Saturday, June 02, 2007

Kingfisher acquires Deccan

Kingfisher Airlines has acquired a 26% equity stake in Air Deccan, India's low cost, no frills airline. Although C R Gopinath of Air Deccan will be Chairman and Vijay Mallya of Kingfisher Vice chairman, nobody should have any illusions as to who will call the shots. It will be Mallya who has the deep pockets.

Air Deccan is the second low-cost airline to be acquired. The first was Sahara which was acquired by Jet Airways. I read that Air Deccan gave away 1.2 mn tickets free last year. No surprise that it has made huge losses and its share is languishing below its issue price. India's private airlines have gained market share but are losing billions. So much so that the Civil Aviation ministry had to call a meeting to knock some commercial sense into them. The government-owned Indian Airlines (to be merged with international carrries Air India) turns a profit. Reminds you that of the basic principle that cutting costs to gain market share can only be a temporary expedient; you need a strategy for the long term.

Observers expect that flow of free tickets from the low cost airlines to slow down to a trickle hereafter. Understandably as the two acquirers would like to see the colour of money.


Krishnan said...

The Civil Aviation Ministry calls a private airline to ask them as to why they are accepting losses? Yet another company has bought them - obviously for some assets that will return handsomely I imagine. It would be as if the Secretary of Commerce asking as to why some company could not have raised prices so in some specific quarter they would have made money instead of showing losses! ... I am always leery when someone outside of some company decides that they know better than the people running the company.

Ofcourse - when companies fail, they run to the Government for a bail out and so in some cases it may look like some bureaucrat trying to prevent some potential future mishap by reining in some present practice ... (I wonder about all this and the free flow of information through prices and market forces and all that) ...

Ofcourse through lobbying, companies do manage to get legislation passed to their benefit and it is not easy for most to understand ... Many US Airlines are now playing that game about their pension obligations and how to estimate future payments and so on ... they could simply say "Sorry, cannot pay you" - and voters then ask the feds to pay up

Many years ago, Chrysler was bailed out by the US Fed's - big mistake. True, Iacocca turned things around ... yet, look at the mess. A 36 billion dollar investment (Daimler) had to be got rid off by payment of an additional 5 billion dollars to Cerberus. Oh well ... stuff happens all the time!

T T Ram Mohan said...

Krishnan, the government had to intervene because the private industry as a whole was losing money because of ultra-competitive fares. That put in jeopardy the huge investment that had taken place in the industry.


Krishnan said...

Well ... if a company collapsed and there was that danger of an entire industry collapsing, I am sure some white knight may have rescued such companies - Often though excesses lead to unintended, positive consequences that are difficult to predict ... Tom Friedman notes how the excessive build up of communication infrastructure by companies like CICSO/MCI/WorldCom led to inexpensive internet access for companies outside the US and the growth we see - many companies lost significant/almost all of their market value because of such excesses ...(I know, not a good analogy perhaps!) ... This in fact points to one danger with privatizing part of the US Social Security Fund - if the Feds are part owners of companies, one wonders what the heck they may do (in addition to other things that they do) (I am guessing the Central Government made significant investment in infrastructure that they were loath to let lose in value/something else)