to go in for Initial Public Offerings by mid-2006. Reportedly, the GoI intended to sell around 20-25 percent of the stakes in these companies...
Exhibits
Exhibit I: Airline Companies Operating In India In 2006
Exhibit II: Airlines To Be Launched In India
Exhibit III: Market Shares Of Major Airline Companies In India In The Domestic Sector In January 2006
Exhibit IV: Financial Results Of Jet Airways For The Year Ended March 31, 2005
Exhibit V: Aircraft Operated By As And Ja As Of February 2006
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