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Kingfisher deal to buy 26% of Deccan spells consolidation

Kingfisher deal to buy 26% of Deccan spells consolidation
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First Published: Fri, Jun 01 2007. 12 31 AM IST

Updated: Fri, Jun 01 2007. 12 31 AM IST
In the boldest consolidation move yet in the Indian aviation sector, United Breweries (Holdings) Ltd, a UB Group company that runs full-service carrier Kingfisher Airlines Ltd, bought a 26% stake in Deccan Aviation Ltd, which runs the country’s biggest discount airline, Air Deccan.
In April, India’s largest airline, Jet Airways (India) Ltd, bought smaller rival Sahara Airlines Ltd-run Air Sahara. State-run carriers Air India Ltd and Indian Airlines Ltd, which runs the Indian brand airline, are preparing for a merger starting July.
These moves will leave more than four-fifths of the Indian passenger aviation market with three major players.
The Air Deccan deal, which will cost UB Rs550 crore and give it the rights to bid for another fifth of Deccan Aviation, gives Vijay Mallya, the flamboyant chairman of the liquor-led group, an airline with 43 planes and 22% market share by passengers. Air Deccan, India’s first no-frills carrier that started in August 2003, operates 350 flights to 61 destinations daily.
Kingfisher (11%) and Air Deccan will have a 33% share of all Indian domestic passengers, inching ahead of Jet (22%) and Sahara (9%), based on April figures.
Industry insiders predicted fares would go up as airlines would start taking advantage of their new scale.
“All those gimmicks of free tickets and zero fares are going to go away; that’s good for the industry,” predicted Chennai-based Paramount Airways managing director M. Thiagarajan. Indeed, shares of low-cost airline SpiceJet Ltd shot up nearly 21% to Rs61 each, while the Jet share added 1.36% to Rs769.35.
The consolidation wave would, however, likely hit the smaller players, predicted another aviation expert. “In this industry, size does matter. It’s only the beginning of further consolidations. Most of the smaller airlines will either be sold out or close shop,” said Rajeev Batra, an executive director at consulting firm KPMG International. Carriers such as SpiceJet, IndiGo, GoAir and Paramount Airways collectively have only about 12% market share.
G.R. Gopinath, managing director, said Kingfisher and Air Deccan would continue to operate as “independent entities.” “Initially, when Mallya spoke to me of being an investor, I mistook him because of his typical style and thought he would acquire Air Deccan and make it a full-service airline,” said Gopinath. “If it was a merger, then it was deemed to fail as there cannot be any fit between the two companies—culturally or in terms of the business model.”
A trained pilot, Gopinath is being made chairman, replacing N.S. Narahari, with Mallya assuming the vice-chairman role.
“It is high time that I shifted (from day-to-day operations),” Gopinath said in a phone interview. “I had already decided long ago that I will bring in a new CEO and restrict myself to the responsibility of an entrepreneur as the company has grown really large.” Deccan Aviation chief financial officer Ramki Sundaram would officiate as chief executive until a new CEO is recruited.
A new chief operating officer to replace outgoing Air Deccan COO Warwick Brady has been selected but Gopinath declined to identify the person. Brady appears headed to Jakarta-based Mandala Airlines PT as chief executive.
The Kingfisher deal values shares of Deccan Aviation at Rs155 each, 6% more than its Rs146.20 closing price on Thursday. Air Deccan shares rose 12% on Thursday in reaction to a story in The Economic Times that Kingfisher was close to a deal though the paper wrote Gopinath “flatly denied any deal was in the offing with Kingfisher.” There have been off-and-on speculation about a possible tie-up between the two as Deccan went about trying to find partners to help infuse money into the loss-making company.
Air Deccan shares have risen nearly 41% in May, a month it became evident that the Bangalore firm was desperate for funding with equity being whittled down to about Rs40 crore after the January-March quarter threw up some Rs212 crore losses. A Rs200 crore credit line from State Bank of India was to expire end of May.
Senior executives of the UB Group defended their offer. “Our idea is not to squeeze every penny from the company we buy, but provide significant value addition, even though it may seem to be a bit expensive,” the group’s CFO Ravi Nedungadi said in a phone interview, adding that an open tender for 20% of Deccan Aviation shares would open in about a week’s time. He also said UB did not plan to merge Air Deccan into Kingfisher Airlines.
A majority stake in Deccan Aviation will bring multiple benefits like “route rationalization” for Kingfisher Airlines. For instance, both airlines fly to Hubli from Bangalore using short-haul planes but now they have the option of reducing the flights to one and using freed-up aircraft to expand routes. Also, the fleets at both the carriers almost mirror each other with Airbus jets and ATR-turboprop planes—Kingfisher has 29 of these—potentially reducing overall maintenance costs.
Kingfisher and Air Deccan will now have access to ground infrastructure at 65 airports of which more than 28 are common. At congested metropolitan airports New Delhi and Mumbai, which account for more than half of India’s 33 million passenger traffic, they will be able to operate 155 flights.
“There could more parking slots at the intensely competitive airports. Then you can play around with the departure times given the synergies.” Kingfisher Airlines chief financial officer A. Ragunathan said.
Taking Wing (Graphic)
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First Published: Fri, Jun 01 2007. 12 31 AM IST
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