Why did Vijay Mallaya buy Air Deccan?

The reason why I am raising this issue is because I am unable to understand why Vijay Mallaya of KingfisherAirlines bought Air Deccan or why Jet Airlines bought Air Sahara. Here I will just focus on Kingfisher’s acquisition of Air Deccan. Was there a strategic fit? In fact, was there any fit? I am not sure if there was any fit at all.

Kingfisher is losing money. Air Deccan has been losing money since the time it started 3/4 years back. This is the 5th year. The 9-month loss on 31/3/2007 stood at Rs. 246.5 crores or Rs. 2465 million. And remember the economy is at its peak. In goodtimes, the airlines are losing money. What would happen if the economy takes a downturn.

There is already talk of PE funds shying away from investing in airlines and increase in fuel prices. It is reported that Kingfisher is looking for equity funding but PE funds are reluctant to pay the high valuations expected by the promoters. It is also reported that Kingfisher and Jet are finding it hard to achieve the synergies that they expected to achieve.

It is obvious that there is no fit between the target market of both the airlines. Kingfisher wants to serve the elite while Air Deccan wanted to serve the masses.

Kingfisher is a premium airline while Air Deccan was a low-cost airline.

From the above it is obvious that the culture of the two organization will be miles apart.

I also feel that while acquiring Air Deccan, Vijay Mallaya didn’t have a plan. This is obvious from the fact that he the conducted the research on what to do with the airline after he bought it. I am not sure if he is still very clear on this point.

So why did Kingfisher acquire Air Deccan? Did he buy it to acquire its assets? If that be the case, he should have merged the two airlines instead of keeping them separate?

Did he buy to take benefit of the back-end synergies? If yes, can he save Rs. 2000 million in combining its backend operations? I am not too sure.

Or did he buy so as to take advantage of Air Deccan’s eligibility to fly abroad? I think I read somewhere that Mallaya has postponed its decision to fly abroad.

Or did he buy Air Deccan to buy market share hoping that with fewer competitors prices will rise. In fact, he jokingly alluded to this fact.

Or was he basing his decision on the findings of PIMS database which suggests that higher the market share, more the profit. The PIMS database suggests that there is a tremendous difference in the level of profitability of the market leader and the follower(s). But is this applicable to companies who increase their market share inorganically. I remember when I was pursuing my MBA that Yamaha tried to buy market share with dire consequences. I believe its CEO had to resign and it suffered heavy losses. Also, how many airlines will Vijay Mallaya buy as there are more new airlines starting operations.

Airlines is a glamorous business and everybody wants to get into it. However, it is a risky business. When I was in the US in 1980s, airlines used to go belly up like nobody’s business. They used to be in and out of Chapter 11 (Bankruptcy). It is a high fixed cost business with high level of breakeven point. People have a hard time running one airline, Vijay Mallaya has decided to run two. Well, good luck to him.

On the other side, where was the need to buy Air Deccan. I think Kingfisher Airline was doing well. It had established a very sought after positioning of “on-time” airline with excellent service. If I was Vijaya Mallaya, I would have stayed focus on expanding Kingfisher rather than muddy the water with an acquisition which didn’t bring much to the table. But then, how many of us can be Vijay Mallaya? Not many.

So if any of you out there knows what Vijay Malaya is thinking, do let me know know. Also, do let us have your thoughts on the subject.

Avinash Narula

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Comments

Hey relax……
What you see, through the merger of KF-AD is just a money game .. This is just to get overseas permission to KF through AD. Once KF gets permission for overseas , there will be no more AD. Wait and see..
Its a smart game …

Captain

Reply

Captain Hi!

Sure its a money game but is being played in a manner not understood by me. If Mallaya wanted to just acquire rights to fly to US, he didn’t have to spend more money in a re-branding exercise. Also, I think I read somewhere that he has postponed his intention to fly US routes. Further, US route is competitive and I am not sure it is a wise decision to buy an Airline for that.

I think it was a mnoney game as Mallaya expected the valuations to rise and he could have offloaded part ofthe equity to raise funds. But PE funds are not willing to pay. It is because of this that Jet has postponed its IPO. By the way, all this has been in the press.

Thanks for your comment. Hope I will keep hearing from you.

Avinash Narula

Reply

Air Deccan will complete 5 years in August 2008, that is, nearly 4 quarters away. Its recent quarterly loss is nearly Rs. 230 crores. I shudder to think of how much one shoukld pay just to fly abroad.

I again repeat that this is happening when the economy is at the peak. With ATF prices on the rise, airline fares are also expected to go up. It was reported in the newspapers that the airlines are expected to impose a fuel surcharge of Rs. 150.

Wait there is more. on 31/10/2007, it was reported that Vijay Mallaya has said that he had appointed management consulting firm Accenture to study the possibility of integrating the operations of Kingfisher and Air Deccan. Now I am truly surprised. I think he has just spent decent money for a marketing overhaul of Deccan. Logo, positioning and Air Deccan’s marketing collateral have been changed. I would think that it may have been cost effective to first decide whether you want to merge the airlines or not.

As I have mentioned before, I think the merger of two airlines is inevitable. I think Accenture is just a vehicle to that end. I think this is the best solution.

Avinash Narula

Reply

I believe that following are reasons why he bought Air Deccan:
1. Use of So called ” LOW COST AIRLNESS” is very important in todays world, people are happy with fast service and cheap cost.
2. Air Deccan has large number of AFT air planes for which government is charging less in form of duties.
3. I am sure, Accenture will definatly help in bringing best synergy between two.
4. Use of airport space, for maintanance activity is also important aspect.
5. Get apportunity to fly internationally, specially in US-INDIA, London- Mumbai, DUBAI- Mumbai routes…

Reply

Hi!

Here is the latest on Kingfisher. As predicted in my earlier posts, Deccan will be merged with Kingfisher. Mallaya has gone about in a roundabout manner to do what he should have done in the first place and saved himself some money.

Anyway, lets consider what benefits he has achieved or can achieve. One of the major benefits that he thinks he has obtained from the merger is that he can now fly the profitable international sectors. But guess what? It was reported in Mint that practically every foreign airline currently operating in India is increasing a number of flights or adding new destinations. This means that competition will increase even on international sectors.

Vijay Mallaya also expected that he will be able to take advantage of some synergies? Maybe he has achieved some synergies but was it worth it considering the price paid and the losses suffered by Deccan after the buyout. Total accumulated losses stand at Rs. 2000 crores. By the way, Kingfisher also owes the maximum amount money to the Airport Authory, approx. Rs. 500 crores.

Lastly, Mallaya expected that the buyout will increase his market share and also reduce competition. Once he combines the airlines into one brand, I think the mallaya’s overall share should come down. I think there will be some canabalization of sales.

I would be very interested to compare the market share immediately after the buyout with the current market share. If anyone has the numbers, lets have them.

Avinash Narula

Reply

hi,
even i think its just a matter of money. he wants to mergered it so that he gets more power in his hands. and slowly he can acquire many more airlines too. so this would be the first step in it.

Reply

[...] had bought Air Deccan which met the regulatory age of five years. Two companies, same branding, how clever! And Mallya had bought those aircrafts for flying abroad even before the cabinet approval had come [...]

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