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 ACKNOWLEDGEMENT

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Pr
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 Index

Sr. No. Content Pg. No.

Chapter 1
1 Abstract 6
2 Objective of study 7
Chapter 2
3 Introduction 8
4 Processes of merger & acquisition 9-10
Chapter 3
5 Research Methodology 11
6 Analysis and Interpretation 12-19
7 Synergies from the merger 20-21
8 Calculations and Computations 22-27
Chapter 4
9 Summary & Conclusions 28-29
10 Recommendations 30
11 Bibliography 31

1. Abstract

5
Mergers and acquisitions (M&A) are strategic decisions taken for maximization of a
company’s growth by enhancing its production and marketing operations. They are being
used to gain strength, expand the customer base, cut competition or enter into a new
market or product segment. When globalization in the Indian economy was started in
1991, it was believed that it would mean foreigners not only doing business in India but
also taking over Indian companies.

As risk is involved in any business, the success and failure rate of merger goes hand in
hand. Not always there is a successful merger & acquisition. They are done to avoid high
cost and to get readymade markets and resources. The financial cost basically proves to
be low than starting a new company.

This project talks about a case of merger and acquisition between air India and Indian
airlines which proved a fatal loss to the industry and share market. The merger was
initiated with the aim of making profits and gaining high market share for the airline. But
because of post merger HR issues like compensation, career progression, and salary
payment, promotion issues, and employee strikes, the merger did not yield the intended
objectives.

The purpose of this study is to highlight the weak links for the downfall of this merger
which led to a heavy loss in the financial market. The case discusses in detail the major
causes for the AI merger failure, and some of the practices undertaken by the
management to make the merger a success. AI in addition to HR issues was also saddled
with huge financial debts. These two issues gave raise to speculations whether AI would
survive and achieve the objectives of the merger.

6
 A

PROJECT REPORT

ON

MERGER BETWEEN AIR INDIA AND INDIAN AIRLINES

MASTER OF MANAGEMENT STUDIES (MMS)

UNIVERSITY OF MUMBAI

SUBMITTED TO
SINHGAD INSTITUTE OF BUSINESS MANAGEMENT

CHANDIVALI

UNDER THE GUIDANCE OF

Prof. Sreelatha G

SUBMITTED BY

SHALVI SANTOSH VAIDYA

(2015-17 & F-17/50)
FINANCE

1
 CERTIFICATE

This is to certify that Miss Shalvi Vaidya has successfully completed the project work
as a part of academic fulfillment of Masters of Management Studies (M.M.S.) semester
IV examination.

Prof. Sreelatha G.

Name & Signature of Project Guide

Date : _________________

DIRECTOR
SIBM

2
 DECLARATION

I, Miss. Shalvi S. Vaidya of Master of Management Studies (Semester IV) of Sinhgad

Institute of Business Management (SIBM), hereby declare that I have successfully
completed this Project on Merger between Air India and Indian airlines in the academic
year (2015-17).

The information incorporated in this project is true and original to the best of my
knowledge.

_____________________________

Signature

Acknowledgement
3
I wish to express my sincere gratitude to my institute (Sinhgad Institute of Business
Management) to provide me this opportunity. There was always discussion with
professionals about conceptual matters, which enhanced the idea and the knowledge of
training. Thereby I would like to acknowledge the contribution and support of my faculty
mentor Prof. Sreelatha. G who provided valuable insight about aspects of Merger
between Air India and Indian Airlines.

4
 Index

Sr. No. Content Pg. No.

Chapter 1
1 Abstract 6
2 Objective of study 7
Chapter 2
3 Introduction 8
4 Processes of merger & acquisition 9-10
Chapter 3
5 Research Methodology 11
6 Analysis and Interpretation 12-19
7 Synergies from the merger 20-21
8 Calculations and Computations 22-27
Chapter 4
9 Summary & Conclusions 28-29
10 Recommendations 30
11 Bibliography 31

1. Abstract

5
Mergers and acquisitions (M&A) are strategic decisions taken for maximization of a
company’s growth by enhancing its production and marketing operations. They are being
used to gain strength, expand the customer base, cut competition or enter into a new
market or product segment. When globalization in the Indian economy was started in
1991, it was believed that it would mean foreigners not only doing business in India but
also taking over Indian companies.

As risk is involved in any business, the success and failure rate of merger goes hand in
hand. Not always there is a successful merger & acquisition. They are done to avoid high
cost and to get readymade markets and resources. The financial cost basically proves to
be low than starting a new company.

This project talks about a case of merger and acquisition between air India and Indian
airlines which proved a fatal loss to the industry and share market. The merger was
initiated with the aim of making profits and gaining high market share for the airline. But
because of post merger HR issues like compensation, career progression, and salary
payment, promotion issues, and employee strikes, the merger did not yield the intended
objectives.

The purpose of this study is to highlight the weak links for the downfall of this merger
which led to a heavy loss in the financial market. The case discusses in detail the major
causes for the AI merger failure, and some of the practices undertaken by the
management to make the merger a success. AI in addition to HR issues was also saddled
with huge financial debts. These two issues gave raise to speculations whether AI would
survive and achieve the objectives of the merger.

6
 2. Objective of study

 The primary objective of the study is to highlight the failure of merger between
Air India and Indian Airlines.
 To cover the aspects which lead to the downfall of this merger and what
precautionary steps should be taken during merger & acquisition.
 To explain why merger & acquisitions take place.

7
 Introduction

On July 15, 2007 Air India (AI) and Indian Airlines (IA) were merged to form a new
company, the National Aviation Company of India Ltd. (NACIL). The merger was
brought about to solve certain aviation issues such as dipping profits, increase of fleet,
and overcoming competition from new entrants. The merger has brought additional
problems for the airlines and the recent Parliamentary Committee of March 2010 has
termed the merger as a "marriage of incompatible individuals”.

8
 Processes of Merger & Acquisition

Merger and acquisition process is the most challenging and most critical one when it
comes to corporate restructuring. One wrong decision or one wrong move can actually
reverse the effects in an unimaginable manner. It should certainly be followed in a way
that a company can gain maximum benefits with the deal.

Following are some of the important steps in the M&A process:

Business Valuation
Business valuation or assessment is the first process of merger and acquisition. This step
includes examination and evaluation of both the present and future market value of the
target company. A thorough research is done on the history of the company with regards
to capital gains, organizational structure, market share, distribution channel, corporate
culture, specific business strengths, and credibility in the market. There are many other
aspects that should be considered to ensure if a proposed company is right or not for a
successful merger.

Proposal Phase
Proposal phase is a phase in which the company sends a proposal for a merger or an
acquisition with complete details of the deal including the strategies, amount, and the
commitments. Most of the time, this proposal is send through a non-binding offer
document.

Planning Exit
When any company decides to sell its operations, it has to undergo the stage of exit
planning. The company has to take firm decision as to when and how to make the exit in
an organized and profitable manner. In the process the management has to evaluate all
financial and other business issues like taking a decision of full sale or partial sale along
with evaluating on various options of reinvestments.

9
Structuring Business Deal
After finalizing the merger and the exit plans, the new entity or the takeover company has
to take initiatives for marketing and create innovative strategies to enhance business and
its credibility. The entire phase emphasize on structuring of the business deal.

Stage of Integration
This stage includes both the company coming together with their own parameters. It
includes the entire process of preparing the document, signing the agreement, and
negotiating the deal. It also defines the parameters of the future relationship between the
two.

Operating the Venture

After signing the agreement and entering into the venture, it is equally important to
operate the venture. This operation is attributed to meet the said and pre-defined
expectations of all the companies involved in the process. The M&A transaction after the
deal include all the essential measures and activities that work to fulfill the requirements
and desires of the companies involved.

10
 6 Research Methodology

The data required for the study may be collected either from primary sources or
from secondary sources. A major portion of the data in this study has been
collected through secondary sources of data.

The secondary data for the project regarding Merger between Air India and Indian
airlines were collected from websites, textbooks, magazines, annual reports.

11
 7 Analysis and Interpretation

Merger between Air India and Indian Airlines

CASE

AIL goes back to 1932 when Tata Airlines was started by nationalized and was taken over
by the Indian Government. It was turned into a public enterprise and renamed as AIL.
The origin of IAL dates back to 1953 when seven domestic airlines were merged to form
Indian Airlines Corporation (IAC). IAC’s domestic carrier was IAL. IAL enjoyed a
monopoly as the domestic air carrier till the Indian economy was liberalized in 1991.
With the entry of private airlines, IAL’s monopoly began to decline.

With both these flagship air carriers (AIL & IAL) performing poorly, the idea of a merger
between the two began to gain ground. Praful Patel submitted the merger plan to the
Union Cabinet in March 2006 for approval. The Government of India ordered Accenture
Inc (Accenture) to formulate a road map for the proposed merger. According to
Accenture, net synergy benefits of Rs 8.2 billion (against the integration cost of Rs 2
billion) was envisaged, potential recurring synergies were expected to enhance
profitability by Rs 6 billion at the end of the 3rd year of merger.

The merger was approved on March 1, 2007, by the Union Cabinet and the merged body
was called the National Aviation Company of India Limited (NACIL). It was
incorporated on March 30, 2007. The merger became effective from August 22,
2007. The brand name "Air India" was retained as also the "Maharaja" as the mascot of
the merged entity. The logo of AI was a red colored "Swan" shaped image with an orange
colored "Konarc Chakra" placed inside. The logo was placed on the tail of the aircraft.

Contrary to expectations, the merged entity started incurring huge losses right from 2007.
Thus, the major objective of the merger, i.e. gaining profits, was not fulfilled. AI incurred
a loss of Rs 280 billion from April 1, 2007, to March 31, 2012. Employee unrest due to
unresolved HR issues further aggravated the airline's problems. AI also faced fierce
12
competition from private airlines like Indigo Airlines, Jet Airways, and Spice Jet, which
were quick to take advantage of the troubles at AI and the resulting flight cancellations.
These airlines made profits and gained a huge market share at the cost of AI. In addition
to these, inconsistent leadership also affected the fortunes of the merged entity adversely.

13
 Objectives of Merger with respect to the case

 Create the largest airline in India and comparable to other Airlines in Asia

 Provide an integrated international/domestic footprint which will significantly

enhance customer proposition and allow easy entry into one of the three global
airline alliances, mostly star alliance with global consortium of 21 airlines.

 Enable optimal utilization of existing resources through improvement in load

factors and yields on commonly serviced routes as well as deploy ‘freed up’
aircraft capacity on alternate routes.

 The merger had created a mega company with combined revenue of Rs 150
billion and an estimated fleet size of 150. It had a diverse mix of aircraft for short
and long haul resulting in better fleet utilization.

 Provide an opportunity to fully leverage strong assets, capabilities and

infrastructure.

 Provide an opportunity to leveraged skilled and experienced manpower available

with both the transferor companies to the optimum potential.

 Provide a larger and growth oriented company for the people and the same shall
be in larger public interest.

 Potential to launch high growth and profitability businesses

 Provide maximum flexibility to achieve financial and capital restructuring

through revaluation of assets.

14
 Economies of scale enabled routes rationalization and elimination of route
duplication.

 The new entity was in a better position to bargain while buying fuel, spares and
other materials. There were also major operational benefits.

 Traffic rights- the protectionism enjoyed by the national carries with regard to the
traffic right entitlements is likely to continue even after the merger. This will
ensure that the merged airlines will have enough scope for continued expansion,
necessitated due to their combined fleet strength.

15
 Reasons that led to the merger

1.) Escalating costs of Aviation Turbine Fuel (ATF).

2.) Immense competition from private and low cost airlines.
3.) Increased cost pressures due to acquisition of additional aircraft.
4.) Leadership crisis due to frequent change of the chairman-cum-managing
director.
5.) Air India could not fully use the bilateral rights unlike foreign airlines which
took maximum advantage.

6.) Declining passenger traffic in the premium class.

What the merger tried to achieve with respect to the case.

1) Economies of scale in areas such as maintenance, ground operations, the use of

landing slots and parking rights etc.
2) Volume Discounts in areas such as fuel purchase, insurance.
3) Increased fleet size such that the combined fleet was of over120 aircraft,
currently over 150 aircraft, placing it among the top 10 airlines in Asia, and the
top 30 in the world.
4) Hub and spoke system which could be achieved by the merger of the
international and domestic airlines.
5) Leverage and pool-in of resources such as manpower, infrastructure and assets,
better aircraft and resource allocation.
6) Star Alliance membership (Air India has been invited to join the 21 member
consortium).

Post Merger Problems

16
1) Incomplete integration of official positions, of IT systems and as well as infra-
structure due to different aircrafts flown by the two companies, and inability of
employee unions to accept merger.

2) Ballooning of losses due to:

 Increasing prices of ATF
 Decreased passenger traffic during recession
 Unnecessary and costly acquisition of aircraft fleet

3) Leadership crisis continues due to frequent change of CEO’s(Four different

CEO’s in last two years)

4) Increased competition from domestic airlines as well as international airlines due

to unfavorable government policies.

Reasons for failure

1) The merger coincided with a flurry of increased domestic and international

competition.
2) Weak management and organization structure
3) More attention to non-core issues such as long term fleet acquisitions and
establishing subsidiaries for ground handling and maintenance, than to addressing
the state of the flying business.
4) Bloated workforce
5) Unproductive work practices
6) Political impediments to shedding staff

Post Merger Scenario

1) NACIL’s employee-to-aircraft ratio: At 222:1(the global average is 150:1),

resulting in a surplus employee strength of almost 10,000.

2) Fleet Expansion: NACIL’s fleet expansion seems out of sync with the times. Most
airlines are actually rounding their fleet and cancelling orders for new planes.

17
 While NACIL plans to induct around 85 more aircrafts which means their debt
going forward.

3) Mutual distrust and strong unions: Strong opposition from unions against
management’s cost-cutting decisions through their salaries has led to strikes by
the employees.

4) Increased competition: Air India’s domestic market share dropped from 19.8% in
august 2007, when the merger took place, to 13.9% in January 2008 before rising
to 17.2% in February 2009.

5) Lower load factor: The Company’s load factor is decreasing year by year; 2005-
06 load factors are 66.2% which is more than present load factor. Air India load
factor is likely to be low because of the much higher frequency operated on each
route. Lower load factor could decrease the company’s margins

Prevention for failure

1) Continuous communication: employees, stakeholders, customers, suppliers

and government leaders.
2) Transparency in managers operations.

3) Capacity to meet new culture higher management professionals must be ready

to greet a new or modified culture.
4) Talent management by the management.

18
 8 Synergies from the Merger

 The Accenture report expected synergies on two counts – revenue synergies

(primarily on account of network integration) and cost and capital productivity
synergies (leveraging economies of scale for rates for catering, crew boarding and
lodging etc.; opportunities for rationalizing overlapping facilities and
infrastructure e.g. international locations serviced by both airlines). A figure of
Rs. 820 crore on account of synergies at the end of the third year after merger was
projected by the consultant.

Expected build-up of synergy benefits and integration costs.

19
  However, except for a statement that profitability would be enhanced by over Rs.
600 crore (4 per cent of current combined revenue), detailed item-wise financial
analysis was not available; so as to assess the reasonableness and robustness of
these projected savings.
 The only major accounting implication highlighted was that the post-merger net
worth would go up considerably (from Rs. 185 crore as of 2005-06 to Rs. 2557
crore), mainly due to revaluation of fixed assets by 50 per cent of the current
book value. Obviously, this had no operational or cash flow benefits.
 One of the key assumptions for improved employee productivity was that the
merged entity would have fewer employees/ aircraft on account of increase of
fleet through procurement, and reduction of employee base by around 4,000 due
to expected retirements. However, such expected improvement in employee
productivity had not been achieved, and was, in any, case not directly dependent
on the merger.

The Ministry in its reply (August 2011) narrated the action taken during the last four
years, like route rationalization, combined insurance policy, etc. and the benefits accrued
in the first year of merger and also stated that the consultant had looked into the financial
aspects of the merger.

Source:
http://www.cag.gov.in/sites/default/files/audit_report_files/Union_Performance_Civil_Av
iation_Ministry_of_Civil_Aviation_18_2011_chapter_4.pdf

20
 Calculation for Profit & Loss account

Mar’09 Mar’08 Mar’07 Mar’06 Mar’05

Income
Operating income 13,224. 13,638.3 8,438.8 8,833.7 7,588.1
52 5 6 1 7

Expenses

Material consumed - - - - -

Manufacturing 7,060.64 6,252.51 3,527.4 5,067.6 3,920.3

expenses 2 3 8

Personnel expenses 3,338.85 3,224.50 1,340.5 1,244.3 1,182.0

1 7 3

Selling expenses - - - 462.12 403.45

Administrative 7,271.07 7,615.59 4,603.3 1,085.5 1,002.0

expenses 6 0 8

Expenses - - - - -
capitalised

Cost of sales 17,670.56 17,092.6 9,471.2 7,859.6 6,507.9

0 9 2 4

Operating profit 4446.04 -3454.25 1032.43 974.09 1080.23

Other recurring 254.86 1,619.12 780.39 235.4 21.76
income

Adjusted PBDIT -4,191.18 -1,835.13 -252.04 1,209.4 1,101.9

9 9

Financial expenses 1,665.88 701.3 239.44 1,027.7 715.57

21
 7

Depreciation 1,225.89 761.66 398.75 406.19 426.03

Other write offs - - - 1.44 3.52

Adjusted PBT -7,082.95 -3,298.09 -890.23 -225.91 -43.13

Tax charges -1,641.54 -1,071.93 -93.37 -2.51 -46.22

Adjusted PAT -5,441.41 -2,226.16 -796.86 -223.4 3.09

Non recurring - - - -9.97 -30.1

items

Other non cash -106.85 - 348.93 248.31 123.37

adjustments

Reported net profit -5,548.26 -2,226.16 -447.93 14.94 96.36

Earnigs before -7,774.42 -2,226.16 -353.98 94.05 96.36

appropriation

Equity dividend - - - - 15.38

Preference - - - - -
dividend

Dividend tax - - - - 1.57

Balance Sheet

Mar’09 Mar’08 Mar’07 Mar’06 Mar’05

22
Sources of
funds

Owner's fund

Equity share 145 145 153.84 153.84 153.84

capital

Share - - - -
application -
money

Preference - - - - -
share capital

Reserves & 63.35 5,668.13 -261.97 185.96 171.12

surplus

Loan funds

Secured loans 2,365.95 2,891.75 1,846.69 1,243.24 565.95

Unsecured 28,542.07 15,521.65 5,818.41 2,378.67 695.74

loans

Total 31,116.37 24,226.53 7,556.97 3,961.71 1,586.65

Uses of funds

Fixed assets

Gross block 24,329.40 18,654.56 6,471.27 7,109.88 7,121.60

Less : - - - -
revaluation -

23
reserve

Less : 1,838.05 760.12 4,366.85 4,914.43 4,641.18

accumulated
depreciation

Net block 22,491.35 17,894.44 2,104.42 2,195.45 2,480.42

Capital work- 5,011.37 3,972.63 2,994.75 1,185.33 21.91

in-progress

Investments 123.18 90.12 90.7 87.02 58.26

Net current
assets

Current assets, 8,746.02 7,478.95 4,386.48 3,164.77 2,116.88

loans &
advances

Less : current 5,255.55 5,209.61 2,019.38 2,670.86

liabilities & 3,090.82
provisions

Total net 3,490.47 2,269.34 2,367.10 493.91 -973.94

current assets

Miscellaneous - - - - -
expenses not
written

Total 31,116.37 24,226.53 7,556.97 3,961.71 1,586.65

Notes:

24
Book value of 122.42 90.05 - -
unquoted 89.36
investments

Market value 43.03 47.07 36.78 - -

of quoted
investments

Contingent 25,918.42 26,340.93 25,994.75 - -

liabilities

Number of 1450 1450 1538.36 1538.36 1538.36

equity shares
outstanding
(Lacs)

25
 RATIOS for the year 2005 and 2009

Ratios Mar’09 Mar’05

1. Current ratio 1.66 0.68
2. Eps -375.27 0.20
3. Quick ratio 0.93 0.56
4. Fixed assets 0.54 1.07
turnover ratio
5. Dividend per share - 1.00

Interpretation:

1. Current Ratio: In mar’05 liabilities are greater than its assets. It shows that the
company is not in good financial health, it does not mean that it will go bankrupt,
whereas in mar’09 the financial condition is stable.
2. Eps: In pre merger earning per share is in profit than in post merger
3. Quick ratio: Companies with quick ratio of less than 1 do not have the liquid
assets to pay their current liabilities and should be treated with caution. For the
stability the ratio should exceed 1, but again a very high ratio is not always an
unalloyed good.
4. Fixed assets turnover ratio: Fixed assets turnover ratio indicates that a company
has more effectively utilized investment in fixed assets to generate revenue,
whereas in between mar’05 & mar’09 the ratio has decreased, hence the merger
has not effectively utilized investment in fixed assets.
5. Dividend per share: Increasing DPS is a great way for a company to signal strong
performance to its shareholders. But in post merger the company did not made
any gains and so did not have any assets to pay for.

26
 10 Summary and Conclusions

SUMMARY

Reaping the benefits of a merger or acquisition is a notoriously tricky business. Outcomes

are uncertain, previously unknown or unimportant facts suddenly immerge as critical, and
there many moving parts to control. On top of all this, the business must continue to serve
clients, run operations and execute in the face of major often disruptive, integration
activity.

27
CONCLUSION

The merger of Air India and Indian is the most significant recent development for India’s
aviation sector. Managed correctly, the combined entity has huge potential as the largest
airline in one of the world’s largest and fastest growing economies. Global alliances will
be attracted by its extensive network in an untapped part of the world (and indeed Star
Alliance is due to vote on Air India’s membership later this week). However, the
complexity of overseeing a merger taking place against such a challenging environment
cannot be overstated, albeit there was no other option. Ultimately, Air India will need to
be privatized over the next 3-5 years to introduce commercial disciplines. A partial IPO,
scheduled for 2008/09 would be the first step, although the value that can be achieved
will be highly dependent on the results from the integration process over the next 12-18
months. A Heavily debt-laden ledger will not make that process easy, unless profitability
is strong. Introducing a strategic partner would ideally precede this first step, but would
probably follow. Yet an Indian partner might raise competition concerns, and an overseas
partner would require changes in the regulations which currently prohibit foreign airlines
from holding a stake in Indian carriers. If Air India can successfully navigate through the
next couple of years, it has the potential to become a major Asian airline, but 2008 will be
critical.

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 Recommendations

 For the above case we may recommend that two entities should go into the
merger if their capital is on similar lines.
 Should have appointed a professional CEO backed by a strong Board of
Directors and give him a free hand.
 Carry out the planned spin-off of the ground handling and maintenance,
repair and overhaul operations. Offer a voluntary retirement scheme if still
necessary.
 Should have implemented training exercises and training and development
sessions for the employees.
 Should have decided a similar pay structure, way of operating and IT
integration, so they could have avoided conflicts and have made work
simple.

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 11 Bibliography

 https://www.scribd.com/doc/26661602/Merger-Between-Air-India-and-
Indian-Airlines
 www.investopedia.com
 https://www.slideshare.net/vivekmhatre2/38155834-
airindiaindianairlinesmerger
 https://www.slideshare.net/prafulmetange/merger-acquisition-with-case-
study
 http://www.cag.gov.in/sites/default/files/audit_report_files/Union_Perform
ance_Civil_Aviation_Ministry_of_Civil_Aviation_18_2011_chapter_4.pdf

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