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Price wars fly out with airline deal

Mumbai/Bangalore, May 31: The bloodbath in the skies will now probably end — and airlines in the country will not have to yelp in pain over price cuts and balancesheets soaked in red.

Captain G.R. Gopinath, chairman of Air Deccan, said the deal to create the country’s largest airline combine would bring spinoff benefits to all the stakeholders, its customers and the airline industry over the long term.

With today’s deal, the merger of Jet Airways and Air Sahara and the proposed amalgamation of Air-India and Indian, the industry can hope for a modicum of pricing discipline in a world of dogfights with frequent under-cutting by the leading airlines as they struggle to carve out market share.

This is in addition to the synergies that Kingfisher Airlines and Air Deccan can expect from the inter-lining agreement and the costs savings on the operational front.

“Merger never works. This is a perfect answer,” Gopinath said while describing the deal as an “alignment without losing the business model and identity”.

Asked if Mallya was bailing out the debt-ridden Air Deccan, he said, “We are bailing each other out. I don't think he (Mallya) would be doing it without (the advantage of) enormous benefits.”

He said both airlines held huge inventory and they would examine how to take advantage of the massive infrastructure they had. The deal, he said, would drive cooperation between the two companies and “anything we do will benefit us. We will have to study where we can bring down costs and improve efficiency”.

He said there would be no job cuts or staff poaching after the deal. Gopinath said the airline would now have a better negotiating power while dealing with vendors.

“With commonality of fleet, we foresee sharing of infrastructure, resources and best practices between both the airlines. This would definitely lead to decreased costs, maximising shareholder value, increased efficiencies and improved profitability,” Gopinath said.

“The industry has so far been highly fragmented. But with such powerful alliances and mergers being formed, we are unlikely to see any price undercutting by players to grab market shares,” an analyst with a foreign brokerage said.

The presence of three big players with double digit market shares will certainly give rise to better pricing environment,” an analyst with a foreign brokerage said.

He added that for both Kingfisher Airlines and Air Deccan, synergy benefits on operational fronts like maintenance, security ground, ground handling, backend operations and inventories will also flow in. These operations, experts say, alone account for about 20 per cent of the total cost of operations.

“Air Deccan would fill up the gaps of Kingfisher, and vice versa,” he added.

With its more classy rival picking up a stake, Air Deccan, which currently has the second largest market share after Jet Airways, will be Kingfisher’s low-cost carrier while Kingfisher will pursue higher-end travellers and its plans to fly abroad. Gopinath said a team would be appointed next week to work out operational synergies with the UB group, which runs the premier full-service Kingfisher Airlines. The two together would have a fleet of 71 aircraft, fly to 70 destinations and have a combined market share of 33 per cent, he added.

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