Competition Law and Role of Merger
Aviation sector is one amongst the least researched sectors in India because it has restricted range of players. However, because the sector is growing quickly, it becomes essential to possess knowledge about the sector and the activities that are happening within the sector. Mergers and Acquisitions in aviation sector has become the most popular topic within the trade, last as a results of increasing cost pressures. These mergers and acquisitions became highly strategic involving many concerns. The dynamic growth and potential in the Indian aviation sector may be gauged from the statement of the EX- civil aviation minister of India in 2004, Mr. Praful Patel - “India’s civil aviation industry will attract investments worth more than US$150 billion in the next ten years.”
The aviation market in India has the market adult very rapidly, however the trade has seen, M&A, the entry of variety of latest carriers with aggressive pricing policies and vital additions of capacity resulting in cut-throat competition. The airlines industry is noisy with news of mergers and acquisitions. within the previous couple of years airline mergers and acquisitions are a growing trend in many countries across the world. it's extremely strategic in nature and square measure undertaken once taking into thought many vital factors.
The finding of this study shows that there's no improvement in surviving Company’s come back on equity, net profit margin, interest coverage, earning per share and dividend per share post-merger & Acquisition. To conduct a homogenous analysis and reach an correct conclusion, it's restricted analysis to solely Indian firms.
This paper makes an endeavor to administer a short summary to comprehensively trot out the Aviation industry in India and M&A within the aviation sector in comparative with Anti-Competitive measures and mergers lead to concentrated markets, antitrust policies must balance these conflicting needs when deciding whether to approve a merger or not?
India’s Aviation Industry
India‘s civil aviation sector is way younger than alternative modes of transportation, and its market structure has modified often over the last few decades. Some features of India‘s civil aviation sector embody a large variety of consumers (passengers and cargo), a comparatively small number of airlines with significant market share, significant value barriers to market entry, differentiated services, and competitive corporations poignant each other‘s business decisions. In 2010- 11 six major Indian carriers with around 400 aircraft catered to 143 million passengers, together with 38 million passengers that originated abroad. In 2010-11, Indian airlines carried or so 1.6 million tons of air cargo. additional growth of the aviation sector between 2011- 2013 is estimated at 15 August 1945. Growth: estimated domestic traveler segment growth is at twelve-tone system every year. Anticipated growth for International traveler segment is 7-membered whereas the expansion for International cargo is likely to grow at a healthy rate of twelve-tone system. India is presently the ninth largest aviation market within the world, according to a RNCOS report “Indian aerospace industry Analysis”. Given the sturdy market fundamentals, it's expected that the civil aviation market can register a compound annual rate of growth (CAGR) of additional than 16 per cent throughout 2010-2013. India's domestic air traffic grew at a rate, which is the second highest after Brazil, consistent with international figures for June 2011, compiled by IATA. The country's domestic traffic grew by 14 per cent within the same amount as against Brazil's 15.1 per cent. India is expected to cross the 450 million mark of domestic passengers by 2020. During the last 20 years from a fleet of solely concerning 100, the scheduled operators currently have reached 435 aircrafts connecting the nation and also the world. Private carriers are anticipated to post a combined profit of US$ 350–US$ 400 million for the fiscal years 2012-13, as reported by Centre for Asia Pacific Aviation (CAPA) India, in its 2012- 13 - Aviation industry outlook. Domestic capacity is also projected to grow by 13-14 per cent for the assessment amount.
Major Players in aviation industry
The players in aviation industry can be categorized in three groups:
Ø Public players: Air India, Indian Airlines and Alliance Air
Ø Private players: Jet Airways, Air Sahara, Kingfisher Airlines, Spice Jet, Air Deccan, Go Air lines, Paramount Airways
Ø Startup players: Omega Air, Magic Air, Premier Star Air & MDLR Airlines.
The Reasons of Merger
The history of civil aviation in India began in December 1912, with the opening of the primary domestic air route between Karachi and Delhi. Air travel remains an outsized and growing industry. It facilitates economic growth, world trade, international investment and commercial enterprise and is thus central to the globalization taking place in several alternative industries. Within the past decade, aviation has mature by 7-membered p.a., because the economies of developing countries, with their own growing population are turning into the new international tourists of the longer term. The additional rise in demand for the air services, the additional is that the provide. The urge to supply additional better and better services with the zeal of high profit inducing market players be a part of the regime of Airline industry. therefore, additional is that the competition among players. But economic theory tells United States of America that competition within the market is nice each for the buyer and therefore the economy. It maximizes client welfare and offers wider selection, better products and services. Competition also enhances productive and allocative efficiencies and, as Michael Porter has emphasized in “The Competitive Advantage of Nations”, it sharpens the competitive edge of the national economy. assuming this to be the some among thousands of advantages to the competition, here are a number of the factors highlighted the creates the nexus between competition and Airline industry.
In different words this part provides the solution to the question to despite the actual fact that the developing country like India were flying within the air remains a Dream for lacks of the individuals, why the Air industry is facing competition?
Reasons for boom in Aviation industry in India
Foreign equity allowed: Foreign equity up to 49 per cent and NRI (Non-Resident Indian) investment up to 100 per cent is permissible within the domestic airlines through the automated route that's while not the RBI (Reserve Bank of India) or government approval. However, the govt. policy bars foreign airlines from taking a stake, directly or indirectly, during a domestic airline company.
Low entry barriers: these days, venture capital of $10 million or less is enough to launch an airline.
Attraction of foreign shores: Jet and Sahara have gone international by beginning operations, 1st to SAARC countries, and so to South-East Asia, the UK, and the US. after 5 years of domestic operations, several domestic airlines too are going to be entitled to fly overseas.
Rising financial gain levels and demographic profile: though India's GDP (per capita) remains terribly low as compared to the developed country standards, India is shining, a minimum of in metro cities and urban centers, wherever IT and BPO industries have created the young generation prosperous. Demographically, India has the highest proportion of individuals in people of 20-50 among its fifty million sturdy middle class, with high earning potential. All this contributes for the boost in domestic air travel, significantly from an occasional base of eighteen million passengers.
Untapped potential of India's tourism: traveler arrivals in India are expected to grow exponentially, particularly as a result of the open sky policy between India and therefore the SAARC countries and also the increase in bilateral entitlements with European countries, and US.
Indian airline industry is beset with several issues, that carries with it high value of ATF, insufficiency of skillful labour, fast fleet expansion, rise in labour costs and price battle among the players. However, the most important issue that poses a challenge for the airline industry in India is infrastructure limitation which is needed to be quickly upgraded.
Airline M and A
Airline M&A are on the rise across the world. These M&A are extremely strategic involving several considerations. Airline M&A bear serious implications for travelers additionally as airline workers. The airlines industry is buzzing with news of M&A. within the previous few years airline M&A are a growing trend in many countries across the world. However, M&A within the aviation industry are extremely strategic in nature and are undertaken once taking into thought many vital factors.
Factors considered in taking M&A decisions
Ø Some of the vital factors thought of by airlines in taking merger and acquisition selections are -The coverage area of the other airline. Strategically an airline would really like to merge with or acquire an airline that operates in routes totally different from its own. This helps in increasing service coverage and avoiding overlapping of flight schedules.
Ø the standard of service and brand image of the other airline.
Ø If the other airline has any partnership with a rival cluster of airlines.
From the purpose of read of consumers M&A might lead to increased airfares. this can be as a result of M&A reduce the number of operators thereby reducing competition and pushing up costs within the aviation industry. Airline M&A even have vital impacts on the staff of the collaborating airlines.
Study Sample: Jet Airways And Sahara Airlines
In Jan 2006, the Indian aviation sector witnessed its biggest merger up to now when Jet Airways (“Jet”) declared its acquisition of Air Sahara (“Sahara”) for an estimated Rs. 2,300 crores (US$ 500 million). The deal created quite stir within the aviation industry, and rival airlines felt that the merger would produce a monopoly, as Jet, who already enjoyed a dominant position within the Indian aviation sector, would gain additional market share post-merger.
In March 2006, when a detailed review, the aircraft Acquisition Committee cleared the transfer of all of Sahara’s assets to Jet. The Ministry of Company Affairs additionally gave its green signal to the merger under section 108A of the companies Act, 1956, under that the Central Government’s previous approval needs to be taken if a body corporate acquires over 25th of the paid-up equity share capital of a public company, and either the acquirer or the target may be a dominant undertaking (i.e., it controls 25th or additional of any services that are rendered in India). moreover, the Monopolies and Restrictive Trade Practices Commission (“MRTPC”) gave its plow ahead once the Director General of Investigation and Registration (“DGIR”) found that the merger between the 2 entities didn't violate the provisions of the Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”).
The reasoning given by the DGIR and different government bodies to justify the merger was that, there had been tremendous growth within the civil aviation sector within the past few years and also the sector was subject to healthy competition. Moreover, new carriers like Spice Jet, kingfisher and Air Deccan created a wider playing field for customers, and, therefore, the Jet-Sahara merger wouldn't have an effect on public interest. In our view the law being incompetent and wasn't able to curb a company attain Monopoly and thus all the authorities ultimately had to clear the obstacles. They were certain by the Lex-loci or the law of land and so if the essential foundation is weak one will do nothing regarding it.
Clearly, the govt. authorities, as well as the MRTPC, have taken a soft approach towards this merger between Jet and Sahara. when 2 companies garner almost 500th market share in an industry, this could benefit stricter scrutiny. for instance, the merger management authority in Europe rejected the proposed GE Honeywell merger some years back on anti-competition grounds.
Unfortunately, the MRTPC has additionally been patterned down significantly over the years and also the Competition Act, 2002 (the “Act”) wasn't totally effective. As of then, a lot of necessary provisions of the Act with reference to anti-competitive agreements, abuse of dominant position and regulation of combinations had not been available in force. this could even be another excuse why the merger passed regulatory muster.
The key advantages to Jet Airways on account of this acquisition were as under:
Ø A wider and a more practical coverage of the Indian market and giving the 2 airlines a really strong position particularly in the metro markets.
Ø A strong platform and a bigger operational base for future growth.
Ø Clear worth proposition for the customers in the kind of wider network coverage, increased and convenient connections and better service levels on a larger scale of operations.
Ø Increased time departures and frequencies through a subsidiary.
Ø Acquire access to skillful personnel like Pilots and Engineers, categories of which there was a major shortage in India.
Ø Exaggerated accessibility of airport infrastructure facilities and accessibility of a bigger operational base for future growth.
Ø Unit cost savings and improved levels of productivity due economies of scale and customary utilization of facilities and resources, arising significantly from common maintenance and training facilities, airport handling facilities, increased purchasing power, finance and administrative set-ups, etc.
Ø Since Sahara Airlines would operate as an independent carrier with its own operative allow, it'd have access to available traffic rights for international operations.
Another vital profit that Jet Airways derived from the acquisition of Sahara Airlines was that their order for extra ten B737NG aircraft that were scheduled for delivery between June 2009 and August 2011 thereby enabled Jet Airways to possess access to additional aircraft to expand its fleet. This delineated substantial extra intangible asset for Jet Airways since it had no aircraft on order and delivery positions weren't accessible before 2011 or solely accessible at a premium.
The acquisition of Sahara Airlines gave Jet Airways the chance to reassess its strategy and use this carrier to provide an innovative service idea of higher quality than current essential carriers.
Critical Analysis: Jet Airways-Air Sahara
Centre for Asia Pacific Aviation is of the view that the acquisition of Air Sahara by Jet Airways was perhaps the carrier’s 1st major strategic error. Permitting Sahara to exit from the market would have resulted in a market correction that may have been to the advantage of all players. Jet incurred a high acquisition value and has been funding operating losses ever since. the process of integration has been difficult and expensive and continues to negatively impact Jet Airways. it's reported that Jet Airways has nonetheless to settle the full purchase price for the carrier, reflective the state of its monetary situation.
Jet Airways’ bottom line has been additional impacted by an aggressive international growth that stretched the carrier’s resources and damaged investor confidence.
The airline has since been forced to cut variety of existing routes and halt new services because it consolidates its overseas network. to deal with the overcapacity in its long run fleet, Jet Airways has hired variety of wide body aircraft to Gulf Air and Muscat and Oman Air.
Hence there are no significant improvements in surviving company’s performance post-merger and acquisition and reject the alternative situation which considers that there is significance improvement in surviving company’s performance post-merger and acquisition activity for the sample under consideration.
# Http://www.psalegal.com/pdf/AVIATION BULLETIN-ISSUE I.pdf Last Accessed on 19th November, 2016, 20:00
# Verma, J.C, Corporate Mergers Amalgamations and Takeovers’, 4th Edn., 2002, p.59
# Bhalla, V.K, ‘Financial Management and Policy-Text and Cases’, 5th revised Edn., p.1016
# Nawaz, Shafaque, ‘Law of Mergers & Acquisitions’, p.3