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MCBS/0018


The Proposed Air India
Indian Airlines Merger
In May 2007, Indias Ministry of Civil Aviation announced that Air India
Limited (AI), Indias national flag carrier and Indian Airlines Limited (IA),
the government owned domestic airline, would merge with effect from July
15, 2007.
1
The new airline formed by the merger was to be called Air India,
and would operate in both the domestic and international sectors.
The proposal to merge AI and IA had been first mooted in the 1990s.
2
In
February 1999, a Parliamentary Standing Committee on Transport and
Tourism had recommended the merger of AI and IA in its report on the
Functioning of Air India.
3
However, the process had formally been initiated
only in September 2006, when the Indian government assigned the duty of
preparing the roadmap for the merger to Accenture Inc., a management
consulting, technology services and outsourcing company.
4
After being
endorsed at various levels of the administrative hierarchy, the plan for the
merger was finally approved by the Union Cabinet in March 2007.
5

A new company called the National Aviation Company of India Ltd. (NACIL)
was incorporated on March 30, 2007 under Sections 391 and 394 of the Indian
Companies Act, 1956 to facilitate the merger.
6
Under the terms of the merger,

1
Indian Airlines To Merge Operations from July 15, Financial Express, May 11. 2007
2
R. Krishnan, A Long Haul Solution, Business Line, April 12, 2006
3
www.rajyasabha.nic.in
4
Accenture to Assist Air India, Indian Airlines Merger, www.efytimes.com, September
27, 2006
5
Vinay Kumar, Cabinet Nod for Air India, Indian Merger, The Hindu, March 2, 2007
6
Sections 391 to 394 of the Companies Act, 1956 deal with mergers and amalgamations
through schemes of arrangement approved by the High Courts. A resolution to approve the
scheme of arrangement has to be passed by the shareholders in the general meetings. The
shareholders have to vote on the resolutions on the schemes of arrangement on the basis of
the disclosures in the notice/explanatory statement. Section 393 of the Companies Act,
1956 specifies the broad parameters of the disclosures which should be given to the
shareholders / creditors, for approving a scheme of arrangement.
The Proposed Air India Indian Airlines Merger
2
all the undertakings, properties, and liabilities of AI and IA were to be
transferred to NACIL.
7

The AI-IA merger was expected to create one of the biggest airlines in the
world in terms of the fleet size. As of May 2007, the two airlines had a
combined fleet of 122 aircraft and 34,000 employees including 1,315 pilots.
8

The combined fleet size placed the merged entity among the top 10 airlines in
Asia, and the top 30 in the world. It would also be Indias first airline with
more than 100 aircraft.
9

The motives for the merger were widely discussed in the media. India was the
fastest growing aviation market in the world, ahead of China, Indonesia and
Thailand, as of early 2007.
10
The number of people traveling by air had been
increasing rapidly in the country.
11
The main reason for this was thought to be
the advent of low cost airlines like Air Deccan and SpiceJet in the country in
2003-2004, which brought air travel within reach of Indias large middle class.
The entry of a number of new airlines had intensified the competition in the
aviation sector by 2004. According to information posted on IAs website, the
increasingly intense competition faced by AI and IA from private and global
airline companies, was the main reason for the merger of the two airlines.
12

In addition to helping AI and IA tackle competition, the merger was expected
to result in considerable synergies by integrating routes and streamlining
overlapping facilities and infrastructure. Accenture had identified significant
potential synergies between the two airlines in the areas of sales and
distribution network, fuel procurement, material procurement, passenger
amenities, ground handling and parking facilities. According to a report
submitted by Accenture in late 2006, the merger could result in a 3-4%
reduction in costs, and lead to a revenue increase of around Rs 6 billion
initially.
13

However, the proposed merger was not without its share of critics. Initially
there was opposition from the employees of the two airlines as they feared that
the merger would result in job cuts. The Aviation Minister, Praful Patel, had

7
Formalities for Merging IA And AI to be Completed by July 2007, www.pib.nic.in, May
3, 2007
8
Merged Air India-Indian Revenue Projected at Rs 15,000 Crore by 2010, www.domain-
b.com, February 22, 2007
9
GoM Clears Merger of Air-India, Indian; Formal Clearance by March, February 21,
2007
10
Merged Air India-Indian Revenue Projected at Rs15,000 Crore By 2010, www.domain-
b.com, February 22, 2007
11
The airlines in domestic sector flew 25.5 million passengers in 2006 which was 27.9%
more than in 2005. Similarly the number of international passengers was 22.4 million in
2006 which was 15.1% more than in 2005 (www.domain-b.com)
12
Merged Air India-Indian Revenue Projected at Rs15,000 Crore by 2010, www.domain-
b.com, February 22, 2007
13
Ashwini Phadnis, Air India, Indian Merger May Add Rs 1,200 Cr to Kitty, Business
Line October 27, 2006
The Proposed Air India Indian Airlines Merger
3
allayed their fears and assured the employees unions of the two airlines that
employment conditions, wages, seniority and career progression, would
largely remain unchanged. He also said that a grievance redressal mechanism
would be set up to protect employee interests.
14
The government also
indicated that there would be no layoffs.
Despite this, analysts warned that the merger might pose a serious challenge in
terms of integrating the employees of the two airlines, especially as they had
followed completely different operational methods, before the merger. The
two airlines also had different fleet compositions, which might create
complications in inventory management, maintenance and repair
establishments, and pilot training.
Analysts also felt that the merger should be followed by a thorough overhaul
of the operations of the airline. Kapil Kaul, Chief Executive (South Asia) of
the Centre for Asia Pacific Aviation, an airline industry consultancy, had
suggested a partial sale of equity through an initial public offer to begin with
to help induce professionalism and market dynamics, followed by
privatization over the next five years or so.
15

The Indian aviation industry was headed towards consolidation in 2006-2007.
Jet Airways had already acquired Air Sahara in April 2007. This had been
followed by Kingfisher Airlines acquiring a 26 % stake in Air Deccan in June
2007. The merger of AI and IA following these was expected to bring about
more changes in the dynamics of the industry.
References and Suggested Readings:
1. www.indian-airlines.nic.in
2. www.sebi.gov.in
3. Ashwini Phadnis, Air India, Indian Merger May Add Rs 1,200 Cr To
Kitty, October 27, 2006
4. Indian-Air India Merger-Aviation Minister Meets Staff,
www.dancewithshadows.com, January 19, 2007
5. GoM Clears Merger Of Air-India, Indian; Formal Clearance By
March, www.domain-b.com, February 21, 2007
6. Merged Air India-Indian Revenue Projected At Rs15,000 Crore By
2010, www.domain-b.com, February 22, 2007
7. Govt Eyes Twin Legal Tracks For Air India, Indian Merger, The
Economic Times, February 26, 2007

14
Manika Gupta, Cabinet Give Green Signal to AI-IA Merger, The Economic Times,
March 01, 2007
15
Merged Air India-Indian Revenue Projected At Rs15,000 Crore by 2010, www.domain-
b.com, February 22, 2007
The Proposed Air India Indian Airlines Merger
4
8. Manika Gupta, Cabinet Gives Green Signal To AI-IA Merger. The
Economic Times, March 01, 2007
9. Air-India And Indian To Merge, To Enhance Profitability By Over
US$133m. www.m-travel.com, March 02, 2007
10. New Company To Be Formed With Air India, Indian Merger,
www.domain-b.com, March 12, 2007
11. Formalities For Merging IA And AI To Be Completed By July
2007, www.pib.nic.in, May 03, 2007
12. Patel: Merged Entity To Be Called Air India, Will Be Operational
By July 15, www.domain-b.com, May 11, 2007
13. Merger Process At AI, IA Moving Apace, www.domain-b.com, May
16, 2007
14. State Carriers To Merge As Air India, Will Operate As The National
Airline Company Ltd: Praful Patel, www.domain-b.com, May 22,
2007
15. First Air India Flight On August 1, Business Standard, May 23,
2007
16. New Merged `Air India' Will Tap Market In 2008, Business Line,
May 23, 2007
17. Thulasidas Is Cmd Of Air India, Trivedi Named Joint Md,
www.domain-b.com, May 29, 2007