Inorganic Activity is Inevitable in The Domestic Airline Business, given The Huge Overdues, debt load and losses. The Skies are open for Consolidation and pe activity. Sellouts or mergers – what will happen?
Given the strong promoter backing of SpiceJet, JetLite and IndiGo, these three cannot be counted as takeover targets. Not for now. But cash infusion through the PE route is a strong possibility. In this regard, the spotlight is on the two profitable SpiceJet (PAT: Rs.0.61 billion during FY2010) and IndiGo (Rs.5.5 billion).
Acquisition of controlling stakes in Indian carriers by foreign carriers cannot be ruled out either. Though the government has not taken a decision on this, since March 2010, discussions have been on to increase the FDI limit in aviation to 74%. [Given that Air India is in trouble, it is expected to become a candidate for such a case soon!] So we could well see a repeat of the Emirates-SriLankan Airlines deal where Emirates bought over 40% of SriLankan to take control of the airline and bring about a significant improvement in the financial & operational performance of SriLankan. There could even be a PE firm interested in one of the larger Indian airline companies, whose huge debt load ($13 billion in total – the highest in Asia) and poor financials automatically would make it a steal, as Port Washington-based airline industry expert Robert Mann (CEO of R. W. Mann & Co.) tells B&E, “Where barriers to entry have risen, consolidation has stabilised pricing and airline fortunes. Barriers to entry remain low in India, thus there has been limited success of M&As to date in India. In this case you could see a pure financial player – a PE firm – buying a huge stake in an airline over the next few quarters.” It is not to be forgotten that PE investor Texas Pacific Group’s entry into management and restructuring of Continental Airlines and its simultaneous board-level involvement with America West helped the merged entity bounce back. Though it is always considered better if the suitor is an airline, for selling airline seats may be selling hotdogs, but running an airline is no driving around fast-food stall. And the domestic circuit would hate to see another failure, whether an airline-airline or a PE-airline deal. In the past there have been many instances of non-airline investors having largely failed in airlines such as Malev, Mexicana and other Asian airlines. And many-a-time, the accrued debt has overwhelmed the airline and its revenue-generating potential.
So the forecast is – over the next 24 month, there will be some notable inorganic activities in the sector. At the same time, it is important that the government gives the domestic airline industry a chance to behave rationally. Someone has to be allowed to fail. Air India’s failure in July 2011 to gain entry into Star Alliance indicates that there is no clear way ahead for the carrier and that it continues to operate under short-term begging measures. With airlines on perpetual financial life-support, the industry cannot invest in a successful business model. Similarly, ailing companies will continue to deter new market entrants whilst at the same time, plead for protection to maintain their presence (like the shield being put in place to restrict Lufthansa’s A380s entering the Indian market). This neither benefits the industry nor the investment community. Creating ‘zombie’ carriers and merging them – both are fruitless. The failed merger between Pan Am and TWA in the 1980s is a lesson. Fundamentals have to improve to have a healthy business environment – and then will consolidation make sense for Indian carriers.
Acquisition of controlling stakes in Indian carriers by foreign carriers cannot be ruled out either. Though the government has not taken a decision on this, since March 2010, discussions have been on to increase the FDI limit in aviation to 74%. [Given that Air India is in trouble, it is expected to become a candidate for such a case soon!] So we could well see a repeat of the Emirates-SriLankan Airlines deal where Emirates bought over 40% of SriLankan to take control of the airline and bring about a significant improvement in the financial & operational performance of SriLankan. There could even be a PE firm interested in one of the larger Indian airline companies, whose huge debt load ($13 billion in total – the highest in Asia) and poor financials automatically would make it a steal, as Port Washington-based airline industry expert Robert Mann (CEO of R. W. Mann & Co.) tells B&E, “Where barriers to entry have risen, consolidation has stabilised pricing and airline fortunes. Barriers to entry remain low in India, thus there has been limited success of M&As to date in India. In this case you could see a pure financial player – a PE firm – buying a huge stake in an airline over the next few quarters.” It is not to be forgotten that PE investor Texas Pacific Group’s entry into management and restructuring of Continental Airlines and its simultaneous board-level involvement with America West helped the merged entity bounce back. Though it is always considered better if the suitor is an airline, for selling airline seats may be selling hotdogs, but running an airline is no driving around fast-food stall. And the domestic circuit would hate to see another failure, whether an airline-airline or a PE-airline deal. In the past there have been many instances of non-airline investors having largely failed in airlines such as Malev, Mexicana and other Asian airlines. And many-a-time, the accrued debt has overwhelmed the airline and its revenue-generating potential.
So the forecast is – over the next 24 month, there will be some notable inorganic activities in the sector. At the same time, it is important that the government gives the domestic airline industry a chance to behave rationally. Someone has to be allowed to fail. Air India’s failure in July 2011 to gain entry into Star Alliance indicates that there is no clear way ahead for the carrier and that it continues to operate under short-term begging measures. With airlines on perpetual financial life-support, the industry cannot invest in a successful business model. Similarly, ailing companies will continue to deter new market entrants whilst at the same time, plead for protection to maintain their presence (like the shield being put in place to restrict Lufthansa’s A380s entering the Indian market). This neither benefits the industry nor the investment community. Creating ‘zombie’ carriers and merging them – both are fruitless. The failed merger between Pan Am and TWA in the 1980s is a lesson. Fundamentals have to improve to have a healthy business environment – and then will consolidation make sense for Indian carriers.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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IIPM: Indian Institute of Planning and Management
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
