Case Study Air India & Indian Airlines

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The Issue: On July 15, 2007 Air India (AI) and Indian Airlines (IA) were merged The Reasons: The merger was brought about to solve certain aviation issues such as dipping profits, increase of fleet, and overcoming competition from new entrants

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Background to the Case

Air India: Air India, formerly named Tata Airlines was founded by JRD Tata. It was converted into a Public Limited Company on July 29th 1946 and renamed as Air India, primarily operating on international routes. Air India was based out of Mumbai. Indian Airlines: The airline was set up on 1 August 1953 and operated on domestic routes. The airline was based out of New Delhi and had a pre-merger fleet of over 55 aircraft in 2006.

Interestingly both companies also made an 3/29/12 attempt at merging in 1986 as well

Reasons leading to the Escalating costs ofMerger Aviation Turbine Fuel (ATF)
Immense competition from private and low cost airlines Increased cost pressures due to acquisition of additional aircraft Leadership crisis due to frequent change of the chairman-cum-managing director Air India could not fully use the bilateral rights unlike foreign airlines which took maximum advantage Declining passenger traffic in the premium class

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What the merger tried to achieve

Economies of scale in areas such as maintenance, ground operations, the use of landing slots and parking rights etc Volume Discounts in areas such as fuel purchase, insurance Increased fleet size such that the combined fleet was of over 120 aircraft, currently over 150 aircraft, placing it among the top 10 airlines in Asia, and the top 30 in the world Hub and spoke system which could be achieved by the merger of the international and domestic airlines and pool-in of resources such as

Leverage 3/29/12

Air India after merger with Indian Airlines

The report prior to merger stated that merger of the two entities and replacement of the ageing fleet would result in a profit of Rs 1,000 crore in the first year itself. Instead, in the three years following the merger in 2007 we have seen losses Rs 1,200 cr in the first year Rs 2,600 cr in the second year Rs 5,500 cr in the third airline today has accumulated losses of Rs 16,000 crore.

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Contd..

hundreds of flights had to be either cancelled or were delayed, not because of a lack of pilots or planes but because of a lack of crew. Air India had to withdraw its flights from routes where it had good loads and this was given to private airlines by ministry. Indian Airlines pilot had gone in strike because of disparity between them and those of Air Indias. Air India is over-staffed ( having 140 employees per aircraft as opposed to 100, prescribed by aviation regulations). Air India 3/29/12 is also asking government for bailout.

Major Challenges and Obstacles

Employee opposition due to fear of retrenchment, and redundancy of roles Union issues and distrust as both companies had strong unions which would oppose any kind of wage and operational changes Operational differences as both the airlines followed completely different pay structures and airline routes which could result in a conflicts of interests situation Different fleet compositions of the airlines would create complications in inventory management, maintenance, repair establishments, and pilot training IT integration as both airlines had separate

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More attention was devoted to non-core issues such as long term fleet acquisitions and establishing subsidiaries for ground handling and maintenance, than to addressing the state of the flying business. Air India has continued to see its domestic market share decline. Increase in internal politics, a potentially messy situation in an entity with 35,000 employees. A bloated workforce, unproductive work practices and political impediments to shedding staff made the creation of a viable business model extremely challenging. 3/29/12