There's - Orient Aviation

is loosi ng t hei r sh i r t sdomestically. It’s a questionof who has the deepestpockets,” he said.T he st r uggle forpassengers, and the losses,may soon escalate. Industryinsiders expect a viciousdomestic ticket price warto start around June whenthe low season arrives andcarriers battle to fill seats.Even worse, several newLCCs are on the sidelines,ready to enter the market.They include Omega Air,Mega Airways, Magic Air,East West, Indus, PremierStar Air and MDLR Airlines.The country’s existing carriers becameso concerned about the cost pressures ontheir industry late last year they formed anew body, the Federation of Indian Airlines(FIA), to lobby on such issues as the highgovernment fuel tax that drives up costs.The chairman is Air India chief, VasudevanThulasidas.Chris Tarry, head of U.K.-based transportstrategy consultancy CTAIRA (Chris TarryAviation Industry Research and Analysis), isanother analyst who believes consolidationis inevitable and will likely occur through acombination of airlines leaving the marketor merging. But he warns this is no panacea.“It’s not just putting one business togetherwith another,” he said. “There has to be astructural gain from doing it.“The reality is the cost benefits tend tobe more illusory than real. It is importantto be realistic about what is achievable onthe cost side. It is difficult. There are a lot ofissues, from pilot seniority to what officesyou are going to close and how to integratethe workforce. Generally speaking it takestwo things: very strong management - and alot of cash,” he said.The one consolidation now is the mergerof international carrier, Air India, anddomestic/international Indian, formerlyIndian Airlines, both government-owned.The move will create one of the Asia-Pacific’s biggest airlines, with a fleet ofmore than 100 aircraft. But no one expectsit will be easy.There has been talk for decades aboutmerging the two and the union will finallyofficially be in place on April 1. At that stage,however, it will be a merger in name only.Air India’s Thulasidas won’t comment inAir India chairman,VasudevanThulasidas: themerger with Indianbegins on April 1detail, but he has said that,once final cabinet approvalis granted, the two airlineswill take the legal stepsnecessary for the merger,a process that could takeup to four months. Totalintegration is not expected tobe completed until the end of2008 at the earliest.Analysts don’t expect thetransition to go smoothly,with several pointing tothe difficulties surroundingsimilar moves in recentyears, such as the mergerof Qantas Airways andAustralian Airlines andthe coming together of Japan Airlines andJapan Air System. Both were plagued byproblems involving the integration of thecarriers’ different businesscultures. In Japan, the mergerbecame so complex it led tomanagement losing focuson core business operations,triggering huge financiallosses.Air India and Indianare unlikely to be muchdifferent. Minister for CivilAviation, Praful Patel, has‘I know banks ... who areeyeing the sector very closely.But they are still reluctant [toinvest], until they are satisfiedthe basic structure is … inplace’Shukor Yusofanalyst, Standard and Poor’sCivil aviationminister Praful Patel:he’s concerned thebubble may bursthad to guarantee staff thatthe merger “would involveno retrenchment, no cuts orlosses in pay scale, perks orallowances”. In itself, thisdecision will severely limitthe new joint carrier’s abilityto rationalize and trim costs, according toanalysts.Nevertheless, Patel said the two airlineswill gain US$$113 million annually after themerger, with the cost of the integration itselfbeing somewhere between US$34 millionand US$45 million. In the end, according toPatel, it will enable the carriers to optimizeexisting resources through improvementsin load factors and yields on commonlyservicedroutes as well as deploying “freedup” aircraft capacity on to new routes. “Itwill provide maximum flexibility to achievefinancial and capital restructuring throughrevaluation of assets and cleaning up offinancial books,” he said.However long it takes and whateverhurdles have to be overcome, even rivalsthink it makes sense. Jet’s Prock-Schauertold Orient Aviation a merger “is absolutelymoving in the right direction”. He does notsee a stronger, revived government operatoras a threat.“It is a first step in consolidation. It is alsoa logical fit because you have a primarilyinternational carrier merging with adomestic, regional, international carrier,” hesaid. “It will have a lot of synergy. Naturallyevery merger has its complexities and it hasto be executed properly, but it is a good move.I firmly believe the stronger a combined AirIndia-Indian, the better itis for the whole industry,because then we can alloffer high quality productat higher prices.”With foreign airlinesnow moving up to 75% ofinternational traffic to andfrom India, he believes themerger will ultimately helplocal carriers claw backmarket share to at least 50%.“In a country like Indiathere is easily room for two,maybe three, full-serviceinter national car r iers.There is no doubt that thereis room for a combined AirIndia-Indian and a big Jet Airways offeringa strong domestic-international network,”said Prock-Schauer.As for other mergers or airline collapses,it is extremely difficult to identify likelycandidates. According to Standard andPoor’s Yusof, “you can’t separate the‘wannabees’ from the guys that will makeit in the long run.“There is going to be consolidation in thevery near future because they can’t possiblygo on at this level. The infrastructure interms of airports and the number of pilots tofly these aircraft are not there,” he said.The concern is hardly surprising. Lastyear’s capacity increase of 45% is expectedto slow down to below 25% this year, butthere are still a lot of new seats arriving ona monthly basis.In its latest Current Market Outlook,MARCH 2007 ORIENT AVIATION INDIA 5