by Domain-B

22 March 2006

The high profile merger proposal between Jet Airways and Air Sahara to create the largest domestic airline with a dominant market share is reportedly in trouble. Unconfirmed reports indicate that the proposal is facing stiff opposition from various regulatory authorities.

The Director General of Civil Aviation (DGCA), the regulatory body for the domestic aviation industry, has reportedly taken the stand that a merger between two airlines would not mean automatic transfer of landing rights and parking lots at various airports to the merged entity. There are no clearly laid down norms to be followed in the case of a merger between two airlines.

The civil aviation ministry is said to be in favour of the Jet-Sahara deal and says approval would be granted once an application is received from the parties. Curiously, Jet Airways has so far not made an application for approval.

To make matters worse, the Monopolies and Restrictive Trade Practices Commission (MRTPC) has written to both airlines asking for information about the deal when everyone had forgotten about the existence of MRTPC.

Other domestic airlines like Indian (the new name for the old public sector Indian Airlines) and Kingfisher had objected to the Jet-Sahara deal on the grounds that it would create a near monopoly with access to the best airport infrastructure.

The industry also saw the formation of two camps with smaller airlines like Kingfisher and Spicejet teaming up to discuss sharing of airport infrastructure. Air Deccan, the largest low-cost operator, joined hands with the Jet-Sahara alliance for possible business cooperation.

A section of the industry believes these are pressure tactics from Jet to bring down the acquisition cost for Air Sahara. Jet had agreed to pay $500 million for Air Sahara, nearly double the amount offered by the only other bidder Kingfisher. The high cost can be justified only if Jet gets all the airport rights of Sahara.

If Jet calls off the deal, it will have to pay Rs150 crore to Sahara as per the terms of the merger agreement. Jet is understood to have already paid Rs120 crore to Sahara and the balance of more than Rs2,000 crore payable to Sahara is kept in an escrow account.

It is unlikely that Jet would be willing to take a hit of Rs150 crore. Some analysts believe that the airline can easily re-negotiate the terms with Sahara and bring down the acquisition cost by at least $100 million. Air Sahara is also in a tight spot as it would be difficult to find another buyer.

Meanwhile, legacy carriers like Jet, Indian and Sahara have reportedly lost further market share in recent months. Jet is reportedly the biggest loser as low-cost carriers have gained considerable market share.