Expect turbulence

If the merger of Indian Airlines and Air India is being pursued in order to arrest the two airlines’ loss of market share over the years (as some reports have suggested), it is a bad idea. A merged airline would of course show a spike in the numbers when it comes to market share, but that would be statistical illusion. It would in any case be a temporary feature, unless the underlying factors that have caused the two airlines to lose ground are addressed. So far the argument has been that it was the failure to order new aircraft that was the villain of the piece; that has been addressed. If that was the sole source of the problem of declining market share, then both airlines should start doing better in the near future. So the business of market share should not drive the merger decision.

This is not to argue against size being an advantage in the aviation business. The trend of even giant airlines merging in many markets (KLM and Air France, for instance) is too well-established to dispute that aviation has become a size game. And a merged Indian Airlines and Air India will be a sizeable regional airline, even if not a global giant. The other argument in favour of merger is economies of scale in a whole series of areas: maintenance, ground operations, the use of landing slots and parking rights, and much else.

But the single-most powerful argument is that a merged company can effectively deliver the classic hub and spoke system that the largest airlines have been operating: Emirates in Dubai; Lufthansa in Frankfurt and Munich; British Airways in London; Delta in Atlanta; and so on. The domestic leg will bring passengers to the two main gateways of Delhi and Mumbai; also, Air India’s domestic flights can be scheduled to complement the Indian Airlines schedule. This could be important when looking at a future in which rival Jet will be operating both domestic and international routes. The same result cannot be fully achieved through airline cooperation or even through the device of a common holding company. Merger is therefore a logical solution.

That is in theory. The problems arise in terms of the disparate nature of the two airlines’ work forces, their pay structures and organisational ethos. In a merger scenario, for instance, it is likely that pay structures will migrate upwards, towards the level prevailing in the higher-paying airline. Similarly, the airlines have duplicate structures in a large number of areas; unless these are got rid of, it will add a layer of fat and a lot of staff unhappiness. Both airlines, for instance, have ground-handling facilities at the Delhi airport, to take one instance. Without rationalisation of staff, it will become impossible to benefit from the economies of scale that are there for the asking; and both being public sector airlines with strong trade unions that have access to politicians (especially from the Left), any attempt at staff rationalisation is going to run into turbulence.

There is also the issue of flying overseas, traditionally seen as the higher end of the aviation business. If Indian Airlines pilots/crew are expected to stay in the domestic arena while Air India flies overseas, there will be heartburn. If Air India pilots are asked to do domestic routes, there will be an even bigger problem as they lose their fat international allowances. And finally, as more and more airlines start international airlines, the hub and spoke system itself may break down. Lufthansa, for instance, now flies to six destinations in India and does not need domestic spokes at all. In other words, the practical reality may be that none of the benefits of merger may become available, and there will simply be a lot of friction and unhappiness. Some caution would therefore be in order, before rushing headlong into a merger.