“Mergers, Acquisitions and Takeovers in
Indian Civil Aviation- A Critical Analysis”
2011 – 2012
Airline mergers and acquisition are on the rise across the globe. These mergers and acquisition are highly
strategic involving several considerations. Moreover airlines mergers and acquisitions bear serious
implication for travelers as well as airline employees. Important issues related to airline mergers and
acquisition is time, approvals, efficiency, competition, passenger benefits and strife.
Mergers and acquisitions ("M&A") are strategic decisions taken for maximization of a company's growth
by enhancing its production and marketing operations. They are being used in a wide array of fields in
order to gain strength, expand the customer base, cut competition or enter into a new market or product
Aviation sector is one of the least researched sectors in India as it has limited number of players.
However, as the sector is growing rapidly, it becomes essential to have knowledge about the sector and
the activities which are taking place in the sector. The dynamic growth and potential in the Indian aviation
sector can be gauged from the statement of the civil aviation minister of India.
“India’s civil aviation industry will attract investments worth more than US$150 billion in the
next 10 years.” The aviation market and scenario in India has seen major developments in the last 5 years.
Not merely has the market grown very rapidly, but the industry has seen, M&A, the entry of a number of
new carriers with aggressive pricing policies and significant additions of capacity leading to cut-throat
A merger is a combination of two or more businesses into one business. Laws in India use the
term 'amalgamation' for merger. Under section 2(1B) of the Income Tax Act, 1961 amalgamation
is defined as mixing up or uniting together. It is a process where one company blends with
another company (both being existing companies and carrying on business). Provided that
following conditions are met with:
1. All properties are transferred to the amalgamated company.
2. All liabilities are transferred to the amalgamated company.
3. Shareholders holding at least 3/4th in the value of shares of the amalgamating company
Become shareholders of the amalgamated company.
A Horizontal Mergers occurs when one firm combines with the other in the same line of
business. This kind of merger takes place between entities engaged in competing businesses
which are at the same stage of the industrial process.
Vertical mergers refer to the combination of two entities at different stages of the
industrial or production process. For example, the merger of a company engaged in the
construction business with a company engaged in production of brick or steel would lead to
A conglomerate merger occurs when unrelated enterprises combine. The principal reason
for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and
increase in the value of outstanding shares by increased leverage and earnings per share, and by
lowering the average cost of capital.
An acquisition or takeover is the purchase by one company of controlling interest in the
share capital, or all or substantially all of the assets and/or liabilities, of another company. A
takeover may be friendly or hostile.
Regulations governing M&A in India may be divided in to the following categories:
1. National M&A transactions
a) Companies Act, 1956.
b) Companies Court Rules, 1959.
c) Income Tax Act, 1961.
d) Central Sale Tax Act, 1956.
e) Indian Stamp Act, 1899
f) Competition Act, 2002 (It has been enacted but is not yet fully enforced)
2. M&A transactions involving listed companies
a) The Securities and Exchange Board of India (SEBI) Regulations
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
b) Listing Agreements
3. International M&A Transactions
a) Foreign Exchange Management Act, 1999
The Takeover code also restricts consolidation of holdings and indirect acquisition of
control over the target company without making a public announcement. Take over code applies
only to listed companies
The Competition Act contains provisions for regulation of acquisitions, takeover mergers
etc. of enterprises. Section 5 of the Competition Act, 2002 has laid down some benchmarks
standards on whose satisfaction, the Commission will invoke an enquiry into the proposed
Mergers seeking to check whether it has any anti-competitive effects or not. No person or
enterprise shall enter into a combination which causes or is likely to cause an appreciable
adverse effect on competition within the relevant market in India and such a combination shall
3. History of aviation and mergers
From 1978, the beginning of the period now know as “deregulation”, up until mid to late 2011,
when the airlines experienced a resurgence in profitability, legacy airlines have lost at least
staggering 29 billion dollar, and have had to take drastic measures. It has long been speculated
that airline industry, which at one point in the 1985 included more than 20 individual carriers,
would consolidate down to five. And though it’s been said before, the flurry of activity just in
2010 shows that airlines could entered in that direction at some point in the future. Deregulation
of 1970’s saw the rise of low cost airline. It was pricing that created the biggest problem for
legacy airline during this time. As a result the number of airlines quickly began to shrink due to
mergers and acquisition.
The industry leveled out for a number of years leading up to the early 2000s was trending
upward. But in 2001 it took quite hit for obvious reasons when the airline was topped out at 172
billion dollar in 2006-07. Example taken, the US Airlines and America West Airlines mergers a
few years back , the now-singular airline is still operating with two different networks. For the
airlines themselves there are considerable drawbacks:
Time spent configuring to complex operational issues
Devising a new approach for the completion
Strife among workers
Responsibility to honor increased mileage rewards to travelers.
The late 2000s in particular has been quite an interesting one for the airline industry. Profits have
been down considerably during the recession and looming gas-price increases never spell out
good news for carriers.
The history of civil aviation of India may be traced back to the year 1933, when Tata
Airlines was formed by Mr. JRD Tata. At the time of Independence nine airlines were
operational in the Indian Territory. The number was then reduced to eight when Orient Airways
shifted its base to Pakistan. The then operational airlines were the Tata Airlines, Indian National
Airways, Air service of India, Deccan Airways, Ambica Airways, Bharat Airways and Ministry
Airways. The era of private airlines came to an end on 28th May 1953 - with the enactment of
the Air Corporations Act, 1953 - Government of India nationalized the airline industry. In
accordance with this Act, two air corporations, viz. Indian Airlines Corporation and Air India
International, were established and the assets of all the then existing nine air companies were
transferred to the two new Corporations. The operation of scheduled air transport services was
made a monopoly of these two Corporations and the Act prohibited any other person or their
associates from operating any scheduled air transport services from/to/ or across India.
In the year 1990, open-sky policy was adopted by the government and it allowed air taxi-
operators to decide their own flight schedules, cargo and passenger fares.
On March 1, 1994 the Air Corporation Act, 1953 was repealed thereby ending the
monopoly of the Corporations on scheduled air transport services. While the domestic air
transport services were liberalized and private operators were permitted to provide scheduled air
transport services, the Government had laid down a policy framework to ensure safety and
security of operations as well as the orderly growth of air transport services keeping in view the
infrastructure constraints at a number of airports.
Aviation Industry in India is one of the fastest growing aviation industries in the world.
With the liberalization of the Indian aviation sector, aviation industry in India has undergone a
rapid transformation. From being primarily a government-owned industry, the Indian aviation
industry is now dominated by privately owned full service airlines and low cost carrier. At
present, private airlines account for around 75% portion of the domestic aviation market. The
open sky policy of the government has helped a lot of overseas players entering the aviation
market in India. Earlier air travel was a privilege only a few could afford, but today air travel has
become much cheaper and can be afforded by a large number of people.
The 9th largest aviation market in the world is India with a compound annual growth rate
(CAGR) of 18 per cent. However, the Indian Aviation Industry is still in a very nascent stage.
India’s air passenger per capita at 0.09 is still abysmally low as compared to 0.30 in China, 5.63
in Australia and 4.69 in US.
Competition issues related to Indian aviation sector
Competition Act 2002 prohibits association or enterprises to enter into an agreement in respect of
production, supply, distribution, storage, acquisition, or control of goods or provision of services,
which causes or is likely to cause an appreciable adverse effect on competition within India. The
central theme of the competition act 2002 is to prohibit:
1. Anti-competitive agreements
2. Abuse of dominance
3. Regulation of M&A
Now, we shall be analyzing the competition related issues that need to address. Some need to
be addressed by the ministry where as some must be evaluated by the competition
authorities. The Indian Aviation sector in a nutshell is with following issues:
1. Regulatory Barriers
2. Scarcity of slots
4. Regulation of M&A
One of the most important considerations in front of the commissions
across the world when evaluating cases from competition angle is to consider the possibility of
new entry. The competition Authorities may not interfere in a case even if an existing incumbent
is making super normal profits by abusing his dominant position.
Scarcity of slots
Going by simple rule of demand for one good is rising then supply
correspondingly is increased to match the demand. However this is not possible for the
aviation sector as capacity cannot be augmented in response to demand.
Airports have a fixed capacity and in terms of their ability to handle traffic. In
absence of alternate airports, the major metropolitan airports are becoming congestion
and are constrained capacity and in terms of their ability to handle traffic. In absence of
alternate airports the major metropolitan are becoming congestion and in terms of
capacity. Now this may act as barrier to entry for new entrants as there is acute shortage
of slots 6 , ground handling and others. This might act as an entry barrier in the current
regime where slots allocation is based upon grand fathered rights.
A cartel is a group of formerly independent producers whose goals is to increase
their collective profits by means of price fixing, limiting supply, or other restrictive
practices. Cartels typically control selling prices, but some are organized to control the
prizes of purchased inputs. Any agreements entered into between enterprises or
associations of persons or between any person & enterprises or practice including cartels ,
engaged in identical or similar trade or goods or provisions of services shall be presumed
to be anti-competitive if they-
a. Directly or indirectly determines purchase or sell prices
b. Limits or control production, supply, markets, technical development, Investment
or provision of services
c. Shares market or source of production or provision of services by way of allocation
of geographical area of market, or type of goods or services, or no. of customer in
the market or any other similar way
d. Directly or indirectly results in bid rigging or collusive bidding.
(bid rigging means any agreement, between enterprises or persons engaged in
identical or similar production of trading of goods or provision of service. Collusive
bidding may be of different kind namely, agreements submit identical bids,
agreement as to who shall submit the lowest bid for submission of cover bids
As per section 5 of the competition act 2002 , all M&A are bond under CCI lens if
they meet bench marks :
1. The prescribed number turnover levels for M&A are : assets of merged entity if
is more than rupees 1000 cr. Or a turnover of more than rupee 3000 cr.
2. The limits are more than 4000 cr. Or 12000 cr. And US$ to billions and 6
millions in case the merged entity belongs to a group in India or outside
4.Aviation Sector – M & A
The airline industry has to operate in a competitive world. Many airlines are unable to
survive in their present set up and have to streamline their operations through cost cutting
measures. Merging with another airline provides a possible method to improve airline operations
and reduce costs by sharing the available resources and eliminating duplication of service.
Aviation is, by its very nature, a critical part of the infrastructure of the country and has
important ramifications for the development of tourism and trade, the opening up of inaccessible
areas of the country and for providing stimulus to business activity and economic growth.
The Indian civil aviation can be broadly classified into the following categories:-
Scheduled Air Transport Service means an air transport service undertaken between
the two or more places and operated according to a published time table or with flights so regular
or frequent that they constitute a recognizably systematic series, each flight being open to use by
members of the public.
Non-Scheduled Operation means an air transport service other than scheduled air
transport service and that may be on charter basis and/or non-scheduled basis. The operator is not
permitted to publish time schedule and issue tickets to passengers.
The Ministry of Civil Aviation is the nodal Ministry responsible for policy formulation,
development and regulation of the Civil Aviation sector in India. The Ministry also handles the
planning and implementation of schemes for the growth and expansion of civil air transport,
airport facilities, air traffic services.
DGCA is an attached office of Ministry of Civil Aviation. It is a principal regulatory body for
Civil Aviation in India and primarily deals with safety issues. It is responsible for:
The important laws relevant to civil aviation are:
a) The Aircraft Act, 1934 which controls the manufacture, possession, use, operation, sale,
import and export of air craft. Also relevant is the Aircraft Rules, 1937.
b) The Carriage by Air Act, 1972.
c) The Air Corporations (Transfer of Undertakings and Repeal) Act, 1994.
d) The Civil Aviation Policy.
e) The Civil Aviation Requirements.
Rising income levels and demographic profile:
Though India's GDP (per capita) is still very low as compared to the developed country
standards, India is shining, at least in metro cities and urban centers, where IT and BPO
industries have made the young generation prosperous. Demographically, India has the highest
percentage of people in age group of 20-50 among its 50 million strong middle class, with high
earning potential. All this contributes for the boost in domestic air travel, particularly from a low
base of 18 million passengers.
Untapped potential of India's tourism:
Tourist arrivals in India are expected to grow exponentially, especially due to the open
sky policy between India and the SAARC countries and the increase in bilateral entitlements
with European countries, and US.
Before going into the competition related issues pertaining to M&A of airlines, as the current policy
framework going M&A in India .
Regulations governing M&A
M&A are regulated by the provisions of the companies Act,1956.
Securities and Exchange Board of India Act 1992, and guidelines, rules and regulations framed
there under specifically the Security and Exchange Board of India.
Other legislation governing commercial transactions example Independent Regulator’s approval.
The Competition Act 2002 that has enacted but is not yet fully enforced, contains provisions for
governing competition issues relating to mergers and acquisition
The takeover code requires an acquirer of share would entitle him to more than 5% of the shares or
voting rights in the target company. To make disclosures to the target company and to the shares or
voting rights in the target company, to make disclosures to the target company and to the stock
exchanges where the shares of the target company are listed . The acquirer is also required to make a
public announcement in case he acquires shares or voting rights that would entitle him to 15% or
more of the voting rights in the target company. The takeover code also restricts consolidation of
holdings and indirect acquisition of control over the target company without making a public
announcement. Takeover code applies only to listed companies. Sections 391 to 396 of the companies
Act embody the law relating to mergers and reconstruction of companies. The companies Act also
provides restriction however apply only to a dominant undertaking the term being defining under the
Monopolies and Restrictive Trade Practice Act, 1969 to mean an understanding having a market share
of at least 25%.
4.1. Airlines – M & A
Indian airline Industry is beset with many problems, which consist of high price of ATF, scarcity
of skilled labour, quick fleet expansion, rise in labour costs and price competition among the
players. However, the major issue that poses a challenge for the airline industry in India is
infrastructure limitation which is required to be rapidly upgraded.
Airline M&A are on the rise across the globe. These M&A are highly strategic involving
several considerations. Airline M&A bear serious implications for travelers as well as airline
employees. The airlines industry is abuzz with news of M&A. In the last few years airline M&A
have been a growing trend in several countries across the globe. However, M&A in the aviation
industry are highly strategic in nature and are undertaken after taking into consideration several
Consistent with the global trends in aviation, aviation sector in India has and is likely to
witness more number of consolidations amongst airlines. The question regarding use of airport
infrastructure in case of merger / takeover of airlines and sale / transfer of aircraft etc. had drawn
attention of the Government for quite some time. In keeping with the spirit of consolidation the
Aircraft Acquisition Committee of the Ministry of Civil Aviation considered the issue of policy
on transfer of airport infrastructure in case of merger/take-over of airlines and sale/transfer of
aircraft in 2006. Some of the general principles forming the basis for consideration of this policy
· The Government would adopt a non-discriminatory approach towards the acquiring entity.
· No public inconvenience should be caused by disrupting flight schedules.
· Policy should not be arbitrary and should not hamper growth and consolidation of the airline
After examining the pros and cons of the various alternatives particularly with reference
to the position of the civil aviation sector in the Indian context, it was decided by the
Government through the policy:
1. The airline that takes over the aircraft (acquirer) pursuant to merger / takeover or sale / transfer
of the aircraft may be allowed the use of airport infrastructure like parking bays, landing slots
etc., which is allotted by Airport Operator without any payment. This was particularly necessary
as the transferred aircraft is in operation in the country already availing the airport infrastructure.
2. In terms of schedules / connectivity etc. it will be in public convenience if usage of such
infrastructure is allowed to the airline that take over the aircraft provided the user rights are
actually used by the airline. Only the user rights over such infrastructure that are given to an
airline on non-payment basis e.g. parking bays, landing slots etc. may be allowed to be used by
the airline that takes over the aircraft. For all other rights, the terms of lease / sale agreement
between the airport operator and the airline may apply.
3. The user rights belong to the Government / airport operator and therefore, cannot be
transferred by one airline to the other airline in any event. The Government / airport operator
shall allow the user rights to be availed by the airline that takes over the aircraft.
4. The user rights will be available with the airline that takes over the aircraft only in respect of
those rights, which are actually under use by the airline that transfers the aircraft. All other rights
will be taken over by the Government / airport operator. The user rights will be available with
the airline that takes over the aircraft only till such time that the infrastructure concerned is under
actual use. If the airline that takes over the aircraft does not use the concerned infrastructure, it
will lose the user rights over the infrastructure.
1. Air India – Indian Airlines Merger
The two state run carriers entered into a merger in April 2007, in a bid to consolidate and
optimise the use of assets of two public sector airlines and help the two airlines to synergize their
The key benefits to Indian Airlines and Air India on account of this merger were as under:
The merger had created a mega company with combined revenue of Rs. 15000 crores
The new entity had seen a number of changes in its operating model. It was much less
restricted by government control and is therefore much more agile and could churn better
returns than the two different entities.
2. Jet Airways– Air Sahara Merger
Centre for Asia Pacific Aviation is of the view that the acquisition of Air Sahara by Jet
Airways was maybe the carrier’s first major strategic error. Allowing Sahara to exit from the
market would have resulted in a market correction that would have been to the benefit of all
players. Jet incurred a high acquisition price and has been funding operating losses ever since.
The process of integration has been difficult and costly and continues to negatively impact Jet
Airways. It is reported that Jet Airways has yet to settle the full purchase price for the carrier,
reflecting the state of its financial situation.
Jet Airways’ bottom line has been further impacted by an aggressive international
expansion which stretched the carrier’s resources and damaged investor confidence.
The airline has since been forced to cut a number of existing routes and halt new services as it
consolidates its overseas network. To address the overcapacity in its long haul fleet, Jet Airways
has leased a number of wide body aircraft to Gulf Air and Oman Air.
Besides, operational synergies (engineering, inventory management and ground handling
services, maintenance and overhaul), the management and staff of both the airlines would be
integrated. They would be stronger lessors, aircraft manufacturers, and will also spend less on
training and employees. Costs would also reduce which is associated with maintenance of
aircraft. The savings in cost would be lower by about 4-5% (Rs 300 crores).
· The merger would create a more competitive business in scale and there would be scope to
emerge as market leader.
3. Kingfisher Airlines – Deccan Merger
The Kingfisher Airlines acquisition of Air Deccan is another case of
underestimating the challenges of merging two carriers. It is a venture that has
proved to be costly. Removing Air Deccan as an independent operator took out
the airline that was most responsible for the irrational fares in the market place
and, to this extent, it restored some pricing discipline which advantaged the entire
However, integrating such different carriers (one, a classic low cost airline and the
other a 5 star carrier), has proven to be extremely difficult. The huge combined
network and distinct in-flight products of the two carriers, has created duplication
and confusion about the brand. This has been damaging to Kingfisher, with
repercussions for its financial performance. The combined entity today has a large
network and diverse operations that are proving to be hard to manage.
Air Sahara, which should ideally have been left to fail and exit, continues to
create problems for Airways. The Air India merger has been a non-starter because
of a lack of leadership, while Kingfisher is still digesting Air Deccan.
For Jet Airways and Kingfisher, the key driver of their decisions to acquire Air Sahara
and Air Deccan, was to establish market leadership in order to be able to influence the direction
of the industry and achieve pricing power.
Other anticipated benefits included network expansion, access to scarce airport slots and
infrastructure, and costs savings through scale economies. At that time, the market was reporting
growth of 25% year-on-year and the acquisition strategy appealed to investors.
The carriers, with $29 billion in combined revenue last year, will have about 700 jets
in their main fleets and employ 87,000 workers. The new carrier expects as much as
$1.2 billion in annual savings and new revenue from the merger by 2013. It has about
$9 billion in unrestricted cash.
The merger blends award winning customer service with industry leading network
carrier. The merged company would fly the latest fuel efficient fleet (adjusted for
cabin mix) and will also have the finest order book amongst the leading network
carriers of the US. Customers will get to access the services of the number one
frequent flyer program in the industry.
· A performance oriented incentive program would be awarded to employees and there would be
focus upon goal sharing. Another thrust area would be the creation of cooperative labour
relations, which would include negotiating contracts with collective bargaining units that would
work both for the employees and the company. Both airlines have stated that frontline employees
would hardly be affected. Reductions would come in mainly from retirements, attritions, and
Indian aviation sector has its own competition issues that need to address. Some need to be
addressed by the ministry where as some must be evaluated by competition authorities. Indian
aviation sector is re-shaping itself for survival. The Indian Airlines-Air India merger, the
Kingfisher-Deccan merger and the acquisition of Air Sahara by Jet airways has set the ball
rolling for further M&A activities in this sector. LCCs such as Indigo and Spice Jet have
significant capital requirements and will need further flows of funding. The next round of
consolidation is therefore most likely to occur in the LCC sector, especially as the full service
carriers do not have the balance sheets to engage in further acquisitions. Foreign airlines appear
unlikely to be able to participate in any consolidation opportunities in the short term though, as
they are barred from holding in equity in Indian carriers.
1. Aviation Industry Regulation, Harry P.Wolfe, David A, New York.
2. Privatization in India – A Study of Different Modes of Infrastructure Provision.
3. NALSAR study material.