The Hindu

New Delhi, Jun 19: AS THE global civil aviation scenario undergoes rapid changes, Air India and Indian (erstwhile Indian Airlines) strongly believe that their proposed merger by this year-end will endow them with a distinct competitive position but thorny issues of manpower and operational integration may still pose challenges.

Ever since the Civil Aviation Minister Praful Patel made it known earlier this year that a merger was the only way out for the two national carriers to survive in the face of stiff global competition and a liberalised and deregulated environment, both have started seeing things differently. Already there is a move to set up at least four joint working groups to prepare a business plan with a combined fleet, a common schedule and a single balance sheet as one organisation. Consultants will be appointed soon to suggest a road map for the merger.

Time bound process

In fact, a recent presentation made before Prime Minister Manmohan Singh by Mr. Patel had advocated merger within a specified time frame with full operational and manpower integration, considered to be tricky issues which, Mr. Patel says, can be overcome as the roller-coaster ride of the merger process takes off.

With a combined fleet strength of 160-plus aircraft after merger, AI-IA will be better able to compete with global players like Air France-KLM with 480 aircraft, Lufthansa-Swiss with 401 aircraft, British Airways with 284 aircraft, Singapore Airlines with 126 and Jet-Sahara with a fleet strength of 80 aircraft.

As for the benefits of merger, the presentation made to the Prime Minister, a copy of which was accessed by The Hindu, said the new entity would enjoy a dominant domestic and international market position; it would have synergies in sales and distribution; offer seamless connectivity to international passengers; enjoy economies of scale in purchasing, spares inventory, insourcing and outsourcing and would have scope for substantial unit cost reduction. The new airline would also get ample opportunities to create joint ventures in engineering, maintenance, repair and overhaul facilities as well as in areas of ground handling and cargo.

Mr. Patel, who is the prime mover behind the merger proposal, says that merger was never considered seriously earlier as both airlines worked in a protected environment, faced no serious threat of competition and had "complementary'' roles. Now, the environment is vastly different and if AI and Indian remain separate, they would only compete with each other and would also face the real threat of getting marginalised.

The Civil Aviation Ministry feels that past efforts at synergy and merger did not succeed as there were distinctive roles for the two carriers, there were no competitive pressures and each airline feared that merger would benefit only the other. Apart from the daunting task of merging manpower, there was the lack of government and top management will to push for merger.

The Ministry says that a holding company model was studied and found inadequate as it would not lead to operational integration and the two entities would have acted independently and divergently. Issues of network integration and expansion still remain to be tackled while attempts to allocate international and domestic operations are likely to meet with resistance.

Past attempts to enhance synergy and cooperation between the two airlines were not successful due to differences in perception of each other's needs. Both recognise the need to integrate resources, networks and strategies but this will be possible only with complete merger.

Size also is a critical factor in ensuring success and the Ministry says global civil aviation is witnessing increasing dominance of airline alliances. High operating costs will eliminate small and inefficient airlines and expensive cutting edge technologies will remain key to survival which only major carriers can afford.

Global alliances like One World, Star and Skyteam control over 80 per cent of global airline capacity, providing gateway-to-gateway connections and also behind gateway feeder routes. Passenger load factors of alliance members like United, Air France, Delta, Singapore Airlines, American Airlines and Lufthansa range from 79 to 74 per cent while those of non-alliance airlines like Southwest, Air India, China Eastern and Saudi Arabian vary between 62 and 69 per cent. Clearly, alliance members have been able to achieve higher load factors.

In this scenario, it is imperative for AI and Indian to jointly bid for global partnership lest they should face isolation and marginalisation. Individually the two bring negligible value to any global alliance but together with integrated domestic and international networks, they become very attractive.

The Civil Aviation Ministry points to single airlines with both domestic and international operations such as Qantas in Australia, Varig in Brazil, Air France and Lufthansa which use a combination of narrow-body aircraft for domestic operations and wide-body jets for international operations.

In the post-merger scenario, the new entity will be among the top 20 airlines globally and will rank eighth in the Asia Pacific region. It will carry 13.1 million passengers annually and increase its market share to 30 per cent .

The net profit will grow to Rs. 162 crore and the revenue will be around Rs. 13,000 crore. While the domestic market share of Indian has nosedived from 100 per cent in 1990 to 31 per cent last year, AI's share has plummeted from 24.5 per cent to 19.5 per cent during the same period.

Changing dynamics

With Indian civil aviation growing at breakneck speed ever since norms for new private domestic carriers were eased, ten domestic airlines are likely to dominate the scene, forcing Indian to face greater competition. Structural changes such as entry of no-frills, low-cost carriers, airport privatisation, financial restructuring and Jet-Sahara type acquisitions have changed the dynamics of the sector. While Delhi and Mumbai are already major hubs for both domestic and international air traffic, supporting hubs in Bangalore, Chennai, Hyderabad and Kolkata are likely to witness a boom in the near future. With a near doubling of capacity and more routes opening up, a large network is critical for full service carriers like AI and Indian, aviation experts say.

The presentation to the Prime Minister also referred to huge increases in entitlements and new routes for foreign airlines, open skies with the U.S., near open skies with U.K./ASEAN and SAARC countries as well as liberal bilaterals with Germany, France, China and other countries.

Indian domestic carriers like Jet and Sahara were allowed to fly overseas and allowed to forge partnerships with foreign carriers in a bid to access secondary destinations.

Jet Airways with a vast domestic network is in a position to fill international flights with ease. Other private domestic carriers will also qualify for international operations in the next three to four years and by then they will also have fairly large domestic networks.