Aviation industry poised for Merger and Acquisition
April, 28th 2009
The Indian aviation industry is poised for another round of consolidation as early as the first half of the current fiscal, with low-cost carriers like IndiGo and SpiceJet requiring significant capital and funds inflow, the Centre for Asia Pacific Aviation (CAPA) has said.
"The next round of consolidation may be strategic in nature. For example, SpiceJet has indicated that it would be interested in participating in such a development," the CAPA said in its report titled "Indian Airlines Prepare for Consolidation Round Two".
Stating that the market and investors will support sensible consolidation which is designed to restore profitability rather than pursuing scale, it said, "CAPA expects that activity will be seen on this front in H1 (first half) 2009-10".
Though the report is silent on the specifics of the mergers and acquisitions expected, it says: "Low-cost carriers (LCCs) such as IndiGo and SpiceJet also 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."
SpiceJet and Indigo officials were not available for comments on the CAPA report.
The CAPA report further said consolidation was most likely to happen in the LCC segment, "especially as the full service carriers do not have the balance sheets to engage in further acquisitions".
The paper notes that the earlier round of consolidation in 2007 with the Kingfisher-Air Deccan merger, Air India and Indian Airlines merger and Jet-Sahara acquisition took place against the background of an industry that was beginning to exhibit the first signs of distress.
The bullish fleet orders placed by Indian carriers in that period saw capacity being introduced at the rate of 6 to 6.5 aircraft a month, whereas the actual growth in demand was closer to equivalent of three aircraft.
Also, the rapid increase in capacity was taking place at a time when the airport modernisation programme was yet to deliver upgraded infrastructure which meant that airports and airways were highly congested, increasing airline operating costs, it added.
The report further said in a period of boom, demand for skilled personnel such as pilots and engineers also outstripped supply leading to a sharp escalation in wages, and in some cases grounding of aircraft due a shortage of staff.
As for the next phase of consolidation, the process would be more strategic in nature. Foreign airlines appear unlikely to be able to participate in any consolidation process in the short-term though, as they barred from holding any equity in Indian carriers.