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27 Aug, 2007

India Okays Merger of Two National Airlines

India last week cleared the final legal hurdle for the merger of its two state-owned airlines Air India and Indian Airlines into a single company called National Aviation Company of India Limited (NACIL).

To fly under the brand of ‘Air India’, the new airline will have a combined fleet of over 112 aircraft, putting it among the world’s top 30 airlines, according to an announcement by the Ministry of Civil Aviation. Between them, the two airlines have signed agreements to acquire another 111 aircraft, of which 21 (7 Boeing 777s, 10 A-320s and 4 Boeing 737-800s) are to arrive this year.

Along with massive development work to build new airports and expand capacity by 60 passengers million per annum on the domestic sector and 30 million per annum on international sector, the ongoing revamp of Indian aviation will pose a significant long-term threat to the competitive positions of airports and airlines in Southeast Asia and the Middle East. Both have benefitted significantly in the last few decades by exploiting India’s infrastructure and regulatory impediments to their advantage.

Air India’s managing director Mr V. Thulasidas will take over as the Chairman and Managing Director and Indian Airlines’ MD Vishwapati Trivedi will be the Joint Managing Director of the merged company.

The Ministry was very careful to stress that the merger would “safeguard the employees with an assurance that all will be secured as a result of the merger. All current benefits and perquisites and career progression will be protected.”

Last June, a strike by Indian Airlines and its subsidiary Alliance Air did Rs. 350 million worth of damage in lost revenues, additional expenditure on hotel, food and conveyance charges for disrupted flights.

Already, the state-owned airlines are showing strong signs of taking on the competition from both international carriers as well as the privately-owned Indian airlines.

Earlier this month, Air India launched its first daily non-stop Mumbai – New York flight with its first Boeing 777 200 LR aircraft, the first to sport the new branding.

According to the Ministry, the merger will significantly enhance customer services, facilitate entry into a global airline alliance, and “unlock significant synergies on account of optimal utilisation of resources through improvement in load factors and yields on commonly serviced routes as well as deployment of ‘freed up’ aircraft capacity on alternate routes.”

Leveraging the assets, capabilities, infrastructure and skilled manpower is also expected to reflect on the balance sheet by providing “maximum flexibility to achieve financial and capital restructuring through revaluation of assets; and provide an increased thrust and focus on airline support businesses.

“Overall, over Rs 8 billion worth of annual synergies are expected to be realised once the merger is completed.”

Similar to the merger between Thai Airways International and the former domestic airline Thai Airways Company in the 1980s, the Indian airlines merger will help establish seamless schedule connectivity between domestic and international flights from any domestic point in India.

An improved frequent flier programme is in the pipeline along with a dedicated holiday packages website with new offerings to various global destinations. This, along with better in-flight entertainment, better seats and enhanced in-flight service, will make the consumer “a clear winner,” the Ministry said.

The Ministry also expects the merger to “unlock significant value” from other revenue-generating divisions such as cargo, the low cost carrier, ground handling and maintenance, repair and overhaul. Each will be managed as a separate Strategic Business Unit (SBU) under the merged corporate umbrella.

The new cargo airline, Air India Cargo is converting some of its B-737 and A-310 passenger aircraft into freighters, with a plan for almost 10 aircraft over the next year. The first A-310 freighter has started operations to the Gulf and Europe while the B-737 freighter will be deployed in the North-East Region.

The low-cost airline, Air India Express, will fly on both domestic and international routes, deploying “a brand new fleet with in-flight entertainment, meal service and other services that distinguish it from traditional low cost carriers.”

The support MRO and Ground Handling units will also bring in new revenue streams from India’s fast-growing aviation sector.

In another significant development that will open up access for foreign airlines to India, the Ministry of Civil Aviation has cleared the way for smaller airlines with fewer than seven weekly flights to India to be exempted from the Mandated Commercial Agreement, with effect from 1 January 2008.

This is in line with a decision reached in December 2004 that all existing Government Mandated Commercial Agreements would be reviewed and phased out over five years and all new operations by foreign carriers, both on new destinations as well as on existing routes, would be free from the obligations of these agreements.

“This new system is expected to bring about a level playing field between the national carriers and the foreign carriers on the international operations,” and also help brind won fares, Aviation Minister Praful Patel told Parliament last week.

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