New Delhi: The consolidation wave in the Indian aviation industry has led to a fundamentally strong and mature market place, but low fares would become a casualty, say analysts.
Consolidation is an inevitable move at this stage when the aviation sector was pulsating with an unprecedented growth rate of 25% per annum. The passenger traffic levels are rising at a dramatic pace and the inherent competition would make the sustenance of players without deep pockets difficult.
“The fare war in the domestic sky would continue for some time but as the market matures, the Indian consumer’s mindset will also mature to choose service than fares,” KPMG India Senior Adviser Mark D Martin said.
“Even though there will continue to be competitive pricing, I expect the reactionary pricing that we saw earlier to reduce considerably. Passengers will have to shell out more,” Kuwait Airways Sales and Marketing Manager (Indian Subcontinent) Pran S Dasan said.
“The fare war will continue in the short term within the similar segments. But with the continuing widening of the gap between passenger growth and seat availability, the competitive pressures would be less,” Martin added.
Global advisory firm Grant Thornton, in its recent report on airline industry, said that the key reasons behind this consolidation were stabilisation in the industry post the high growth period, huge losses for several airlines, high competition resulting in a price war, among others.
Consolidation, analysts believe, is more a strategy to enhance market presence and grow in an organic manner rather than a means to improve financial performance.
This is because airlines stand to benefit from lower operating and maintenance costs through sharing of route networks, marketing presence, infrastructure at stations and manpower.
“Low prices that some carriers offer tend to harm the industry and cause bigger losses to the sector as a whole. With consolidation, airlines would be in a position to improve yields and thus break away from the vicious cycle of low fares and consequent losses,” Dasan added.
“With the advent of regional airlines, consolidation in the aviation sector would gradually see a transition from the present merger and acquisition route to synergy-based initiatives as strategic alliances,” Martin said.
An analysis of data from January 2005 to August 2007 by Grant Thornton shows that the value of M&A deals in this period amounted to $465.12 million while private equity investment in value amounted to $142.46 million.
Private equity is definitely being pumped into the Indian aviation sector even though mergers and acquisitions are taking place, Dasan said. These investments have a high lock-in period, ranging from a minimum 7 to 10 years, with the investor adopting a ‘backseat´ role.
Most PE investments seen in aviation have been extremely successful and continue to flow. Initially, investments were seen in full service carriers as Jet Airways to fund expansion in the late 90’s, while the new wave of PE investments is expected to be seen in regional airlines, airports and general aviation operations, Martin added.
The aviation sector has witnessed quite a few investments
in the recent past. There are at least 15 applicants awaiting clearance from the authorities to get air-borne, Dasan said, adding the new Government policy on regional carriers has further boosted interest in the sector.
In the first seven months this year, there were three M&A deals -- Air India with Indian Airlines, Jet Airways and Air Sahara, UB Group (Kingfisher Airline)’ acquiring 26 per cent stake in low cost carrier Deccan Aviation.
While in the case of private equity investment, BNP Paribas Arbitrage Fund has put in 15.11 million dollar for 5.43 per cent stake in Spicejet.
There have been several private equity investments in the last two years which helped many of the new business establish and grow.
There were as many as five PE deals in 2005 and eight in 2006, as per data provided by Grant Thornton.