Analysing Jet Airways Sahara airlines merger

The first takeover attempt was made by Jet Airways on 19 January 2006, when Jet offered US$500 million in cash for acquiring Air Sahara. The news was received with mixed emotions amongst the investors in the market and analysts even suggested that Jet had overvalued Sahara. In spite of getting a go ahead from the Indian Civil Aviation Ministry, the deal fell apart due to disagreement on the price. Lawsuits were filed by both the companies seeking damages from each other.

The second attempt was made on 12th April, 2007 and this time Jet Airways managed to buy Air Sahara for Rs. 1450 Crores. This merger marked the beginning of consolidation in the Indian Aviation sector.

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Motive of the Acquisition

The merger of Jet and Sahara gave Jet Airways access to the entire leased fleet of 27 aircrafts of Air Sahara along with its infrastructure and logistics. It also gave Jet Airways presence in those areas in India where they were not there but Air Sahara was. Air Sahara proved to be complementary to Jet even in the international arena. While Jet was operating on long haul routes such as US and Europe, Air sahara operated to neighboring countries such as Sri Lanka, Nepal and Thailand. Jet had about 62 aircrafts and operated 320 flights to 44 domestic destinations and 6 foreign destinations at the time of the deal.

One major gain for Jet in the deal was that it could gain access to Sahara’s parking slots in London’s Heathrow airport as well as in Delhi and Mumbai. Another factor was that there was a huge shortage of airline pilots. Hence, it could utilize Air Sahara’s pilots. The maintenance facilities of the smaller carrier would also be available within the country.

Since Air Sahara had leased all of its 27 aircrafts, Jet would not own them and hence there was not much gain in terms of tangible assets especially since Air Sahara was not transferring its real estate and helicopters. However when the deal was announced in January 2006, the plan was to take over all of Air Sahara’s assets for $545 million.

Jet Airways was also looking at capturing more market share post the deal. It used to have a 40 percent market share which fell down to 27 percent at the time of the deal. The major reason was Jet’s intention of becoming the king of Indian skies by becoming the number 1 private airlines in the industry.

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Summarizing the reasons of merger

Buyout to make merged entity largest domestic private carrier with market share of 42% and fleet of 88 aircraft, 27 operated by Air Sahara

Jet – Sahara was expected to turn into the only privately owned airlines which was permitted to fly international routes

The deal is commercially viable since Jet would get a lot of infrastructure and manpower – areas where India is facing a lot of pressure now

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Jet to gain access to Sahara’s parking slots in London, Delhi and Mumbai

Low costs through economies of scale would enhance the capability of Jet to compete with the low cost carriers in terms of price

Air Sahara was proving to be a very good buy as its financial status was better than most of its competitors. The debt equity breakup of Air Sahara was about Rs. 500 Crore funded by promoters which comprised of Rs. 236 Crore of equity, Rs. 50 Crore in preferential shares and loans taken by the group amounting to Rs. 250 Crore. The remaining promoters contributed around Rs. 40 to 50 Crore.

What went wrong?

The terms of transfer of the infrastructure of the airports was quite unclear in the policy related to M&A in the Indian civil aviation industry. Even though the guidelines were comprehendible in terms of parking bays and landing slots, they did not tell anything about the status of aircraft hangars, check-in counters, cargo warehouses, passenger lounges and other such airport facilities post the merger or acquisition.

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Since Jet was very keen on becoming the number one private player, they rushed into the deal and overvalued Sahara. Later on they wanted a discount on the deal of the order of 20-25 percent on the original bid. This exhibited that Jet was showing signs of overvaluing a company which did not have a robust business model.

The combined Jet Sahara entity would achieve economies of scale and would put Jet in a position of advantage from where it could better drive the market economies. But still, it would not have attained monopoly as it had initially thought. The growth in passenger traffic was predicted at 40 percent which ensured that there would still have been a gap in the available seat capacity.

Air India and Indian Airlines were due for a merger which together would account for one third of the domestic market. This was a big threat and direct competition to the merged Jet Sahara entity. According to the policy issued by the government in April 2006, only parking rights and slots for flying time were transferable in case of acquisition of an airline. As a result, Jet would not automatically get the maintenance facilities of Sahara and the commercial spaces at airports such as airport counters and lounges belonging to AAI or GMR and GVK group in Delhi and Mumbai airports and Jet would have to renegotiate for the same. Also, since these airport operators were planning huge capex, Jet might have to pay up more for the same facilities.

Value Chain Analysis

Firm Infrastructure

Procurement

Outbound Logistics

Financial Policy

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Flight Connections

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Human Resource Management

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Service

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Aircraft Acquisition

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Resources

Using the Grant Framework to classify resources of Jet Airways and Air Sahara based on the Resource Based View of the Firm:-

Jet Airways

Tangible Resources

Financial

Annual Turnover – Rs. 500 crore – £58m approx.

Physical

Fleet Overview:

Intangible Resources

Technology

Jet Airways’ Panasonic eFX IFE system on-board the Boeing 737-700/800 and Panasonic eX2 IFE system on-board the Airbus A330-200/Boeing 777-300ER, called “JetScreen”

World’s first airline to introduce in-flight entertainment systems on the Boeing 737

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Reputation

Founded – May 1974

Commenced operations – May 5, 1991

Ownership – Naresh Goyal founded Jetair Pvt. Ltd.

USP – Frequent travelers feel it is the most preferred carrier that offers the high comfort, courtesy and standards of in flight and ground service and reliability of operations.

Network – 49 destinations – 44 in India and 5 abroad.

International Network – Colombo, Kathmandu, Singapore, Kuala Lumpur and London (Heathrow).

Hubs – Mumbai, New Delhi.

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Consumer Traffic – 8.6 million passengers annually.

Frequent Flier Program – Jet Privilege (JP Blue, JP Silver, JP Gold & JP Platinum)

Human Resources

Staff Strength – 18562 employees

Air Sahara

Tangible Resources

Financial

Annual Turnover – Undisclosed.

Physical

Fleet Overview:

Intangible Resources

Reputation

Commenced Operations – December 3, 1993 (1st private sector airlines)

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Ownership – Part of the multi-crore Sahara India Pariwar.

USP – 1st airlines company in the private sector. High level of punctuality (limited amount of delays in flights).

Network – 28 destinations – 24 within India and 4 abroad.

International network – Flights to Chicago, Colombo, Kathmandu, London and Singapore (Hong Kong, Bangkok and Kuala Lumpur are the proposed destinations to which Air Sahara is seeking approval from authorities).

Hub – Delhi.

Consumer Traffic – 1.8 million passengers annually.

Frequent Flier Programme – Cosmos (Executive, Silver & Gold).

Human Resources

Staff Strength – 4200 employees approximately

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Post the merger, the two airlines continue to operate separately with Jet Airways remaining as the Full Service Airline FSA and Air Sahara rebranded as Jet Lite acting as the Low Cost Carrier LCC.

A few unique points with the Jet Airways strategy are:

The tie ups or the code share agreements that Jet Airways has is a strategic marvel. It has entered into long term agreements with airlines throughout the world such as Air Canada, Malaysia Airlines, American Airlines etc. Under this, for example if a passenger wants to fly from Surat to New York, he can buy single Jet Airways ticket. What essentially would happen at the backend would be that the passenger would fly a Jet flight from Surat (which is a spoke destination) to Mumbai (which is a hub destination). From here, he would be automatically transferred to an American Airlines flight which would take him to New York.

In addition to this, Jet Airways also has frequent flyer tie ups with airlines such as Air France, Delta Airlines and KLM. Under this, no matter what airlines the passenger travels, he can accumulate and redeem his frequent flyer miles with any of the above airline.

Major Environment Changes: A resource view

Owing to changes in the demography of the country and policy shifts of the Government, the Indian airlines industry is poised to witness dramatic changes. These changes are expected to have an effect on the resources that would be required for Jet Airways to succeed compete successfully in the market.

Capability of operating in tier II cities

The Indian market that is currently under-penetrated is expected to grow fast. This is also evident from the recent rise aircraft purchases from Airbus and Boeing. However, major airports like Mumbai, New Delhi and Bangalore are already congested with existing players, so much so that the Government is planning to hike landing and takeoff charges.

On the other hand, Government is coming up with policies promoting regional airlines. The Civil Aviation Ministry has identified regions where operating airlines would be exempted from navigation and airport charges and would have to pay only a concessional sales tax of 4%. Hence, these cities seem to be an attractive destination for Jet Airways. But entering these markets is difficult, from a commercial point of view since existing airports in these regions lack technology and infrastructure to service a significant number of flights and passengers. However, the situation is expected to improve since the Government has plans for developing 35 non-metro airports.

Jet Airways thus needs to develop capabilities that allow it to operate in these regions profitably. First and foremost, the airlines would need competitive pricing (competitive with railway ticket prices) to be able to capture the market. Secondly, it would need low-cost smaller aircrafts adequate for the capacity in tier II cities. Most importantly, Jet Airways needs to operate in key tier II cities which are linked to multiple tier I cities in order to maximize traffic. Besides, they need to operate in multiple tier II cities in order to optimize on scheduling via connecting flights.

Capability to operate globally

With shifts in Government policy, major Indian players are scheduled to fly overseas and carriers from other countries have been given access to major Indian cities. To operate globally, Jet Airways would need new capabilities such as a fleet that conforms to international standards, international crew and ground handling staff, tie ups with key foreign airline parties and a strong brand.

Capability to cope with increased competition

Jet Airways faces threats from new players expected to enter and from existing players, most of whom have undertaken fleet expansion and promotional initiatives such as frequent flyer programmes. In this industry, the key to profits is scale because of the high fixed costs involved. Hence, additional resources in terms of fleet, crew, ground handling staff, ground infrastructure are paramount. This is also the reason why the industry is moving towards consolidation. Jet Airways has to continuously explore opportunities to reduce costs. Considering the severe shortage of pilots in the country, adequate human resources need to be ensured. Training facilities might also be required.

Capability to cope with infrastructure constraints

Infrastructure is the main problem currently plaguing Indian carriers. This is poised to change with the Government encouraging foreign investments in airports and maintenance facilities. Even so, the process needs to be quickened for Jet Airways to gain some initial momentum, especially in tier II cities. For this purpose, the airlines need to have some amount of lobbying power with the Aviation Ministry.

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Plans to leverage resources

Jet would have the opportunity to convert Sahara into a low cost carrier, while maintaining its focus on business travellers. This would ensure market share and profitability for the combined entity.

The combined entity would become the only private airlines with permission to fly overseas. Jet could enter the Gulf, UK, and West Asia regions for without significant investment in logistics and infrastructure. This would bring about better loads and better margins.

Jet could access Sahara’s parking lots London’s Heathrow airports, apart from the Delhi and Mumbai airports, for building international presence.

Air Sahara’s existing network could serve as feeder airlines for Jet routes. Jet could deliver the classic hub and spoke system for better positioning. Jet could access Sahara’s maintenance facilities in India.

There were plans to consolidate infrastructure and manpower resources, which are areas where the industry in general is weak.

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Synergies

Fleets could be rationalized to capture the market better. Routes could be rationalized and capacity redeployed in other routes.

Low costs through economies of scale were expected to augment Jet’s ability to compete on price.

Opportunity to integrate functions such as fleet planning, fleet acquisition, purchasing and finance.

Allocation of parking bays could be consolidated.

The new entity could combine and control the arrival and departure slots during peak traffic hours in the 4 metros.

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Integration Issues:

The acquisition of Air Sahara gave Jet Airways a dominating presence in the Indian aviation sector but the takeover brought its own set of problems as well. The problems arose because Issues such as due diligence, legal and regulatory matters, compensation, personnel related issues, leadership, integration strategies etc that needed attention were left out. Due to the negligence some of the problems that Jet Airways faced after the merger were:

Achieving fleet efficiencies:

Although both Jet Airways and Air Sahara used the same types of aircrafts for their domestic operations but still achieving fleet efficiencies was not that easy as Air Sahara had a mixture of aircrafts a lot of which were older than 10 years and some them were leased at very high costs. The Sahara fleet also operated on engine types that were different from the engine types of Jet Airways. Operating different types of aircrafts using different types of engines increased maintenance and repair costs, inventory management costs and pilot training costs. Moreover all the aircrafts that Jet acquired were not operational and hence the immediate priority for the new management was to ensure that the fleet was fully operational and running at maximum utility.

Employees

A lot of attention is given to study of financial feasibility etc of an acquisition but people related issues are left out and a lot of these deals end up being a failure because these issues were left out. The deal was completely rejected by Air Sahara employees as they feared for their jobs. Jet Airways had planned to hire only about 1000 of a total of 4500 of Sahara’s employees which caused a huge hue and cry. Sahara group of companies decided to absorb the rest which was did not satisfy most of the people as they wanted to work in the aviation sector only. The 1000 odd employees were seconded to Jet for a 90-day period. During this time, it was essential for Jet management to establish a new corporate structure and rationalise the workforce and map out an integration plan between the two carriers. But this never happened as Air Sahara pilots were drawing much less than their counterparts in Jet. For e.g. post merger, a senior commandant of Air Sahara was forced to draw a salary same as that of junior most first officer of Jet Airways. Due to the shortage of skilled staff in the Indian market during the period a lot of the competitors took the opportunity to poach pilots and engineers due to the secondary treatment they received at Jet Airways which made them feel less certain about their roles.

Culture

The work culture at Sahara was different from that of Jet. Getting the Sahara employees to work as a Jet Airways employee was another challenge. The management of Jet Airways had to create a new organization named JetLite, a low cost carrier. There was clear discrimination between Jet Airways employees and Air Sahara employees as most of the latter were transferred to Jet Lite when neither of the two was experienced in low cost carriers. Moreover the philosophy of Jet Lite would be different from Jet Airways and a lot of investment was required both in terms of time and in terms of money. This was adequately done but no visible effort was made to involve the employees of Air Sahara in the process and thus getting the already demoralized employees to work with a Jet mindset was another challenge. Ideally efforts should have been made to introduce acceptable parts of Air Sahara’s culture into JetLite so that these employees would have not faced a completely alienated environment and got disillusioned further.

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What is evident from the treatment given to Sahara employees was that Jet Airways was more interested in attaining operational synergies, reducing costs and increasing its resources such as Air Sahara’s fleet of aircrafts and parking spaces at airports and they had no interest whatsoever in the employee of Air Sahara which is a recipe for disaster.

Administrative differences

There were operational differences in terms of internal processes & procedures, pay structures, working conditions etc and not much effort was made to overcome these differences and thus it became very difficult for the employees of Air Sahara to adjust to a completely new environment.

Absence of strategic planning

The policies related to M&A in the industry were not very clear as terms of transfer for airport infrastructure such as hangars, check in counters, cargo warehouses, passenger lounges etc. was not specified. The only transferrable items were parking rights and flying time slots.

Jet Airways overvalued Air Sahara when the deal was made in January 2006 as the stock market were doing well at that time and investors interest in airlines was very high. People suggested that Jet Airways had overvalued Air Sahara and committed a strategic miscalculation by agreeing for a high price. Jet offered a discount of 20 to 25% on the original price in the month of March which Air Sahara rejected. Jet Airways pulled out of the deal saying that they did not receive regulatory approvals to close the deal but the real reason was that Jet Airways had realized that it had to spend over Rs 250 crore to just get Air Sahara functioning in full capacity and also it was incurring an expenditure of nearly Rs 40 crore a month after it took control of Air Sahara’s operations. This sent calculations out of the window and when Jet performed due diligence the value of Sahara was reduced from 2300 cr to 1750 cr and it. The deadlock reached such heights that it was felt that the deal could not be repaired.

Capital

Jet Airways needed to raise capital to meet the capital expenditure and working capital requirements of the company soon. The projected fund needed to turn around JetLite was around $150-200 million which was difficult to raise as interest in domestic airline market had dropped down.

Network

There was a need to develop a new network strategy so as to optimize the operations as Jet Airways and Air Sahara were operating in the same routes with some of them operating even at similar times. The combined network was to be structured in a way so as to ensure that they complemented each other rather than eat into each other’s business.

Story after the merger

Jet finally overtook Air Sahara for Rs 14.5 billion after a long legal battle. The airline industry by that time has become extremely competitive and in a bid to capture market share all of them rapidly expanded their fleet. But this growth took place at the cost of profitability as the costs incurred by the airlines were on the rise and they were unable to hike their fares. This resulted in all airlines slid deep into red with the combined losses of industry being Rs 48 billion. The capital structure of the airlines went for a toss and most of the carriers also faced strong liquidity crunch and had to raise further debt to infuse capital. The operating margins in 2007-08 were at a negative 15 percent as the airlines did not pass cost on to the customers because of intense competition. The economic downturn of 2008-09 worsened the situation as the operating profits reduced further. Jet Airlines began to make profit only in early 2009 which was way off the mark from the target they had set when they had bought Air Sahara. So the market conditions after the merger were such that the full potential of this deal could not have been realized. Although jet has been losing market share regularly but JetLite in recent years has begun to increase its market share. Overall Jet Airways is the single largest airline operator in India and finally things have started looking good for the company.

Analyzing the acquisition

The following framework represents an analysis of the acquisition-based dynamic capabilities of Jet Airways, and identifies where the firm succeeded and where it failed.

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