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Jet-Kingfisher looks to cut jobs, costs; eyes savings of Rs800 cr

Jet-Kingfisher looks to cut jobs, costs; eyes savings of Rs800 cr
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First Published: Tue, Oct 14 2008. 10 40 PM IST

Updated: Wed, Oct 22 2008. 12 26 PM IST
Mumbai / New Delhi / Bangalore: An operational alliance between India’s two biggest airlines, Jet Airways (India) Ltd and Kingfisher Airlines Ltd, could result in annual, combined savings of about Rs800 crore as both rationalize their routes, save on shared infrastructure, buy fuel together and likely lay off at least 1,500 employees, equivalent to 5% of their combined workforce, say people close to both companies.
“There is no point in fighting, because everybody is bleeding,” said Jet Airways chairman Naresh Goyal.
Late Monday night, Jet and Kingfisher formally announced an alliance of “wide-ranging proportions” aimed at reaping “maximum synergies” and reducing costs. Even as some analysts speculated the partnership could end up in a merger of some form, the airlines said it won’t involve any equity investments between the two.
“This was a joint decision. With two giants coming together, it is a win-win situation for both of us. These are troubled times and you should cooperate now,” said Hitesh Patel, executive vice-president of Kingfisher. “Now Jet Airways and Kingfisher Airlines will have huge management bandwidth and information about the market.”
If the alliance is cleared by the government, it would also likely put significant pressure on Air India (AI), the Indian government-owned airline run by the National Aviation Co. of India Ltd (Nacil).
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“Even if it may be a small beginning, but ultimately it will amount to two major airlines working together and they naturally become the market leader and (then they) will fire shots,” said Gurcharan Bhatura, secretary general of the Foundation of Aviation and Sustainable Tourism, an independent non-profit research body on aviation.
Rivals no more: Kingfisher Airlines’ Vijay Mallya (left) and Jet Airways’ Naresh Goyal addressing newspersons in Mumbai late on Monday. Abhijit Bhatlekar / Mint
Jet and Kingfisher “are flying on all meaty routes already. Competition for AI (will be) certainly more stiff”.
The alliance will also potentially help Nacil push harder for Rs1,000 crore in equity infusion from the government to fuel its own expansion.
“The Jet-Kingfisher alliance is not going to have any impact on the funding plans from the government as Jet or Kingfisher will not get any pricing power,” claimed one Nacil official, who didn’t want to be named. “It simply means sharing of infrastructure and capacity restructuring in the market. Time has shown that the Indian market is too price sensitive, and those who increase fares will have low load factors.”
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In August, the latest month for which domestic airline market share data is available, Jet, which includes JetLite, had a 33.5% share of passengers, followed by 25% for Kingfisher, 18% for AI, with IndiGo at 10.3%.
This move will also put significant pressure on the remaining smaller airlines, such as GoAir and SpiceJet Ltd. The alliance of larger airlines could push similar tie-ups with smaller airlines to cut costs and improve profitability.
Some low-cost carriers, such as IndiGo airlines, ruled out any alliances with peers such as SpiceJet and GoAir. “Cost efficiency is our key ingredient and that will help us to stay competitive,” said Aditya Ghosh, president of IndiGo.
Key issues
“If both players agree to aggressively cut capacity, rather than try to curb other costs, raise fares, we would be more positive on the agreement and outlook for the sector,” wrote Citigroup analyst Jamshed Dadabhoy in a note to clients. “Valuations—and investor perceptions—could meaningfully improve if this agreement led to a scenario of these companies merging and trying to raise funds to improve their severely impacted balance sheets.”
The move, he added, will improve pricing “in the business class segment”, but “economy segment traffic should continue to contract”.
Mahantesh Sabarad, an analyst with Centrum Broking Pvt. Ltd, said that while Jet would gain marginally from the tie-up, the opportunity to reduce costs was “limited” because aviation turbine fuel (ATF) prices, which account for nearly 55% of total revenues, are not negotiable in India, where most sales of the fuel are through state-run oil firms.
“Viewed differently, the alliance could result in a monopolistic market, thereby denying an air traveller a competitive price,” he said. “We now expect a regulatory due diligence of the deal, which makes us wary of the durability of the alliance.”
Meanwhile, consumer groups claimed the tie-up could decrease choice for passengers, lead to an increase in fares and result in a monopoly that would fly planes only on profitable routes.
“It is going to kill competition, it is not beneficial for passengers,” said D. Sudhakara Reddy, founder and national president of Air Passengers Association of India, a body of 10,000 members, based in Chennai. “The gap in fares (of Kingfisher and Jet combine) with low-cost carriers would be so huge, the low-cost carriers will also increase fares.”
Deal saga
The idea of an alliance between the two loss-making carriers came about in a conversation between Goyal, the founder-chairman of Jet Airways, and Kingfisher chairman Vijay Mallya, on the sidelines of a meeting of the Federation of Indian Airlines in Mumbai, a person with knowledge of that meeting said.
The first discussion, in September, between Goyal and Mallya was centred around potentially cooperating on an India-UK-San Francisco route. Goyal requested Mallya to help in feeding passengers from Kingfisher’s Bangalore-London flight on to Jet’s London-San Francisco flight, this person said, on the condition he would not be named.
That thaw between two larger-than-life and flamboyant entrepreneurs led to Union agriculture minister Sharad Pawar, head of the National Congress Party (NCP), then talking to both sides about a larger deal. India’s influential civil aviation minister, Praful Patel, belongs to the NCP. It is unclear what role, if any, Patel played in this and calls to his office were not returned. Also, Mint couldn’t independently ascertain Pawar’s involvement in the deal.
“In this environment, the Jet Airways-Kingfisher alliance represents a completely new industrial model for aviation in India, which would be based on an unprecedented depth of cooperation between the two companies,” said Goyal in the Monday night statement. “Both Jet and Kingfisher fully realize that better understanding of supply and demand in this capital- and labour-intensive industry is the key to profitability and enhancement of shareholder value,” added Mallya.
India’s airlines are estimated to collectively lose about $2 billion (Rs9,540 crore today) in this fiscal year ending March.
The proposed Jet-Kingfisher deal is subject to regulatory approval. A senior civil aviation ministry official said it had not been formally asked to weigh in on the proposal. “It’s too early (to comment). We don’t have any scheme (on the table),” the official said, on condition of anonymity.
Shares of Kingfisher, which had risen 32% on Monday, ahead of the announcement of the alliance, slipped by 2.34% to Rs50.15 a share on Tuesday, while Jet Airways’ shares, which had jumped 11% on Monday, stayed somewhat flat to close at Rs289.40.
Nitty gritty
The proposed alliance will first aim at what in the industry is called code-sharing, which allows two or more airlines to share the same airline codes, easing booking of tickets, on both domestic and international flights. The two airlines have a network that uses 189 aircraft across 927 domestic and 82 international flights every day, according to a statement released on Monday.
Both of them are betting on Delhi and Mumbai, the high traffic route that accounts for half of domestic flights in India. When Kingfisher acquired Air Deccan, it removed all flights of the low-cost carrier on the Delhi-Mumbai route and replaced them with its full service flights.
For example, on the Chennai-Madurai route, currently three flights of Jet, Kingfisher and Paramout Airways (P) Ltd operate, all early morning ones. The alliance could do away with one flight, resulting in better capacity utilization and improved revenues.
“It is difficult to give an example (of what the rationalization would mean) as we are exploring various ways to make this alliance work out, subject to approval of Directorate General of Civil Aviation,” said a senior Jet executive, who didn’t want to be named. Passengers will be able to travel by Kingfisher or Jet and can redeem each other’s frequent flier points, he added. Jet, for instance, has around 10 lakh Jet Privilege members.
The same Jet executive said the carriers are also looking at common ground handling and cross-selling of flight tickets using a common ticket distribution system. “To begin with, we will reduce our labour on the ramp side at airports. And the carriers will start sharing buses” that carry passengers to planes, he said.
“Another area is joint fuel management to reduce aviation turbine fuel cost. We are jointly exploring the possibilities of renegotiating with oil marketing companies for a better rate,” said a Kingfisher Airline executive, who also didn’t want to be named. “We are also planning to hedge our fuel requirements jointly.”
pr.sanjai@livemint.com
C.R. Sukumar contributed to the story.
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First Published: Tue, Oct 14 2008. 10 40 PM IST