What Vistara and Jet Airways merger means for Indian aviation

The Tatas have begun due diligence of Jet Airways’ books in a bid to possibly purchase a majority stake in the airline. While contours of any such deal are not yet known with any certainty, it is being speculated that Vistara, the Tata-Singapore Airlines JV in which the Tatas own 51 percent stake, will likely be merged with Jet Airways. This may or may not happen and there are strong reasons for either scenario.

First, the positives of such a merger. Vistara and Jet Airways merger will create the biggest full service airline (FSC) in India, with Air India the only other remaining FSC and not in a very sound financial state at that. The merged entity would be able to command the FSC traffic, which has been growing at about 10 percent (slower than the growth in low-cost carriers (LCCs) at close to 20 percent). The combined entity gets close to 20 percent share of the domestic market, slots at premium airports including Mumbai and Delhi and this merger will provide Tatas the much needed heft in the aviation business.

Additionally, it brings in 14 percent international share of traffic that Jet already has to the table – remember, Vistara has had international ambitions for long but does not have the required fleet to fulfill these on any scale just now. (The amended overseas flying norms dictate that only the 21^st aircraft from an airline’s fleet can be deployed on international routes). Jet has been a strong international player and even in the September quarter, when its domestic business lost over 5 percent in revenue, its international business reported over 17 percent growth in topline. Almost 60 percent of Jet’s topline comes from the international business.

So, a merger of Jet with Vistara would be helpful not just for the Tatas’ persistent attempts to become a meaningful player in the Indian aviation market but also offer international wings to Vistara.  A source close to developments, however, said that the merger, if at all it were to happen, will be a decision for later.

“Right now, the energies of the Tatas are concentrated on evaluating Jet’s books and a merger is not on the horizon. This is why Singapore Airlines (the 49 percent partner in Vistara) has not yet made its comments known on the Tata-Jet deal,” this person said.

This source also said that while there are multiple synergies in the two brands, the biggest problem would be divergent fleet. While Vistara has an all-Airbus fleet, Jet is primarily Boeing. Jet has 97 Boeing aircraft, 18 ATRs and 4 Airbus aircraft in its 119 aircraft fleet while Vistara has a fleet of 22 Airbus aircraft. This is a recipe for disaster since any financial benefits of a merger of operations could be wiped out by the costs involved in operating and maintenance of divergent fleets. The number of spare engines to be maintained, for example, is critical to self-sufficiency needed in one aircraft and in the case of divergent fleet, this number obviously goes up. Some global airlines do operate twin fleets but then, planes from one manufacturer are predominantly large in their combined fleet.

Moreover, mergers within the Indian aviation industry have not always seen happy endings. Who can forget the misery of the merger of the erstwhile Air India and Indian Airlines in 2007 to create the current entity? The merger was done to synergise operations but ended up being a drag on the exchequer – the merged entity has never made a net profit in its 11 years of existence, it has needed thousands of crores of taxpayer money to stay afloat and has become an insignificant player in the very market where it once ruled the skies. This merger has yet to fully integrate the cultures and work ethics of the two erstwhile organisations (apart from many other assimilation) and this cultural mismatch has played a significant role in Air India ceding its premium position in the domestic market.

The other two major mergers – Jet acquired erstwhile Sahara Airlines and the defunct Kingfisher Airlines (KFA) then acquired Air Deccan – have also lead to disastrous consequences. Many believe the financial woes of Jet are due to the merger of Sahara and it is common knowledge that the disastrous acquisition of Deccan eventually lead to the demise of KFA. In the latter instance, the merger envisaged a combination of FSC (KFA), LCC (Sahara) and international (Jet) operations into one entity - an unwise move by any calculation. Besides, proper due diligence was not conducted before the acquisition, as journalist K Giriprakash says in his book “The Vijay Mallya Story”.

Vijay Mallya bought Air Deccan with his eyes closed. His team never went through the books of the loss making Air Deccan before Mallya agreed to buy it for a total consideration of Rs 1000 crore in 2007. At least that is what the book, called "The Vijay Mallya story" suggests. "Gopinath (Deccan promoter) told a reporter later that what impressed him about Mallya was how badly he wanted the airline and how swiftly he had moved to bag the deal. When some reporter asked him whether that meant the deal had been made without any due diligence or checking the balance sheet, Captain Gopinath replied that it was true that during the negotiations, neither Mallya nor his officials ever asked to examine the books. They took Captain Gopinath's assurances at face value because they were eager to go through with the deal,” the book said. KFA could never sustain the acquisition and the airline was grounded in 2012.

Jet itself is no stranger to failed mergers – its acquisition of Sahara lead to the creation of wholly owned subsidiary JetLite. This subsidiary has always dragged down the parent and Jet tried all tricks in the book –from launching another brand Konnect and merging it with JetLite, trying to compete with this offering in the LCC space – but nothing has worked. JetIite continues to see negative net worth.

Acquisition of Jet Airways despite the financial hole this airline is in, with multiple ongoing probes by investigative agencies, dues piled up with vendors and supplies, unpaid salaries and over Rs 8000 crore debt is itself a tall order for the Tatas. Subsequent merger with Vistara may only add to the problems with this ambitious deal.