presents

GATHBANDHAN
Every Grand Alliance needs an Expert Generalist!

Last Date of Submission:

October 08, 2020

Round 1

The Red Brick Summit

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD
 GATHBANDHAN 2020: ROUND 1
1. The Global Aviation Industry
With the creeping advent of neo-globalization in the 1990s, the international aviation industry was triggered
into expanding its operations, on an expedient basis, to facilitate the transfer, transport, and tourism of the
global denizens and their interests. Over the last three decades, the global aviation business has become an
industrial behemoth with its valuation inching towards the one trillion-dollar mark at a CAGR of 4.1%
from 2013-19. (See Figure 1)

Global Aviation Industr y

1200
945 983
1000 900
810 800
701 740 750
USD (in billion)

800 680

600
400
200
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year

Figure 1

However, when the global economy was steadily rocketing towards unprecedented highs on a Q-o-Q basis,
the world was hit, at the beginning of the year 2020, by a deadly viral pandemic ‘Coftin’ which hurled the
global economy into a standstill. The most adversely affected industry was aviation and its ancillary
businesses as all countries, without exception, restricted movement of goods and people alike, both cross-
border and domestically. This led to a huge downfall in effective revenues whilst the capital-intensive nature
of the industry led to airline owners reeling in sweat at the thought of their increasing capital and overhead
costs. (See Figure 2)

Projections for the Global Aviation

Industr y
2852
3000
2500
2000
1500
1000 770.04
392
500 90
0
2020 (Jan-Dec) 2021 (compared to 2020)

Estimated overall reduction in passengers (in million)

Estimate loss of gross operating revenue (in billion)

Figure: 2

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Aviation players, all over the world, are now attempting to find plausible solutions to the problem of
customer hesitance in travelling by aeroplanes. The Coftin awareness campaigns, run in various countries,
have subconsciously instilled the idea that aeroplanes are constricted boxes wherein the air does not get
filtered continuously. Though the airline industry has been able to break the myth by creating several
advertisement campaigns, the lockdown measures and governmental decisions to ban international travel
have led to numbers plummeting in capacity utilization of airlines all across the world. (See Figure 3)

Passenger Numbers v Capacity

500
400
(MILLIONS)

300
200
100
0

MONTHLY TRAVEL GLOBALLY

Actual Seat Capacity offered Total Passenger number

Domestic Passenger Number International Passenger number

Figure: 3

2. Royal Panda Airlines, Narniabaad

Royal Panda Airlines, referred to as ‘RPA’, is one of the major airlines in the world. It is a low-cost carrier
headquartered in the country Narniabaad. The country, with a population of 100 million people, is famous
for its sparkling alpine lakes, majestic mountains, and elegant cities with a rich cultural heritage. In the earlier
years, due to its hilly terrain, roadways and railways were not efficient means of transport, which thereby
hindered many tourists from coming to the country despite having many exciting destinations. Realizing
the need for a domestic airline carrier, the government of Narniabaad helped RPA substantially to lay its
foundation in 1920.

Initially, RPA operated between the country’s capital and its several tourist destinations. The services
gradually expanded to smaller cities too. At present, it is also operating international flights to and from 10
countries whose passengers are predominantly travelling for leisure and tourism. RPA operates two kinds
of flights- economic and luxury. The luxury flights of RPA are also cheaper compared to its global
counterparts signifying its philosophy of operating on low margins and capturing high market share. RPA
is also well known for its safety standards.

Due to the operations of RPA, Narniabaad has become one of the most popular tourist destinations in the
world. Seeing its success, many other airlines started to enter the market. However, by catering to the needs
of both segments adequately, RPA is still the market leader in both the economy and luxury flights
commanding a market share of 50% and 70% in the respective segments. RPA has a fleet of 692 aircrafts
whose breakup is given in Figure 4.

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Despite the business acumen of its management and associated returns that it has reaped, RPA is not
respected as a paymaster by its employees. Informal complaints, through grapevine chatter, regarding
inappropriate conduct, negligible employee benefits & relations, flouting of labour law and abuse of welfare
norms have been rampant. It is now an open secret that RPA exploits its employees in lieu of profits. There
are registered trade unions at RPA; however, they fear the mandatory adjudication that they would trigger
at the filing of an official complaint. This would inevitably lead to temporary injunctions against paid work.
Consequently, as there are no other major employment alternatives in Narniabaad, trade unions are no
more than paper tigers.

No. of flights of Panda by category

103

195 394

Domestic-economy Domestic-luxury International-luxury

Figure: 4

RPA’s management is sharp and opportunistic. In 1990, when one of its competitors, Rhino Airlines (third
largest in terms of market share), was suffering from financial losses after a change in its leadership, RPA
acquired it at a substantially lower value (relative to its fair value) and strengthened its presence. Also, after
the 2008 financial crisis, RPA has further acquired two smaller airlines that were on the verge of bankruptcy.

Though mergers and acquisitions have a lower success rate in airlines, RPA has a successful history in this
aspect. One of its significant problems is that the aviation industry in Narniabaad has a very high share of
seasonal tourists. (See Figure 5) Presently, there are seven other airlines functioning in Narniabaad
domestically; however, trend analysis has shown that despite marketing vagaries and hostile campaigns, the
other airlines are simply cannibalizing each other’s market while the market share of RPA has remained
stable despite the change in market composition and its constituents. Additionally, there is no significant
growth in the number of tourists in recent years. RPA is now looking to expand its international presence
or, alternately, enter another promising avenue with good growth opportunities.

Number of Tourists Visiting

Narniabaad (in Mn)
80
60
40
20
0
1995 2000 2005 2010 2015 2019

Figure: 5

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3. Current Scenario

The world is presently undergoing the ‘Coftin’ pandemic which is seemingly the world’s worst such
economic & social upheaval in the past five decades. Global economy, and particularly the aviation industry,
has taken a huge hit. It is substantially more significant for RPA as it has had a high share of tourists in the
passengers that it was catering to on a regular basis. Consequently, the need to diversify is much more than
ever! The management of RPA was extremely concerned about the business continuity of the organization.
In a high-level meeting jointly conducted by the tourism and aviation ministry with the leading players in
the market, it was informally ordained that the tourism industry was going to remain stagnant for at least
four more years. This was partly due to the general sentiment about international travel globally with most
countries proclaiming sealed borders for at least three years unless there are specified purposes other than
leisure tourism for which individuals needed to travel. The more significant reason was the inability of the
government to sanction and implement social distancing norms in the local tourist spots due to the
population density. Thus, they did not want international tourists arriving in the country as it would increase
the burden of compliance with norms.

In addition to this, the pandemic is expected to have a huge impact on global trade relations. There is a
trend towards self-reliance and a hardening attitude against globalisation in almost all countries. Companies
are trying to foster domestic self sufficiency by shifting their supply chains to their own countries. This is
expected to reduce cross-country goods transfer and passenger movement.

The Board of Directors at RPA hired a strategy consulting company called “Hashimoto Insights” to
recommend plausible solutions for the prospects of the airlines. Hashimoto, after having analysed all
relevant data, concluded that only consumption-driven economies would recover immediately after the
initial shocks of the pandemic. Hashimoto proposed three consumption-driven economies that the airlines
could foray into for continuing its businesses, namely Indusland, Chimerica, and Hyenatown. Although all
three seemed like feasible propositions at the beginning, Hashimoto cautioned that Chimerica had
developed multiple barriers to entry for foreign players in the market such as a large one-time donation fee,
compliance-triggered-restructuring of the airlines, usage of only indigenously developed aircrafts, etc. To
enter the aviation market in Hyenatown, each player was required to submit through a single window
clearance system developed by the government. However, until further notice, the single window clearance
had been suspended by the government. As per Track-II diplomacy, Hashimoto and the personal legal
advisors of RPA are convinced that Hyenatown will be a closed economy for the next few years to grapple
with the effects of the pandemic and foster its domestic players. Indusland was thus pronounced as the
most appropriate target economy to venture into as an airline company.

Hashimoto and the personal legal advisors of RPA have assured the Board of Directors that the legal and
business environment of Indusland is less hostile compared to the alternatives and the large population of
Indusland provides great opportunities for growth. Though RPA did not necessarily want to foray into a
separate country altogether, the circumstances have become such that the Board of Directors are convinced
that this is the only plausible solution for the sustainability of the business and its stakeholders.

4. Potential Targets

On the basis of Hashimoto Insight’s suggestions, RPA identified Indusland as a suitable market to venture
into. Indusland’s share of tourists in passenger traffic is not very high, but the CAGR of passenger traffic
is the highest in the world for the past decade standing at an average of 12% and projected to grow at the
same rate during the next decade.

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Though initially there was a lockdown imposed in Indusland, the aviation demand has started to grow and
is expected to return to normalcy in a couple of months.

The government of Indusland has now mandated that the width of each seat and distance between adjacent
rows should be above a specified threshold for the next five years for an aircraft to get the requisite NOCs
for flying. This is to reduce the transmission of the Coftin virus intra-aircraft. This decision would require
many low-cost carriers in Indusland to restructure their interiors which is an expensive process; more so as
none of the airlines have secured substantial revenues for the last three months. This new policy is
scheduled to be notified and commence in December 2020. In the meantime, the airlines are mandated to
ensure that adequate safety measures such as PPE kits and alternate seating amongst others are
appropriately adopted.

RPA, well known for its safety standards, is devising a strategy of using their SoPs & repute to attract most
customers returning to taking flights post-Coftin by acquiring or merging with an Indusland-based airlines
company.

Figure(s) 6 & 7 represent the major players in Indusland’s domestic market and their respective market
share:

Domestic Market Share- Revenue

10%
8%
8% 45%
11%
18%

Crown Jewel AirIndus Hastara

GoDragon SafeJet Others

Figure: 6

Market Share by monthly passenger count

60.00%
49.50%
50.00%

40.00%

30.00%
22%
20.00%
10% 9%
10.00% 5.50% 4%
0.00%
Crown AirIndus Hastara GoDragon SafeJet Others
Jewel

Figure: 7

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Hashimoto, pursuant to in-principle approvals from the BoD of RPA Airlines, scrounged Indusland’s
aviation market for potential target companies. The laws of Indusland prohibit greenfield ventures in the
aviation sector from foreign enterprises. Thus, it was deemed imperative that the appropriate targets were
found expediently for RPA to commence with the modalities of collaboration. Post the conduct of
extensive due diligence, it was decided that there were two airlines from Indusland that were aligned per
the requirements of RPA, namely Crown Jewel & AirIndus. As per initial talks with the management of the
two airlines, it was found that both the airlines were also looking for expedient solutions to the issues arising
out of the pandemic.

a) Crown Jewel

Crown Jewel employs a workforce of 17,521 employees across Indusland with 1578 individuals working in
different managerial capacities. Crown Jewel has a centralized HR structure wherein there are HR partners
for the different verticals and corresponding offices of the airlines. The HR partners do not have any
decision-making authority in matters other than those of administrative hues. A corporate-level HR
department was established by Crown Jewel’s top-level management from the very initiation of the
company itself. This system was integrated to ensure that there is a strategic vertical and horizontal fit of
corporate level strategy across the organization. The corporate level HR is led by the founder of Crown
Jewel himself who believes that though skilled human capital is necessary for the airline business, it is still
secondary to the necessary infrastructure needed to run an airline. This approach has led to mass attrition,
employee disputes, and trade union posturing. However, due to the large supply of skilled human capital,
the management of Crown Jewel believes that it can manage to succeed despite the churn rate in employees.

Crown Jewel only operates domestically and has a total of 173 aircrafts in operation in its fleet. Up until
2006, they mostly had short and medium range fuel capacity aircrafts, and all the planes used to take a
detour from an intermediate airport for refuelling along longer routes. The efficiency of flight operations
in long routes critically depended on both fuel capacity and passenger load of the aircraft. Although for a
fully loaded (130+ passengers) aircraft travelling over a distance of over 2000 km, it is economical to refuel
from an intermediate airport; in many cases, the planes were not fully loaded with passengers (50% of full
capacity) and it became a huge burden to Crown Jewel as they did not have higher capacity fuel tanks &
had to pay extra on account of refuelling costs and landing and take-off costs.

From 2004 onwards, they started to buy fuel efficient aircrafts. Although the initial costs of investment
were high, operating efficiency was as high as 2.88 L/100Km (30% higher than the traditional engines). By
2019, 40% of Crown Jewel’s aircrafts were fuel efficient aircrafts. Afterwards they purchased aircrafts of
high fuel capacity too. In December 2019, they had 20 large fuel tank aircrafts each having a capacity of
70000-120000 litres of fuel capacity. Whereas medium and small fuel tanks have a capacity in the range of
45000-70000 and 20000-45000 litres respectively.

There are structural differences in the aircrafts too. There are majorly two types of aircrafts- narrow body
and wide body. Narrow body aircrafts are those which have one aisle space and wide body aircrafts have
two aisle spaces. For domestic operation purposes in Indusland, Crown Jewel mostly uses narrow body
aircrafts and thus only about 10% aircrafts are wide body aircrafts. Wide body aircrafts are only used for
high demand routes, executive bookings, and sometimes when booked by travel agencies.

Before the pandemic, the domestic airlines market of Indusland had a steady growth rate of about 15%
compared to the 7.8% global market growth rate, which is why many international airlines were looking
forward to doing business in Indusland. But due to heavy taxation and unreasonable fleet + hangar charges,

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entering into the domestic market was not easy. For emergency maintenance of aircrafts, international
airlines made a pact with domestic players to use their hanger base in lieu of a reasonable charge.

Crown Jewel initially suffered losses since the demand for flights was hit everywhere due to the pandemic.
However, the Indusland market was able to recover well enough that the low-cost carrier could convert the
losses suffered by it in the first quarter of FY 2020-21 to net profits in the July-September quarter. Although
its Y-o-Y profits took a hit by seeing a reduction of 60%, it was still a viable and sound investment option
owing to its spectacular recovery in the face of the calamity. Crown Jewel, however, is low on cash reserves
at the moment and is considering alternatives to upgrade its aircrafts as per the new government regulations.

Crown Jewel's Revenue Growth Rate

20%
15%
10%
5%
0%
2014-15 2015-16 2016-17 2017-18 2018-19

Crown Jewel's Revenue Growth Rate

Figure: 8

Crown Jewel has followed the strategy of organic growth up till now and has taken the correct pricing
decisions to limit its losses. It has a debt-to-equity ratio of 1:8. As per industry experts, 1:6 is considered
the ideal ratio for Indusland airline operators. Moreover, the Indusland government has come up with a
policy wherein airlines which operate only in the domestic market will enjoy interest waiver of up to 20%
of the interest for the worst-hit quarter, i.e. April-June.

RPA was in talks with Crown Jewel and was willing to make an offer of a swap ratio of 1:6 based on Market
Price per Share (MPS). News of RPA looking for a possible acquisition of a lucrative airlines has made its
PE ratio touch 13 while that of Crown Jewel is at 10. Crown Jewel had agreed to the MPS based swap ratio
in its initial talks with RPA.

b) AirIndus

AirIndus’s management is known for valuing its employees and acknowledging them as the quintessential
resources for the growth of the company. The last annual general meeting of AirIndus witnessed its founder
Mr. Mack Maverick saying that “I am the businessman that I am today only because of the people who have worked with
me to build this company. No one in AirIndus works for me. All of them work with me to scale newer heights. Till my dying
breath, I shall ensure that they are happy and feel they are treated as owners of this company”. The company employs a
workforce of 25214 individuals working in various capacities and hierarchical tiers. There are three
registered workers’ associations; however, no dispute has been filed with any adjudicatory authority in the
last ten years. The management values the insights of the workforce and the trade unions ensure that their
demands are reasonable, and they raise their concerns amicably.

AirIndus has a total of 197 aircrafts, out of which 129 are used for domestic purposes and 68 for
international purposes. In 2018, the government of Indusland banned Jet engine aircrafts on a few domestic
airports due to their shorter runways. As an alternative measure, AirIndus added 20 aircrafts with Turbo

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Propulsion engines to its fleet. Turbo propulsion aircrafts were useful for taking-off and landing on shorter
runways but had low passenger and fuel capacity.

Jet Engine 75
Narrow body
Domestic flights (Low-medium fuel
Turbo Prop. 20
carrier)
Wide body Jet Engine 34

Jet Engine 17
Narrow Body
International flights (High fuel
Turbo Prop. 5
capacity)
Wide Body Jet Engine 46

Breakup of flights available with AirIndus

On the domestic front, AirIndus has not been doing as well as Crown Jewel. From losing out on policies
favoring only domestic airlines to having a high debt-equity ratio of 15:1, its debt-servicing liability makes
up for a big chunk of its fixed costs. On the international front, AirIndus has been unlucky in the choice
of its strategy. It had projected itself mainly as a luxury airline that catered mostly to tourism requirements.
In the current scenario, its positioning needs to change and for that purpose, it has had to invest heavily in
rebranding and other advertising expenses which have made its costs increase exponentially.

RPA sees potential in AirIndus and extended the same offer it did to Crown Jewel. AirIndus, however, did
not want its stakeholders to suffer and thus was adamant on an EPS based swap ratio. Combined with the
differences in employee benefits and culture, RPA isn’t sure whether it should accommodate all the requests
that AirIndus has made.

Although AirIndus has not been faring as well as Crown Jewel, RPA is of the opinion that AirIndus’s
international reach could help RPA expand its operations considerably in comparison to the acquisition of
Crown Jewel.

c) Response to Government Regulations

Recently, with the lockdown measures lifting, most airlines have started to use wide body aircrafts as they
can be easily replanned to accommodate the social distancing guidelines. Moreover, wide body aircrafts are
designed with a seat pitch of 32-33 inches (150-170-seater plane). On international routes, customer
satisfaction demand is still quite different, and wide seats with extra leg spaces are preferred for the purposes
of comfort. It is to be further noted that narrow body aircrafts have 18-24 inches of seat width, single aisle,
lesser leg space, and also less distance between adjacent seats. (70-75-seater plane).

It is to be noted that forty percent of AirIndus’s aircraft are wide body aircrafts; thus, despite the
government guidelines for social distancing within aircrafts, they never lacked the appropriate
infrastructure. They were using wide body aircrafts for domestic flights following government regulation
of social distancing norms.

Crown Jewel came up with an approach of replacing narrow seats in the aircraft and redesigning it in a way
that could comply with the social distancing norm while still maximizing the number of passengers in a
narrow body aircraft. Although this redesigning would take approximately 4-5 hours per aircraft, there were

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only two hangars at its disposal in Indusland due to the busy working schedules. Therefore, it has been
difficult for Crown Jewel to reconfigure the seating arrangements of all the planes.

(Hangars are shaded warehouses in airports used to protect flights from direct sunlight. They are further
used for the purposes of repair, maintenance, assembling, and manufacturing of parts of an aircraft. In each
hangar, three flights can stand adjacently and costs close to 1.2 crores Induslandian rupees in rent per
month. Both Crown Jewel and AirIndus have two hangars in Indusland.)

5. Brand Identity Crisis

Considering the present options posed to the Board of Directors, it is inevitable that the vexatious issue of
brand identity and positioning would arise. Contingent on collaboration with either target company, RPA
shall have to decide on its target market segments and marketing plan. The Board of Directors wants to
retain its vision ‘Safety, Society, Symbiosis’ and mission of ‘Providing low-airfare & safe travel to the common man’ in
the aviation market of Indusland too. Both Crown Jewel and AirIndus are strong players in the Indusland
market and have a well-established brand identity and recollection value. The question posed before the
Board of Directors is regarding who to market their business to in Indusland. Moreover, with the new
collaboration, will the business work with a new tradename? If so, what would the new brand identity be?

RPA is a household name in Narniabaad and does not intend to dilute its brand equity in its home country
despite no incoming business opportunities for the near future.

Hashimoto has zeroed in on some alternatives for addressing this issue.

I. In the event that RPA decides to join hands with Crown Jewel, it would be through the acquisition
route wherein it would continue to operate in Indusland under the brand name of Crown Jewel.
This is because the Crown Jewel being a strong domestic player has built a good name for itself in
Indusland and RPA wants to utilise this to its advantage.
II. In case it decides on entering into a deal with AirIndus, it would be through a merger wherein RPA
will have its subsidiary Baby Royal Panda merge with AirIndus and shall operate under the name
‘AirIndus Panda’. AirIndus, as an international player in the aviation market, is not willing to budge
regarding the new name of the airlines and corresponding brand identity.

RPA understands that the branding decision has to be made keeping in mind the changing dynamics of the
post-Coftin aviation business, and the business environment of Indusland, whilst ensuring the best interests
of both parties.

Hashimoto has procured preliminary non-binding assent from the two target companies regarding the
aforementioned modes of collaboration.

6. Problem Statement

As a Director of the RPA, you had been working closely with Hashimoto in determining the appropriate
target company for the business continuity object of the company. You have now been entrusted with the
responsibility of preparing a pitch deck with a maximum of two slides (excluding the ancillary slides). The
pitch deck should contain your substantive rationale for the decision that you have taken in the best interests
of RPA pursuant to the data that has been provided. Assumptions made, if any, should be reasonable and
also explicitly delineated. The decision should be absolute, unconditional, and should be written in bold for
the Board of Directors to peruse. Please note that you can analyse and justify your decision on the basis of
the following parameters (this is an indicative list and not exhaustive)–

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 1. Human Resource Ideology Conflict; and
2. Financial prudence; and
3. Business continuity & prospects; and
4. Operational issues (if any)

In the event that you feel that another decision (including non-merger) might be more suitable for RPA
(subject to the data provided to you in this case study), you may provide the rationale, synergies, and relevant
issues related to said alternative course of action within two slides.

You may use any model or framework, but your submission must answer the questions posed in the
problem. Please note that there is no absolute answer to the problem statement. Participants would be
judged based on the coherence, cogence, feasibility, and exhaustiveness of their answers.

The title slide should only contain the team details and will not be used for evaluation irrespective of the
information you insert in the slide.

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