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Airline merger gain put at Rs 800cr

Mumbai, May 15: The merger of Indian and Air-India will yield a synergy benefit of Rs 800 crore after forking out Rs 200 crore as the cost of integration for the two state-owned airlines.

That is a back-of-the-envelope calculation at Air-India; civil aviation minister Praful Patel has put the synergy benefit at a more modest Rs 600 crore.

The National Aviation Company of India (NACIL) — which will fly under a single code from mid-July — will have a pretty large pyramid of top managers at 151 from general managers upward. It will have a chairman-cum-managing director (CMD) at the helm, nine functional directors or CEOs and 47 executive directors.

“The board of the new airline will have three group CMDs, three functional directors, six CEOs of individual businesses and an equal number of independent directors,” said S.Venkat, executive director of Air-India.

Accenture has been appointed to outline the structure of the management and map out the various positions within the new company.

The two airlines have already formed 12 working groups to deal with integration issues. Both the airlines reckon that the sticking points will be easily resolved.

No retrenchments are being planned and pay structure at the two organisations are being rationalised to place employees with similar work experience on a par.

“The guiding principle is that at an individual level, a person won’t be worse off than today in terms of payments and emoluments,” said Maushumi Chakravarty, director, media and public relations at the ministry of civil aviation.

“The employees for the new company will be appointed on similar conditions. The pay structure of the two organisations will be rationalised. While integrating at any particular level, there will be harmonisation of policy and wages, and review of productivity norms and linked incentives,” said Venkat.

The merger will enable the state-owned carriers to claw back market share from the feisty private airlines.

“NACIL is likely to have an initial market share of 32 per cent, and will aim to have a share of 40 per cent over its own skies. The merged entity is likely to gain from benefits due to synergy of operations and these benefits would range up to 3 to 4 per cent of its total revenue. Savings in terms of cost would be up to 4 to 5 per cent of total costs.

“After the integration, our revenue would also come in the form of savings in cost. For instance, it has been found out that on one single sector — India-Kuwait — the savings achieved could be up to Rs 80 crore. Similarly, overlapping routes could result in substantial savings due to streamlining of operations,” Venkat added.

There are fears that the merger will spark a lot of friction between employees of the two integrating airlines. Both airlines, for instance, have ground handling facilities at the Delhi airport. “We will minimise duplication wherever required. Economies of scale are expected in commercial areas and procurement,” said Chakravarty.

“Our consultant is examining the facilities available at various airports. Additional facilities may be relocated to other airports to handle the flights of foreign airlines, thereby increasing the market share in ground handling of the merged entity,” Venkat added.

Initially, NACIL is expected to have a fleet strength of about 150. “The single code would aim at joint pricing strategy and distribution integration, procurement synergies, infrastructure rationalisation, outsourcing strategy, harmonious policies and practices,” Praful Patel told the Rajya Sabha today.

However, the merger may not lead to sharp price cuts. “Fares will have to sustain the current level of operations, and the airline cannot afford to operate below the break-even point for a long period of time. We, therefore, feel that (the scope for) price cuts may be limited,” Venkat said.

Meanwhile, the two subsidiaries of Indian and Air-India — Alliance Air and Air-India Express — will not be merged at this stage. The new entity will have six strategic business units and the low cost carrier SBU will be one of them.

“The role and strategy of the LCC SBU is being worked out and its employee structure isn’t expected to change significantly from what prevails today,” said Chakravarthy.

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