Merger between Air India and Indian Airlines Essay Example

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Air India, which was the first airline in India to introduce the wide-bodied A300 aircraft on domestic flights, also introduced the fly-by-wire A320 and offered walk-in flights with easy menus. Currently, Air India serves a total of 76 destinations, including 58 within India and 18 abroad. The airline, along with Alliance Air, employs about 19,300 people and transports over 7.5 million passengers annually. Their main bases are Chatrapati Shivaji International Airport in Mumbai, Indira Gandhi International Airport in Delhi, Netaji Subhash Chandra Bose International Airport in Kolkata, and Chennai International Airport in Chennai. Following permission from the Government of India on July 15, 2007, Indian Airlines merged with Air India to form a unified entity.

After the merger, Air India will become the new airline and will join the Star Alliance, which is the largest airline consortium. In the 1970s, the government allowed limited service airlines like Air Works India, Huns Air, and Golden Sun Aviation to establish. However, these airlines did not last long. Around 1979, IAC changed its name by removing "Corporation". According to the Financial Times of Britain, Indian Airlines was considered as the third largest domestic carrier in the mid-1980s.

Indian Airlines aimed to expand its capacity by merging with Air-India, the country's international carrier, due to its growth rate of over 10% per year. In late 1986, two young industrialists became chairmen of both companies but the merger plans did not last long. However, in 1987 Indian Airlines achieved significant success by carrying 10 million passengers and earning a profit of Rs630 million ($48 million). Despite this success, the airline faced criticism for its service quality as new competitors entered the market.

Merger

of Air India Limited and Indian Airlines Limited with National Aviation Company of India Limited

On March 1, 2007, the Government of India approved the merger between Air India and Indian Airlines. As a result, a new company called National Aviation Company of India Limited (NACIL) was established under the Companies Act, 1956 on March 30, 2007. The registered office is located at Airlines House on Gurudwara Rakabganj Road in New Delhi.

The Certificate to Commence Business was acquired on 14 May 2007. The merger involved AIR INDIA Ltd. (Transferor No 1 Company) and INDIAN AIRLINES Ltd. (Transferor No 2 Company) with NATIONAL AVIATION COMPANY of India limited company (Transferee Company). The Transferee Company, National Aviation Company of India Limited, is a Government Company under Section 617 of the Companies Act, 1956 and is administratively controlled by the Ministry of Civil Aviation. It is incorporated under the Companies Act 1956 and has its registered office at Airlines House, 113 Gurudwara Rakabganj Road, New Delhi 110 001.

National Aviation Company of India Limited, a Government Company, has been formed to offer air transportation and related services. The consolidation of AI and IA through their proposed merger will create a single entity known as the Transferee Company. As a result, assets such as properties, rights, and interests will be transferred to the Transferee Company without requiring any additional steps. However, existing charges from banks and financial institutions will continue to remain valid under this Scheme, in line with Sections 391-394 of the Act and other applicable laws.

Clause 3.1 above does not impact the transfer of movable or intangible assets of the Transferor Companies, which can be transported manually or by

endorsement. These assets, including works, aircraft, machinery, and equipment, will be transferred to the Transferee Company and become its property.

For all other assets not mentioned above, they will automatically be vested in the Transferee Company in accordance with Section 394 of the Act, without any additional action or documentation.

Transportation of Liabilities

Starting from the Appointed Date and after the Scheme becomes effective, all debts, liabilities, responsibilities, and duties of the Transferor Companies – whether secured or unsecured – regardless of whether they are recorded in their accounts or disclosed in the balance sheet – shall become the debts, liabilities responsibilities , and duties of ths Transferee Company. The Transferee Company commits to meeting , discharging ,and fulfilling these obligations . Any liabilities and duties fulfilled by ths Transferor Companies between ths Appointed Date and Effective Date will be considered fulfilled on behalf of ths Transferee Compan y.Additionally , any loans an dliabilities acquired by ths Transferor Companies for their operations between th sAppointed Date an dthe Effective Date will become responsibilityofth eTransfere eCom pany .

Any guarantee, letter of comfort, or commitment provided by the Government or any bureau or bank in favor of the Transferor Companies regarding loans or rental finance will remain effective for the Transferee Company. All contracts, deeds, approvals, exemptions, and other related instruments pertaining to the Transferor Companies that exist or have an immediate effect before the Effective Date shall continue to be valid and enforceable for the Transferee Company. This includes agreements, strategies, insurance policies, warranties, and other relevant documents. The Transferee Company can fully enforce these contracts and instruments as if they were a party or beneficiary instead

of the Transferor Companies. Upon the Scheme becoming effective from the Appointed Date onwards, all rights and licenses associated with hallmarks, know-how, trade names, labels,
trademarks,and intellectual property rights linked to the Transferor Companies shall be transferred to
the Transferee Company. TheTransferee Company shall have equal rights and abilities to enforce these rights as if it had been a party from inception. Additionally,the Transferee Company is entitled to enjoy
the benefits provided by insurance policies issued fortheTransferorCompaniesandshallbe listed as
the "Insured" in those policies.In addition, the Transferee Company will take over as the designated carrier for India in all Air Services Agreements, replacing the Transferor Companies. After the Scheme becomes effective, all licenses and rights held by the Transferor Companies before the Effective Date will remain valid and enforceable in favor of the Transferee Company. This includes operating licenses, quotas, entitlements, trademarks, patent rights, privileges, powers, facilities of any kind at foreign airports related to occupations and time slots. Additionally, all necessary statutory licenses, permissions, approvals, exemption schemes and consents required for the operation of the Transferor Companies will be vested in or transferred to the Transferee Company without any further action or transfer. These will also be duly amended by relevant authorities in favor of the Transferee Company.

The Transferee Company will possess all necessary permissions, licenses, blessings, and consents for the operations of the Transferor Companies as stated in the Scheme. If needed, the Transferee Company will execute documentation with parties involved in contracts or agreements related to the Transferor Companies to formalize these provisions. The Transferee Company is authorized to perform such documentation and carry out any required formalities on behalf of the Transferor Companies.

The amalgamation of

the Transferor Companies with the Transferee Company, along with a comprehensive transformation plan, is essential for enhancing competitiveness. It will enable the utilization of combined assets and capital to establish a stronger and sustainable business. Specifically, this amalgamation will create India's largest airline and a comparable competitor to other airlines in Asia. This merging of two state-run carriers will initiate consolidation in India's aviation sector, which is witnessing rapid growth second only to China, Indonesia, and Thailand.

The text proposes providing an integrated international/domestic footprint that would greatly enhance customer proposition and facilitate easy entry into one of the three global airline alliances, primarily Star Alliance, which consists of a global pool of 21 airlines. This integration would optimize the utilization of existing resources by improving load factors and yields on regularly serviced routes, as well as allowing the deployment of freed-up aircraft capacity on alternative routes. Following the merger, the resulting company became a mega company with a combined revenue of Rs 150 billion ($3.7 billion) and an estimated fleet of 150 aircraft. This fleet consists of a diverse mix of aircraft suitable for both short and long-haul flights, resulting in improved fleet utilization.

• Opportunity to fully leverage strong assets, capabilities, and infrastructure.
• Opportunity to leverage skilled and experienced workforce available with both the Transferor Companies to the optimal potential.
• Creation of a larger and growth-oriented company for the people with increased public interest.
• Potential to establish high-growth, profitable businesses such as Ground Handling Services and Maintenance Repair and Overhaul.
• Maximal flexibility provided to achieve financial and capital restructuring through asset review.
• Increased focus on airline support businesses.

The consolidation

of the two companies resulted in economies of scale through route rationalization and elimination of route duplication. This led to a savings of Rs1.86 billion ($0.04 billion). The new airlines will offer more competitive fares, operate seven different types of aircraft, and make better use of assets like real estate, human resources, and aircraft. However, the merger also brought around $10 billion (Rs 440 billion) of debt.

The new entity has better purchasing power for fuel, spares, and other materials. Additionally, there are major operational benefits as both companies occupy a large number of parking bays and hangars that are often scarce at various airports in the country.

Having new flights at convenient times proved to be a major advantage for me. Even after the merger, it is expected that the national carriers will continue to enjoy protectionism in terms of their traffic right entitlements. This ensures that the merged Airlines will have enough opportunities for further growth, thanks to their strong combined fleet. Additionally, this protectionism on traffic rights serves the purpose of guaranteeing a higher intrinsic value, as the Government is likely to reduce its retention percentage in the near future. The integration of the Transferor Companies' complementary networks will drive significant synergies in terms of revenue.

Opportunities for leveraging economies of scale and rationalizing infrastructure will drive cost and capital productivity synergies. In addition to these synergies, the merger will also provide an opportunity to initiate a comprehensive transformation program to improve the overall competitiveness of the integrated airline, the Transferee Company. This, along with improving the financial position, would help position and align the integrated entity to better confront current and future challenges arising

from intense competition and declining industry profitability. In pursuit of these objectives, this Scheme of merger provides for the transfer and vesting of all the projects, properties, assets, and liabilities of each of the Transferor Companies to and in the Transferee Company.

Post-Merger Scenario - Revenue performance of NACIL

(Sourced from: Magic Carpet Official Magazine of AIR INDIA)

Integration is incomplete

Accenture, the consultant that designed the Air India-Indian merger in 2006, had advised the Center to integrate 748 officials up to the level of deputy general manager (DGM) within nine months of Cabinet clearance, to ensure that the merger pays off.

According to two board members of NACIL, after twenty-five months, the company has successfully hired 44 officials up to the rank of executive manager (ED).

Affected by economic downturn

NACIL, along with other airlines, is facing significant challenges due to the decrease in passenger and cargo traffic caused by the recession. In January 2009, air passenger traffic experienced an 11 percent year-on-year decline, making it the seventh consecutive month of decline. During that same month, NACIL's load factor reached a domestic low of 60.2 percent, which measures the proportion of tickets sold in relation to the total number of available seats.

The nucleus cost drivers, which include line care, land handling, terminal services, flight operations/ dispatches and ticket sales, should have been merged first in order to achieve synergistic benefits. The employee-to-aircraft ratio of NACIL, which measures efficiency, is the highest among its competitors at 222:1 (the global average is 150:1), resulting in an excess of approximately 10,000 employees. The pay percentage of the merged company, which was 23% of total expenses at the time of incorporation, is expected to increase

significantly due to a grade realignment.

Fleet Expansion

NACIL's fleet expansion appears to be out of sync with current trends, as most airlines are actually reducing their fleets and cancelling orders for new planes.

While other Indian airlines have cancelled more than a third of their aircraft orders scheduled for delivery in 2009, NACIL intends to acquire 30 aircraft in the current financial year and an additional 45 by the end of March 2012. As a result, NACIL will face a substantial amount of debt going forward. A board member of NACIL stated that the company's total debt in the medium term is estimated to be Rs 79,000 crore. "Out of this, Rs 44,000 crore will be required for purchasing planes. The remaining amount consists of Rs 22,000 crore in long term loans and Rs 13,000 crore in working capital loans," he explained.

Common Distrust and Strong Brotherhoods

There is a noticeable lack of trust between Air India and Indian Airlines. The unification of their operations will result in job redundancies, particularly affecting employees from Indian Airlines. This has led to resentment among Air India employees. The management is finding it challenging to navigate the integration process.

Strong resistance from brotherhoods against the film editing determinations of direction, mainly regarding wages, has resulted in work stoppages by employees.

Increased Competition

The turmoil at the top has caused delays in decision-making at a time when the demand for air travel has decreased by approximately 8-10% in the past year. Additionally, competition in the industry has intensified. Air India's market share in the domestic sector has been under pressure ever since budget carriers and new private airlines entered the market.

From August 2007 (when the merger took place) to January 2008, Air India's domestic market share declined from 19.8% to 13.9%. It later rose to 17.2% in February 2009.

Lower Load Factor

Although Air India's overall operational performance has remained stable, its passenger load factor of 63.2%, which was a record for the company, falls behind the industry average of 75% in 2006-07. The load factor disparity is particularly pronounced when compared to other low-cost carriers like Air Deccan.

The burden factor of the company is decreasing year by year. In 2005-06, the burden factor was 66.2%, which is higher than the current load factor. Air India's burden factor is expected to be low due to the higher frequency of operations on each route. A lower burden factor could reduce the company's profits.

Decision

The merger of Air India and Indian is a significant recent development in India's airline industry. If managed correctly, the combined entity has great potential as the largest airline in one of the world's largest and fastest growing economies.

The extended web of Air India in an untapped portion of the universe will attract global confederations, as demonstrated by the forthcoming vote of Star Alliance on Air India's rank this week. The complexity of managing a merger in such a challenging environment cannot be overstated, but there is no alternative. Ultimately, Air India must be privatized in the next 3-5 years to become commercially viable. The first step would be a partial IPO planned for 2008/09, although its success will depend heavily on the outcomes of the integration process in the next 12-18 months. However, the heavily debt-laden ledger poses a challenge to this process unless profitability

improves significantly.

Introducing a strategic spouse would ideally come before this first measure, but it is more likely to come after. However, if an Indian spouse is chosen, it may lead to concerns about competition, and if a foreign spouse is chosen, changes would need to be made to the current laws that prevent foreign airlines from having a stake in Indian carriers. If Air India can successfully navigate the next couple of years, it has the potential to become a major Asian airline, but 2008 will be a crucial year.