Jet Airways buys Air Sahara

First marriage in Indian skies.

Jet Airways, India's largest private sector airline, seems to have a penchant for announcements at the start of a calendar year. This time last year the carrier got permission to fly international routes, making the hitherto purely domestic airline a global player.

And on January 19 Jet Airways and Air Sahara issued a joint announcement that the former had acquired the latter for an all cash consideration of Rs23 billion ($500 million). It is estimated that the Jet-Sahara combine will have a fleet of 77 aircraft and a fiscal 2005-06 turnover of more than Rs70 billion (Jet announced a first six months turnover of Rs27 billion suggesting full year's revenues will be at least Rs50 billion; Sahara projected revenues of Rs22 billion for the year).

The news did not come as a surprise to industry observers. In the fourth quarter of calendar 2005 Air Sahara that it had appointed Ernst & Young to assist with a valuation, which would be the precursor to plans to induct a financial or strategic investor into the airline.

Sahara required a capital infusion of $100 to $150 million to enable it to fund its plans to expand its route network to include international destinations and new fleet requirement. At the time private equity investors including Blackstone, Carlyle and Temasek were said to be evaluating the opportunity alongside strategic buyers such as India's Hinduja and Essar group.

Airline industry players such as Jet Airways and Vijay Mallya's Kingfisher Air were also said to be considering the acquisition in order to consolidate and expand their market share. Indeed, for a while it seemed that Kingfisher might emerge as the frontrunner as the acquisition would kickstart Mallya's stated plans to emerge as the dominant player in India's now open skies.

The interest from various quarters is not surprising given that India is currently the third fastest growing domestic aviation market in the world. It is expected to grow at over 20% per annum for the next five years. Airbus, for example, forecasts that the Indian sub-continent will become the third largest market for new aircraft in Asia after China and Japan. Air traffic in India is expected to grow at five million passengers annually over the next few years.

The Jet Sahara combine will control around 50% of domestic passenger traffic. The market share of Indian Airlines, the government owned domestic carrier, has dwindled since private airlines were allowed to start operating and currently stands at around 30%. Other players have expressed concerns about Jet's bargaining power now that it has such a large market share.

Further, it is not clear whether the very valuable parking slots, domestic and international routes and other clearances awarded to Sahara will automatically transfer to Jet. India's Ministry of Civil Aviation is expected to examine the merger proposal in detail. All clearances are expected to be received within three months.

Sahara's motivations to sell are said to have stemmed from its inability to close the gap with the corporate sector's preferred choice, Jet Airways and the public sector monopoly, Indian Airlines. It also faced increasing competition from players with deep pockets including the Wadia (Bombay Dyeing) promoted, Go Air and Mallya's (United Breweries) Kingfisher Air.

For Jet Airways, Air Sahara is a prized possession. The immediate market share gain as well as the pre-emptive value vis-a-vis new entrants is invaluable. Currently, Jet and Sahara are the only two players, which have attained critical mass and both achieved a fillip to their operations last year when they received permission from the Indian government to start plying aircraft on international routes.

Sahara's strengths in Northern India are complementary to Jet's established presence elsewhere in the country, giving Jet an even more dominant footprint. Both airlines' fleets are mainly Boeing planes, making integration even easier. Markets seem to agree with Jet Airways move as the share price responded favourably on India's bourses.

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