United we stand

KINGFISHER AIRLINES-DECCAN AVIATION

The alliance will help revive the fortunes of the aviation industry.

Jet Airways chairman Naresh Goyal may not have done his company a big favour by acquiring Air Sahara for about Rs 2,000 crore in April this year. With hardly any market share or fleet to boast of, all that Sahara brought to the table was some airport infrastructure.

But the alliance triggered some much ""needed consolidation in the industry. That process has now been taken a step further by UB Holdings, which owns Kingfisher Airlines. By picking up 26 per cent stake in low-cost carrier Deccan Aviation for Rs 550 crore, UB Holdings has given both airlines a fresh lease of life.

With red ink splattered on most airline balance sheets, total losses for the industry in FY07 are expected to be in the region of Rs 1,800-2,000 crore. Deccan's finances are in bad shape: it has incurred operating losses of over Rs 1,000 crore in the past eight quarters. Kingfisher's losses for FY06 and FY07 are estimated to be close to Rs 600 crore. Under the circumstances, it would have been difficult for either airline to keep going for much longer without financial support.

The acquisition thus makes sense because there are synergies to be exploited: both airlines operate Airbus fleets and that would strengthen their bargaining position with both aircraft manufacturers and lessors.

Moreover, with lower expenses on spares, ground handling facilities, engineering, staff and crew, around Rs 300 crore is expected to be saved in the first year itself. Much like Jet has positioned Jetlite as a value carrier, Kingfisher plans to let Deccan remain an LCC.

Says Vijay Mallya, chairman UB group, "The combination of Kingfisher and Deccan will allow us to offer a range of price points." Mallya expects Deccan will turn profitable in the forseeable future and claims Kingfisher should make an operating profit (post lease rentals) in FY08 and a net profit in the following year.

The new alliance is also good news for the industry. As a JP Morgan report notes, "This consolidation marks the bottom of the earnings cycle for this profit-starved sector."

That could well be true. Less than three months back the aviation market was fragmented with as many as nine scheduled carriers fighting each other. Market leader Jet Airways commanded a share of 25 per cent followed by Indian with 21 per cent and Deccan with 19 per cent.

Now, the market is split between three sets of players "" the Kingfisher-Deccan combine, Jet (together with Jetlite) and Indian "" and the three control over 80 per cent of the market. Jet and Jetlite command a share of 33 per cent while the Deccan-Kingfisher team has 29 per cent and the government-owned Indian 21 per cent.

Remarks Hemant Patel who tracks the aviation space at Enam Securities, "The two big players now command over 60 per cent of the market which is a huge consolidation for the industry and has big implications for the profits of airlines."

Indeed the era of cheap fares might be coming to an end "" Mallya's already hinting at higher fares for Deccan. Observes Kalpesh Paresh, who heads the research at ASK Securities, "Sanity should return to fares and even if ticket prices are raised by Rs 400-Rs 500, it would help boost yields."

The extent of irrationality in fares can be gauged from the fact that even for Jet Airways, the ratio of discounted fares to full fares has reversed dramatically from 20:80 to 75:25 in just about a year.

Higher fares should help smaller carriers like Spicejet and Indigo, who have been forced to discount fares to gain market share. But, being significantly smaller than their peers, these airlines will find it increasingly difficult to survive profitably.

Spicejet today has a fleet of just 13 aircraft, while Go operates 4 aircraft. The Kingfisher-Deccan combine will account for 50 per cent of the deployed capacity in southern India. With 537 flights daily to 69 cities between the two, the connectivity is unmatched.

Besides, Indian and Air India, which are to be merged shortly, are reworking their route plan to improve frequencies and connectivity. Industry watchers say it won't be long before one of the minnows winds down its operations or sells out.The industry's taking off once again but not everyone's going to have a smooth landing.