Air India Indian Airlines Merge

n May 2007, India's Ministry of Civil Aviation announced that Air India Limited (AI), India's national flag carrier and Indian Airlines Limited (IA), the government owned domestic airline, would merge with effect from July 15, 2007.1 The new airline formed by the merger was to be called 'Air India,' and would operate in both the domestic and international sectors. The proposal to merge AI and IA had been first mooted in the 1990s.2 In February 1999, a Parliamentary Standing Committee on Transport and Tourism had recommended the merger of AI and IA in its report on the 'Functioning of Air India'.3 However, the process had formally been initiated only in September 2006, when the Indian government assigned the duty of preparing the roadmap for the merger to Accenture Inc., a management consulting, technology services and outsourcing company.4 After being endorsed at various levels of the administrative hierarchy, the plan for the merger was finally approved by the Union Cabinet in March 2007.5 A new company called the National Aviation Company of India Ltd. (NACIL) was incorporated on March 30, 2007 under Sections 391 and 394 of the Indian Companies Act, 1956 to facilitate the merger.6 Under the terms of the merger, all the undertakings, properties, and liabilities of AI and IA were to be transferred to NACIL.7 The AI-IA merger was expected to create one of the biggest airlines in the world in terms of the fleet size. As of May 2007, the two airlines had a combined fleet of 122 aircraft and 34,000 employees including 1,315 pilots.8 The combined fleet size placed the merged entity among the top 10 airlines in Asia, and the top 30 in the world. It would also be India's first airline with more than 100 aircraft.9 The motives for the merger were widely discussed in the media. India was the fastest growing aviation market in the world, ahead of China, Indonesia and Thailand, as of early 2007.10 The number of people traveling by air had been increasing rapidly in the country.11 The main reason for this was thought to be the advent of low cost airlines like Air Deccan and SpiceJet in the country in 2003-2004, which brought air travel within reach of India's large middle class. The entry of a number of new airlines had intensified the competition in the aviation sector by 2004. According to information posted on IA's website, the increasingly intense competition faced by AI and IA from private and global airline companies, was the main reason for the merger of the two airlines.12 In addition to helping AI and IA tackle competition, the merger was expected to result in considerable synergies by integrating routes and streamlining overlapping facilities and infrastructure. Accenture had identified significant potential synergies between the two airlines in the areas of sales and distribution network, fuel procurement, material procurement, passenger amenities, ground handling and parking facilities. According to a report submitted by Accenture in late 2006, the merger could result in a 3-4% reduction in costs, and lead to a revenue increase of around Rs 6 billion initially.13 However, the proposed merger was not without its share of critics. Initially there

was opposition from the employees of the two airlines as they feared that the merger would result in job cuts. The Aviation Minister, Praful Patel, had allayed their fears and assured the employees unions of the two airlines that employment conditions, wages, seniority and career progression, would largely remain unchanged. He also said that a grievance redressal mechanism would be set up to protect employee interests.14 The government also indicated that there would be no layoffs. Despite this, analysts warned that the merger might pose a serious challenge in terms of integrating the employees of the two airlines, especially as they had followed completely different operational methods, before the merger. The two airlines also had different fleet compositions, which might create complications in inventory management, maintenance and repair establishments, and pilot training. Analysts also felt that the merger should be followed by a thorough overhaul of the operations of the airline. Kapil Kaul, Chief Executive (South Asia) of the Centre for Asia Pacific Aviation, an airline industry consultancy, had suggested "a partial sale of equity through an initial public offer to begin with to help induce professionalism and market dynamics, followed by privatization over the next five years or so."15 The Indian aviation industry was headed towards consolidation in 2006-2007. Jet Airways had already acquired Air Sahara in April 2007. This had been followed by Kingfisher Airlines acquiring a 26 % stake in Air Deccan in June 2007. The merger of AI and IA following these was expected to bring about more changes in the dynamics of the industry.

Additional Readings and References 1. www.indian-airlines.nic.in 2. www.sebi.gov.in 3. Ashwini Phadnis, "Air India, Indian Merger May Add Rs 1,200 Cr To Kitty,"October 27, 2006 4. "Indian-Air India Merger-Aviation Minister Meets Staff,"www.dancewithshadows.com, January 19, 2007 5. "GoM Clears Merger of Air-India, Indian; Formal Clearance By March,"www.domain-b.com, February 21, 2007 6. "Merged Air India-Indian Revenue Projected At Rs15,000 Crore By 2010,"www.domain-b.com, February 22, 2007 7. "Govt Eyes Twin Legal Tracks For Air India, Indian Merger,"The Economic Times, February 26, 2007 8. Manika Gupta, "Cabinet Gives Green Signal To AI-IA Merger."The Economic Times, March 01, 2007

9. "Air-India And Indian To Merge, To Enhance Profitability By Over US$133m."www.m-travel.com, March 02, 2007 10. "New Company To Be Formed With Air India, Indian Merger,"www.domainb.com, March 12, 2007 11. "Formalities For Merging IA And AI To Be Completed By July 2007,"www.pib.nic.in, May 03, 2007 12. "Patel: Merged Entity To Be Called Air India, Will Be Operational By July 15,"www.domain-b.com, May 11, 2007 13. "Merger Process At AI, IA Moving Apace,"www.domain-b.com, May 16, 2007 14. "State Carriers To Merge As Air India, Will Operate As The National Airline Company Ltd: Praful Patel,"www.domain-b.com, May 22, 2007 15. "First 'Air India' Flight On August 1", Business Standard, May 23, 2007 16. "New Merged `Air India' Will Tap Market In 2008,"Business Line, May 23, 2007 17. "Thulasidas Is Cmd of Air India, Trivedi Named Joint Md,"www.domain-b.com, May 29, 2007

1]"Indian Airlines To Merge Operations from July 15,"Financial Express, May 11. 2007 2] R. Krishnan, "A Long Haul Solution,"Business Line, April 12, 2006 3] www.rajyasabha.nic.in 4] "Accenture to Assist Air India, Indian Airlines Merger,"www.efytimes.com, September 27, 2006 5] Vinay Kumar, "Cabinet Nod for Air India, Indian Merger,"The Hindu, March 2, 2007 6] Sections 391 to 394 of the Companies Act, 1956 deal with mergers and amalgamations through schemes of arrangement approved by the High Courts. A resolution to approve the scheme of arrangement has to be passed by the shareholders in the general meetings. The shareholders have to vote on the resolutions on the schemes of arrangement on the basis of the disclosures in the notice/explanatory statement. Section 393 of the Companies Act, 1956 specifies the broad parameters of the disclosures which should be given to the shareholders / creditors, for approving a scheme of arrangement. 7] "Formalities for Merging IA And AI to be Completed by July 2007,"www.pib.nic.in,

May 3, 2007 8] "Merged Air India-Indian Revenue Projected at Rs 15,000 Crore by 2010,"www.domain-b.com, February 22, 2007 9] "GoM Clears Merger of Air-India, Indian; Formal Clearance by March,"February 21, 2007 10] "Merged Air India-Indian Revenue Projected at Rs15,000 Crore By 2010,"www.domain-b.com, February 22, 2007 11] The airlines in domestic sector flew 25.5 million passengers in 2006 which was 27.9% more than in 2005. Similarly the number of international passengers was 22.4 million in 2006 which was 15.1% more than in 2005 (www.domain-b.com) 12] "Merged Air India-Indian Revenue Projected at Rs15,000 Crore by 2010,"www.domain-b.com, February 22, 2007 13] Ashwini Phadnis, "Air India, Indian Merger May Add Rs 1,200 Cr to Kitty,"Business Line October 27, 2006 14] Manika Gupta, "Cabinet Give Green Signal to AI-IA Merger,"The Economic Times, March 01, 2007 15] "Merged Air India-Indian Revenue Projected At Rs15,000 Crore by 2010,"www.domain-b.com, February 22, 2007