A new round of consolidation has hit the Indian market and this time it's between the unlikeliest of partners: arch-rivals Jet Airways and Kingfisher Airlines.
The two are controlled by rival billionaires, Jet's Naresh Goyal and Kingfisher's Vijay Mallya. Jet is the more established player and Kingfisher made no secret since its 2005 launch that its goal was to unseat the incumbent as India's largest airline group.
But with both seeing losses balloon as a result of overcapacity, a drop in demand and rising costs, a surprise partnership has been forged. Although some have expressed concern that it could be anti-competitive, it is being billed by its supporters as the only option to ensure the sustainability of India's air transport sector, which despite huge growth in recent years is in a delicate state.
The deal was announced on 13 October, after a surprise meeting between Goyal and Mallya. It marked the start of a rollercoaster week for India's air transport sector, culminating in an emotional soap opera-like press conference by Goyal that was televised live on Indian news channels.
Jet and Kingfisher together account for nearly 60% of domestic market share and their partnership will see them codesharing on domestic and international flights as well as interlining. They have also agreed to jointly manage fuel purchases, join forces in ground handling, integrate and rationalise their networks, link frequent-flyer programmes and share flight crews. Until a few months ago such a partnership would have been unthinkable. But India's air transport sector is in serious trouble, and the country's airlines may lose as much as $2 billion this year.
Jet and Kingfisher expect to save as much as Rs15 billion ($310 million) by sharing resources and eliminating duplication. Although co-branding will be explored, they insist that no equity links are planned. The two have portrayed the alliance as one that will "enable a stabilisation of the Indian aviation industry in the larger public interest". India's civil aviation minister, Praful Patel, has given his backing, saying it could be beneficial provided it does not create too dominant a player.
Analysts were supportive in general, but noted that there are no quick fixes to the problems facing India's airlines. "While the alliance is a step in the positive direction, we believe that the revival in traffic growth, at profitable yields, and the ability to raise equity funds is the key to the sector's performance," says CLSA Asia-Pacific Markets.
It will put further pressure on already struggling Air India, which has seen its domestic market share fall in recent years, and the Indian government is considering giving financial aid in the form of a low-interest loan. It will also put pressure on smaller independent carriers such as GoAir, IndiGo, Paramount and SpiceJet. Many industry observers say these carriers may now look to forge partnerships of their own.
India's market started growing in 2003, when Air Deccan launched as the country's first low-cost player. Until then only Jet and Air Sahara were the competitors to state-owned Air India and Indian Airlines, but Deccan's launch was followed by the start of many other new carriers. Consolidation was seen last year, when Air India merged with the former Indian, Jet bought the former Air Sahara and Kingfisher acquired the former Deccan. The three groups now together control nearly 75% of the market.
Two days after announcing the Kingfisher deal, Jet said it was laying off 1,900 employees, or 15% of its workforce. It denied it was related to the Kingfisher deal, insisting it had already decided to "suspend" its expansion programme. But its timing was terrible, and politicians seized on it with one even threatening to bar the carrier from operating out of its Mumbai base.
Jet quickly rescinded, with Goyal holding a press conference to say his conscience did not allow him to see so many employees lose their jobs. But the airline still intends to operate 15% fewer flights in the winter schedule than originally planned and it will need to find new ways to slash expenses to slow its losses.
Some observers see Kingfisher as the one that needs the partnership more, as it has been bleeding cash in part as a result of its international expansion. Jet also has a fledgling international operation but it is more established, and there is speculation that it agreed to the tie-up in return for a pledge by Kingfisher that it will drop its international expansion for at least a few years.
Analysts say there is no guarantee the deal will lead to profitability any time soon, but what the unlikely partnership shows is that desperate times call for desperate measures.
To read our cover interview with Vijay Mallya, go to: flightglobal.com/mallya