Cuckoo Paul is Senior Associate editor at Forbes India. She spends most of her time looking for interesting business stories. She is biased towards tales of dirty, old-style, brick-and-mortar companies in the oil & gas, power and heavy engineering companies. She also looks continuously, if somewhat skeptically, over the horizon to examine clean technologies which threaten to change the old order. Apart from refining margins, her other obsession is with things airborne. She learnt flying on a Piper Super Cub and follows commercial and general aviation keenly. She is also on the board of Childfund India, an NGO that supports about 70,000 children in the country.
The accounts of Kingfisher and Air-India have occupied prime real estate on newspaper front pages for much of the past two-three years. Every nuance of their journey down the tube is being captured up close. Though not many see it, the two are joined at the hip in many ways. Brand new planes combined with massive debt, cancelled flights, delayed salaries and frustrated lenders. All kinds of cookie-cutter solutions have been tried to revive them. Yet both remain on the flight path to perdition. It is time now to think out of the box.
A solution that would end their problems has actually been staring at us all along. The answer, luckily enough for us, also comes from the airline industry. It is consolidation. Dozens of airlines have found out, after similar exploration in the past ten years, that Scale is the solution. Carriers all over the world are proof of this. Take a look at the largest-- Air France-KLM, Delta- Northwest and more recently United and Continental. There are scores more. You’ve tried everything and it hasn’t worked. Now try this. Merge Air India with Kingfisher Airlines.
Like the pros, let's first ask a few tough questions.
What synergies does the deal bring? Well firstly and most importantly- Size. At 190 planes and a route network that spans the world, this will be the mother of all airline companies in India. Outsizing Jet Airways and Johnny-come-lately IndiGo, not just now but for years to come. Imagine the pricing power. Everything from champagne to cucumber sandwiches can be sourced much cheaper. With a market of over 40%, this juggernaut will be impossible to ignore. Airfisher will set the rules (and fares) that everyone else will have to follow. Vendors of aircraft, engines, spares and aviation fuel will queue up—and it won’t be for their unpaid bills. The new management will be able to squeeze out efficiencies, easily cutting operating costs by at least half. And bringing down CASK (cost per available seat km), as every airline knows, is the key.
What do the two have in common?
Oh, everything. For starters- they are both loss-making. In fact, humongously so. Kingfisher Airlines has managed to accumulate losses of Rs 6,000 crore, while the flag carrier is at Rs 13,500 crore.
As it happens, both also compete neck-on-neck for the lender’s rupee (and dollar/euro)- with AI’s debt at Rs 18,000 cr, and IT (the IATA code for Kingfisher) at Rs 7,000 cr. Binding them together are SBI and ICICI, the lead bankers to both carriers. Common negotiations on loan restructuring and haircuts will make things much easier for the airlines as well as the bankers.
On another plane, they also happen to fly a lot of common equipment. More than half of AI’s fleet is Airbus made-- A319, 320 and 321s-- the same is true of IT. Common fleet, pilots, crew and spares. Think of how much cost that will remove. The hallmark of a great airline merger, as we all know from the Kingfisher- Deccan example that played out not so long ago, is fleet type and route commonality. Both airlines flew Airbus planes to more or less the same routes. This merger will only take it higher.
Will it cut losses?
Of course. Talk about sweating the assets—LCCs will surely learn a lesson from this. Everyone knows about Air India’s 30,000 employees who have little to do but take Rashtra Bhasha exams. They will suddenly have work on their hands. The aircraft to employee ratio will swing back to normal. Engineers will have 68 more planes on their hands and so will the pilots. Losses will come down over time, as efficiency improves. There will be a lot more flying, higher revenues and certainly many more good times.