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Mallya, Goyal Make Peace, While Gopinath Sees Red

15 October, 2008

Indian aviation industry seems to be moving to a stage of coopetition rather than competition. Not withstanding the surging fixed costs and a decline in the air travel, country’s two biggest carriers, Kingfisher and Jet Airways, have formed an operational alliance to cut on costs. Meanwhile, former Deccan Aviation owner and vice-chairman of Kingfisher Airlines GR Gopinath is reportedly unhappy with the alliance and may buy back his company. Gopinath may even offer to buy Kingfisher itself at a meeting of the airline board today as he has the backing of some overseas investors. VC Circle could not independently verify this till the time of writing this report.

Also various government agencies have also started looking into the implications of this deal. The deal is being scrutinised by the director general of civil aviation and the Civil aviation ministry. Officals of the Monopolies and Restrictive Trade Practices Commission have also started looking in to the deal as Kingfisher and Jet combine will control 60% of the market. Competition Commission of India may also look into the deal.

Jet and Kingfisher Alliance

The worldwide economic downturn coupled with volatile crude oil prices has hit the aviation industry hard. Also with the declining rupee, the oil bill of these companies is expected to go up. Kingfisher Airlines reported loss of over Rs 1,000 crore and Jet Airways Rs 806 crore in 2007-8. The alliance between the Indian aviation majors is expected to save upto Rs 1,500 crore a year. Kingfisher and Jet plan to save on shared infrastructure and buy fuel from the vendors together, as volume will give them more power to negotiate. They are also expected to lay off employees, and Jet has already given pink slips to as many as 1,000 employees.

There is also a buzz of cartelisation as the two players are also expected to raise ticket prices. Like all cartelizations, this will not be in interest of passengers as it is expected to kill the competition in the industry.

Kingfisher and Jet Airways are also in talks with PE funds to raise money. While Jet plans to dilute a 10% stake, Kingfisher is planning to raise $400 million. Air India, which has losses of over Rs 2,500 crore, has asked the government for a Rs 2,000 crore bail-out.

Jet and Kingfisher now control about 60% of the Indian aviation industry. They have also invited Air India, the other big player in the industry, to join their alliance. If that happens, the alliance will control about 72% of the market.

The industry saw major consolidation last year when Kingfisher acquired Deccan Aviation and Jet acquired Sahara Airlines. The next wave of consolidation was expected in the low-cost carrier (LCC) segment. The latest move by aviation giants is likely to put pressure on the LCCs  such as GoAir, SpiceJet and IndiGo to reach some kind of an arrangement.

Gopinath to Buy Kingfisher?

Media reports suggest that Gopinath, at the board meeting of Kingfisher, is expected to buy back Deccan Aviation. He may also buy out Kingfisher and is being backed by investors who include aircraft leasing companies and private equity players. The buyout of Kingfisher seems to be a tough task as Vijay Mallya controls 65% stake in airlines and he is in no mood to sellout. The ET report quotes Mallya as saying, “I hold 65% stake in the airline. If there is a so-called bid, we will see it off when it is made”.

Gopinath is reportedly upset with Mallya for abandoning the low cost model post merger, which  led to lower passenger traffic and erosion in market share. Gopinath is also setting up his cargo venture and planning a chain of budget hotels with some partners. The report added that he has been approached by Middle East-based NRI businessman to spearhead his aviation venture.


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1 Comment
Rajeeb . 6 years ago

Its the taxes which are hurting and not the fares. So why the hue and cry, bring down takes by 30-50% and all would be fine in the aviation sector

Mallya, Goyal Make Peace, While Gopinath Sees Red

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