Friday, September 21, 2007

Acquisition of Air Sahara by Jet Airways Case Study

Barkha Mittal, Ravi Malhotra, Shriharsh Sarkar, Soham Basu(PGDIM-13, NITIE), K.V.S.S. Narayana Rao

Aviation Industry – “A Glance”

Revolutionized by liberalization, the aviation sector in India has been marked by fast-paced change in the past few years. India is now the second largest aviation industry of the world .The Indian fleet, which comprised of 170 aircraft in May 2005, is now almost twice that, with 312 units. By 2010, India's fleet strength will stand at 500-550. In the same period, the domestic market size will cross 60 million and international traffic 20 million. Aircraft manufacturer Airbus pegs India's demand at 1100 aircraft, worth US$ 105 billion, over the next 20 years. According to Civil Aviation Minister Praful Patel, the country will need 1,500 to 2,000 passenger planes in 10 years, up from 260 now.
India continues to show steady year on year growth, with a 7 per cent increase in the number of flights into and out of India (an additional 835 flights and more than 200,000 seats a month). The number of flights has virtually doubled from 6,800 in May 2001 to 13,200 in May 2007. In fact, India is in third place in the Top 10 list of countries with the highest number of additional flights in May this year, behind only China and the US.
Presently, the number of air travelers is about 0.8 per cent of the population. Given the rapid shift in demographics due to a consistently high-performing economy, a figure of even 10 per cent of the population as air travelers, would necessitate about 5,000 aircrafts in the country.
The years 04-05, 05-06 and 06-07 have been years of record growth in air traffic in India. During the period April-September 2006, international and domestic passengers recorded growth of 15.8 per cent and 44.6 per cent, respectively, leading to an overall growth of 35.5 per cent. During the same period, international and domestic cargo recorded growth of 13.8 per cent and 8.7 per cent, respectively, resulting in an overall growth of 12.0 per cent.

About Jet Airways:

Jet Airways Limited was incorporated as an "air taxi" operator on 1 April 1992. It started commercial airline operations on 5 May 1993 with a fleet of 4 Boeing 737-300 aircraft. In January 1994 a change in the law enabled Jet Airways to apply for scheduled airline status, which was granted on 4 January 1995. It began international operations to Sri Lanka in March 2004.

Key Metrics

• Global Sales of Rupees 5387 crores
• Largest private domestic player with a market share of 25%.
• Operates around 330 flights in over 60 destinations, both national and international.

About Air Sahara
The airline was established on 20 September 1991 and began operations on 3 December 1993 with two Boeing 737-200 aircraft as Sahara Airlines. The carrier has a fleet size of 28 and it serves 34 destinations both inside and outside the country. 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 re-branded 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 11% in January 2006 to a reported 8.5% in April.

Key Metrics
• Global Sales of Rupees 1290 crores.
• Second largest Private player in the aviation industry with a market share of around 6%.
• It flies 115 flights on a network of 20 destinations, operating a dozen Boeing 737 airliners and seven regional jets.

Acquisition of Air Sahara by Jet Airways:

Details of Announcement:

Date of Announcement – January 20, 2006
Place of Announcement- New Delhi
Speaker – Jet Airways CEO- Mr. Naresh Goyal.

Jet Airways had valued Air Sahara at about 500 million dollars (Rs2300crores) initially. However, subsequent negotiations between Jet Airways owner, Mr. Naresh Goyal and the Air Sahara team settled the deal at 450 million dollars (Rs2100crores). The initial valuation of Air-Sahara seemed to be very high, given that the carrier was sitting on Rs96 lakhs of loss in the just concluded financial year. This feeling among the industry analysts were reflected when the Jet Airways share experienced a sharp decline with the announcement of the deal.

Synergies claimed:

The private sector Jet-Sahara combine will end the dominating role of the public sector with the new corporate commanding as much as 32 percent of the domestic market space.
Jet Airways access to the entire leased fleet of about 27 aircraft of Air Sahara as well as to the infrastructure and logistics of the smaller airline including parking bay of 22 flights.
Jet Airways will also benefit from a pan-India presence as Sahara is operating in many areas where Jet is not present.
Even in the international arena, Air Sahara becomes complementary to the larger airline. While Jet has a presence in long-haul routes to the US and Europe, Air Sahara is operating to neighboring countries like Sri Lanka, Nepal and Thailand.
Jet Airways gets access to Sahara's parking slots in London's Heathrow airports as well as in Delhi and Mumbai.
The huge shortage of airline pilots, it can now draw upon the bank of Air Sahara's pilots. Other maintenance facilities of the smaller carrier will also be available within the country.

Steps/Events subsequent to announcement of the deal

After the initial announcement, there were a lot of regulatory issues. Jet airways chairman, Mr. Goyal also echoed what the market felt for a long time – the fact that he was paying too high a price for Air Sahara. Air Sahara meanwhile used 500 crores of the money deposited in an escrow account. Jet airways filed a lawsuit against Air sahara related to the above issue. After several litigations and counter litigations, a lot of mud slinging in public, Jet Airways acquired Air Sahara, for a total cash consideration of Rs. 1460crores (US $ 365 million). The amount was paid to Air Sahara in an all cash deal. The Company has accounted for this acquisition under the purchase method. Accordingly, the financial results for the post acquisition period have been included in the consolidated financial statements of the Company.

Structure and Financing of the deal:

The acquisition was an all cash transaction and Jet Airways would be funding the acquisition through $450 million of promoter’s equity. For Jet Airways, Mr Naresh Goyal retains a majority of the equity, with a small portion of other shareholders.
Closure of the deal:

Closure Date- On April 21, 2007
Place- New Delhi India.

Subsequent performance:

To be added


• Prowess- The Indian Corporate Reports Database.

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