May 2019
It was April 2007 & probably the most critical period in securing Jet’s future had already started however no one could realize it, least of all Jet’s top management. The decisions that were taken in this period sent, an already struggling Jet, further onto the downhill path and to a place from where the recovery was always going to be difficult. With rising competition from low cost carriers, Jet Airways was faced with 2 possible alternatives. One would have been to completely focus on Full-service business, and streamline its own operations; maybe scale down a bit to bring better cost control effectively increasing the profitability. The other would have been to manage Full-service business as well as compete with low-cost carriers by entering into the low-cost airline market. Now many experts at that time said that choosing the first alternative would have been wiser for the Jet. However, the top management decided to enter the low-cost carrier market and that too by acquiring Air Sahara. Jet Airways acquired Air Sahara on 12th April 2007 for a total valuation of Rs.1,450 Cr. Air Sahara was renamed as ‘Jet Lite’ and kept operating as a wholly owned subsidiary of Jet Airways.
Credit: Freepik.com
Benefits identified by Jet at the time of Acquisition
1. Access to Air Sahara’s fleet of 27 aircrafts along with its infrastructure, manpower (especially pilots) and logistics
2. New international routes in the form of access to the neighboring Asian countries like Sri Lanka, Nepal & Thailand. The 2 most lucrative routes from Jet’s point of view were Singapore & London
3. The acquisition would bring economies of scale and would help to compete with the low-cost carriers. The post-acquisition market share of Jet Airways would be close to 42%.
What went wrong post-merger?
1. The valuation of Air Sahara at Rs.1,450 Cr. was considered as significant overvaluation by many experts from the industry. At the time of acquisition Air Sahara already had accumulated losses of Rs.942.90 Cr. Over and above that the amount was payable in cash, which was financed from additional borrowings, added to Jet’s already existing cash flow problems.
2. Post-acquisition Jet Airways’ had a mixed fleet with different sizes of airplanes which lead to higher cost for repairs & maintenance.
3. Some industry experts believed that Jet Airways could not completely achieve the economies of scale because it kept Jet Lite as a separate entity and did not fully merge the operations
4. The human resource from both the airlines had very different operational environments. The compensation for Air Sahara’s personnel was higher compared to Jet which became an issue bringing all the employees under one roof.
5. As Jet Airways kind of rushed into the deal, the terms & conditions laid down for infrastructure & logistical exchanges were not clear in the agreement. This created operational issues later which also required intervention from ministry of aviation.
6. Jet Airways & Jet Lite both simultaneously operated at domestic routes which failed to bring out the appropriate brand separation in the minds of the customers.
7. Jet & Sahara also battled in court over the payment of around Rs.200 crores. Jet Airlines claimed that it had to bear a tax liability on behalf of Air Sahara which Jet adjusted while making balance payments to Air Sahara. The dispute went to supreme court & hence Jet failed to completely concentrate on merging the 2 businesses.
On account of the failed acquisition of Air Sahara and other operational issues in the competitive industry turned the Jet’s financial solvency on its head. Jet Airways reported net losses in all four financial years during this period. These consecutive loss-making years brought down Jet’s Reserves & Surplus from Rs.4,064.51 Cr. as on 31st March 2008 to Rs.1,510.06 Cr. as on 31st March 2011.
Author: Prof. Siddhesh Soman
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