Kingfisher scoops 26% of Deccan

MUMBAI: India’s civil aviation sector is beginning to conform to the Rule of Three. On Thursday, when Air Deccan managing director GR Gopinath announced that Vijay Mallya’s UB group, which owns Kingfisher Airlines, will be buying a 26% stake in his company, the stage was set for a three-way consolidation in the cut-throat civil aviation sector. Price wars will soon be a thing of the past.

While Jet Airways has already bought Air Sahara, the Union government has cleared the merger of Indian with Air-India. The Kingfisher-Air Deccan duo will be the third combo. Together, the three combines will account for over 80% of the domestic aviation market. The bit players will now have to either merge with one of the bigger players or opt for a niche strategy.

After the stake sale, which will infuse Rs 550 crore into cash-strapped Deccan Aviation, the combine will command a market share of more than 29.20% (based on April data), just a nose behind Jet-Sahara’s 29.4%, according to DGCA figures. Gopinath put the duo’s market share at 34% in April, ahead of Jet-Sahara’s 32%.

The Rule of Three, expounded by NRI professors Jagdish Sheth and Rajendra Sisodia, holds that every industry consolidates into a threesome, with a combined market share of 70-90%. The Indian civil aviation sector mirrors the theory as consolidation has accelerated to a new pitch.

The Kingfisher investment brings Deccan Aviation’s year-long quest to induct a financial investor to a successful conclusion, with the added benefit of airline consolidation and synergies in aircraft maintenance and market complementarity. While Kingfisher operates a full-service airline, Air Deccan runs a low-cost one. While Kingfisher promotes a lifestyle, Air Deccan is all about cheap transportation.

Not everybody, of course, buys the synergy argument. Not least Kingfisher’s rivals. “There’s been always a problem in a full-service carrier running a low-cost airline. It has never worked. Low-cost airlines cannibalise full-service carriers,” says Ajay Singh, director of SpiceJet.

This may explain why both Jet and Kingfisher want to run their low-cost airlines as separate entities. While Jet is rebranding Sahara as Jet Lite, Kingfisher may opt to retain the Air Deccan brand since the existing promoter retains his stake. Mallya’s 26% is being raised through a preferential issue of shares at Rs 155 - a 6% premium to Thursday’s closing price of Rs 146.20.

Mallya will also make an open offer for an additional 20% in Deccan. If this raises his stake to 46%, Deccan’s promoter holdings will fall to 22%, making it a takeover of sorts.

After the preferential issue, Gopinath will become chairman and the company will be run by a CEO, Ramki Sundaram, who is current the airline’s chief financial officer.

It was only last month that Capt Gopinath rebuffed Mallya’s request to invest by remarking: “He may want to buy the moon but the moon may not be available for sale. We are from different planets; he is from Venus, I am from Mars.” But Mallya is not an easy man to be fobbed off. He is known to wait tirelessly to make even foes come around.

Remember the Shaw Wallace acquisition, the company he acquired after 20 years from Manu Chabbria’s widow?

When he realised that the Captain was not willing to give up control easily, Mallya decided to change tack. “I’ve a different offer. I’ll come as an investor. We can still collaborate,” said Gopinath about Mallya’s newest overture. And this found a visible change in the Captain’s attitude to the liquor baron.

“That made a lot of sense to me,” Gopinath tried to explain. He needn’t have tried, as it was clear to all observers that Mallya had offered a life jacket to him.

What the Rs 550 crore financial investment means is that there will be an end to cut-throat price wars, and airlines will see the return of pricing power.

Bloomberg quoted Kapil Kaul, chief executive officer of the India unit of the Centre for Asia Pacific Aviation as saying: “Deccan needs investments. They are critical for its growth. The economics and rationale behind Kingfisher and Deccan getting together are very strong. Both the airlines operate Airbus and ATR planes.’’

“We’ll bail each other out,” says captain Gopinath. “He’s buying the future and not looking at the past,” Gopinath explains. Mallya may buy that argument.

With inputs from Bloomberg