jet sahara merger

Jet Airways, Air Sahara Merger: 

Jet Airways, Air Sahara Merger

Indian Aviation Market: 

Indian Aviation Market Pre 2004 Domestic Market Limited carriers Stable 8-10% growth p.a. Supply in line with demand Yields stable at high levels International market Restricted Bilaterals - limited access to foreign carriers AI only designated as Indian Carrier Post 2004 Domestic Market Sudden inflow of new carriers and spurt in capacity High market growth stimulated by huge fare reductions International Market Opening up international markets commenced in 2003-04 with private carriers being allowed to fly international

Indian Aviation Market: 

Indian Aviation Market Impact of changes Post 2004 Low yields and high aviation turbine fuel costs led to huge losses (estimated at $500 mn for FY07) Rising labor costs, shortage of skilled labor, rapid fleet expansion, and intense price competition stretched out the problem for big airlines. Airport and Air Traffic infrastructure under increasing pressure with added capacity Delays at major metros, and lack of slot availability, high costs due to holding times (approx $25 mn in additional fuel burn for Jet Airways alone)

Jet Airways: 

Jet Airways Jet Airways is one of India’s premium domestic airlines and arguably the most successful. The airline, which was set up in 1993 after the central government opened civil aviation to private investment, overtook India’s national airline, Indian Airlines, in the early 2000s in terms of passengers carried. By 2005, Jet Airways had been listed on India’s main stock exchanges and had obtained permission to operate international flights.

Jet Airways: 

Jet Airways Jet’s dominance in the Indian market had been severely challenged. The large number of low cost carriers that have entered the industry had led to an explosive 20 to 25 per cent growth for the industry. Jet’s market share has declined to 35 per cent from 42 per cent at the beginning of the fiscal 2006. Jet has also struggled to keep pace with the industry’s capacity expansion. In the Delhi-Mumbai sector — which accounts for 50 per cent of the country’s air traffic — the industry’s capacity has increased by 70 per cent in the past year. But Jet’s grew by a mere 7 per cent.

Sahara Airlines: 

Sahara Airlines The airlines was established on 20 September 1991 and began operations on 3 December 1993 with two Boeing 737-200 aircraft as Sahara Airlines. Initially services were primarily concentrated in the northern sectors of India, keeping Delhi as its base, and then operations were extended to cover all the country. Sahara Airlines was rebranded as Air Sahara on 2 October 2000, although Sahara Airlines remains the carrier's registered name. On 22 March 2004 it became an international carrier with the start of flights from Chennai to Colombo. It is part of the major Sahara India Pariwar business conglomerate. The uncertainty over the airline's fate has caused its share of the domestic Indian air transport market go down from approximately 12% in January 2006 to a reported 7% in January 2007.

Pre Acquisition Review: 

Pre Acquisition Review Jet Airways’ Scheme of things In 2003, Jet Airways had a 44% market share which reduced to 33% market share in 2006 due to competition by low cost airlines so Jet Airways wanted to maintain the leadership position in the industry To reduce the congestion time in Airports To enter into the low cost Airlines business in a big manner To avoid the delay to purchase new airlines which typically had a waiting time of 2-3 years. To diminish the number of aviation companies in the market, thereby achieving a pricing power in the market

Pre Acquisition Review: 

Pre Acquisition Review Air Sahara’s Scheme of things The mismanagement of the airlines was adding burden to the group. It was making losses It wanted to exit airlines business and focus more on its booming Real Estate Business Their was a huge liability both long term as well as short term and its aircrafts were also on lease or on loan. So, it wanted some quick money to pay off its mounting debts. Solution a merger with Jet Airways was an attractive and an easy bailout for Air Sahara from the aviation industry.

Screening Target: 

Screening Target Target Company: Air Sahara Strategic Fit Air Sahara as on 2006 has a market foothold of 12%, which will increase Jet’s market share to 45% if acquired. Air Sahara had a vast parking bays at important metros, which can be used by Jet to reduce congestion time and reduce fuel burning up to a large extent. Air Sahara was mostly servicing the domestic market (24 domestic and 4 international) and this will increase the domestic share of Jet Air Sahara had a fleet strength of 26 which if acquired will drastically increase Jet’s Fleet strength, without purchasing any new airplanes.

Screening Target: 

Screening Target Target Company: Air Sahara Operational Fit The load factor of Jet in its international flights was 73% and in domestic flights was 72%. Air Sahara had a load factor of 72% on domestic route and 65% in international flights. So, using the expertise of Jet, Air Sahara could gain. Sahara had 4 international destination, Jet Airways also had international flights to those destinations from the same source. So, efficiency and monopoly could be increased. Air Sahara had an identical fleet as the Jet’s consisting mostly of B737. Maintenance in case of merger would be easy and effective Analysts estimate that a cost saving of Rs. 150 crore -200 crore is achievable due to acquiring of parking bays

Screening Target: 

Screening Target

Target Valuation: 

Target Valuation Valuation of Air Sahara The entire business of Air Sahara was valued at Rs. 2300 by Jet Airways, whereas the valuations by E&Y for Air Sahara was done at Rs 3382 crores The valuation has been made on the comparable value with respect to the valuations of Jet Airways. Only the assets will be acquired, liabilities to be borne by Air Sahara itself Nikhil Garg from Edelweiss Capital said that if Jet Airways pays Rs. 2300 crore to Air Sahara, then Jet would be overpaying by 35%, as because the valuations of Jet dipped by 35% within months of deal talks

Slide 13: 

Target Acquisition Strategy Jet Airways had a debt equity ratio of 7:1 in 2005. It was already leveraged. It already had in mind an inorganic growth to capture its depleting market share It came up with an issue of equity on March, 2005, which was oversubscribed 16 times, thereby having a comfortable debt equity ratio of 1:1 post issue. The entire deal was done through debt, majority from IDFC, the company’s long standing banker.

Slide 16: 

New Acquisition: April 12, 2007 Air Sahara got a beating on its valuation, due to the failure of the deal, so it proposed new negotiations at revised valuations. Air Sahara’s market share dimished to 7% Valuations made are comparable with the Jet’s market valuation. As Jet’s valuation plummeted by around 35%, so the new valuation of Air Sahara was done at 35% lower valuation of Rs. 2300 crore i.e. Rs. 1450 crore . On the day of signing the bill, INR 400 crores exchanged hands with addition of Rs. 500 crore in the ESCROW account equals 900 crores upfront. The balance of INR 550 crores were payable in four interest free annual equal installments which was supposed to be ending in April, this yr. NPV= Rs. 1200 crores

Jet Lite: 

Jet Lite Sahara Airlines Limited became a 100% subsidiary of the Company. From 15th May, 2007 Sahara Airlines Limited has been renamed JetLite (India) Limited. Jet Airways on a whole now had 42% of the total Airlines Market.

Post Merger Integration: 

Post Merger Integration Moderate Integration Operational Integration- Stage I (FY 2007-08) Jet Airways and Air Sahara had an identical fleet consisting of B737. So, after the merger the Air Sahara planes were immediately brought into service. Only 20 of the 26 of Sahara are actually flying. So, Jet infused another Rs. 200 crore for refurbishing the entire fleet Bulky insurance policies were removed to short term cost efficient policies. Released premises and office spaces not required

Slide 19: 

Moderate Integration Operational Integration- Stage II (FY 2008-09) 2 CRJs were removed and ATRs were leased to reduce maintenance costs of a different aircraft. The ticketing costs were reduced for JetLite by moving to web platform Food and Cabin Amenities were reduced Loss making flights discontinued Business class services withdrawn

Slide 20: 

Moderate Integration Human Resource Integration- Stage I (FY 2007-08) In case of Staffs integration, Jet Airways was quick to lead the Air Sahara employees through a 90 day period training. Lufthansa Technik team provided support Deal to absorb any excess employee back to Sahara Group To avoid Cultural Clashes, Air Sahara was converted to JetLite , having a different philosophy from its parent, so that a low cost structure can be developed.

Slide 21: 

Moderate Integration Human Resource Integration- Stage II (FY 2008-09) Reduction of staffs due to synergies was made close to 50% reduction in headcount for the entire group. Jet was faced with immense criticism and opposition by various organizations and political parties Jet’s chairman, Naresh Goyal reinstated the employees a day later saying he was not aware of these sackings. So, the HR integration was not smooth enough.

Post Merger Performance: 

Post Merger Performance

Slide 23: 

Particulars FY 2008-09 FY 2007-08 Variance Number of Departures 45528 40020 14% Passenger load factor 73.7 72.1 2.4% Block Hours 84688 77100 10% Revenue Passenger(in mn .) 4 3.2 19% From the Operating Performance data, we see that, the number of departures have increased by 14% YOY basis while Block hours have increased by only 10%, this shows lower higher efficiency being achieved. The number of passengers have increased by 19% because of better brand management

Slide 24: 

Legal Issues Jet Airways and Air Sahara made a pact outside the court that all the contingent liabilities has to be borne by Air Sahara itself. But then, the Income Tax Dept. raised certain tax obligations against Air Sahara of Rs 87 crore . Air Sahara refused, hence Jet was obliged to pay. Jet and Sahara rang the court for non payment of Rs 87 crore . The High Court ordered Jet on May 4, 2011 to pay the remaining 478 crore including 9% interest on the same within 2 days Jet Airways paid Rs. 900 crore upfront and already deposited Rs. 275 crore with the court in installments. So, it paid another Rs. 203 crore within the May 5 th , 2011. Jet’s stock fell 6% after the court ruling.

Current Position: 

Current Position

Slide 26: 

Today, Jet Airways is still the market leader, but its share has depleted to 25.5% out of which JetLite contribution remained stable at 7.7%. The low cost airlines like Spice Jet, Go air, IndiGo are giving stiff challenge to Jet Airways dominance Kingfisher also took the M&A route for inorganic growth and took over Air Deccan to strengthen its foothold in the aviation industry

Conclusion: 

Conclusion After considering the state of Jet Airways and Air Sahara along with the scenario of the Indian Aviation Industry this acquisition was a good decision taken at the right time. This move further strengthened the position of Jet Airways and helped it fight with the other competitors and maintain its market leadership. Also Air Sahara found an easy bailout option to clear its debts. Thus this deal was beneficial for both Jet Airways and Air Sahara.