A Study of Mergers & Acquisitions in Aviation Industry in India and Their Impact on the Operating Performance and Shareholder Wealth Nisarg A Joshi
Ahmedabad Institute of Technology
Jay M Desai
Ahmedabad Institute of Technology
The objective of this paper is to study, why organisations take the inorganic mode of expansion. However, the main focus is on studying the operating performance and shareholder value of acquiring companies and comparing their performance before and after the merger. To conduct a uniform research and arrive at an accurate conclusion, we restrict our research to only Indian companies. To get a perspective on India, we study aviation sector.
We will test feasibility that mergers improve operating performance of acquiring companies. However on studying the cases, we conclude that as in previous studies, mergers do not improve financial performance at least in the immediate short term.
The air travel market grew up originally to meet the demand of business travelers as companies became increasingly wide-spread in their operations. On the other hand, rising income levels and extra leisure time led holidaymakers to travel to faraway places for their vacation. A further stimulus to the air travel market was provided by the deregulation and the privatization of the aviation industry. Stateowned carriers that hitherto enjoyed monopoly status were now exposed to competition from private players. However, one development that changed the entire landscape of the industry was the emergence of low cost carriers (LCCs). These carriers were able to offer significantly cheaper fares on account of their low-cost business models and thereby attract passengers who might not otherwise be willing to fly. LCCs have achieved rapid growth in market share in the U.S. domestic market, short-haul market in Europe and recently in Asia. Since 1970, the international passenger traffic has grown by an average rate of more than 6%, compared to a 7% increase in the domestic passenger traffic. The aviation industry is highly cyclical. However, in times of recession, the decline in the industry growth rate is much sharper when compared to the world economy. After witnessing a strong growth during the late 1990s, the industry saw a sharp reversal in fortune as a result of a global economic downturn in 2001. The situation was further aggravated by 9/11 attack, the Iraq war and the SARS epidemic. The mammoth financial losses incurred by the scheduled carriers during this period led to a long-overdue restructuring among the full service carriers (FSCs). Many airlines embarked upon severe cost-cutting and fleet-rationalisation programmes as they struggled to remain afloat. The conditions for FSCs were further worsened with the advent of budget carriers in the U.S. and Europe.
There was however a strong rebound in traffic in 2004, led by a strong recovery in the world economic growth and which continued for the next two years (2005 and 2006). According to ICAO (International Civil Aviation Organisation), the revenue per passenger kilometers (calculated as the number of seats multiplied by the kilometers flown) for international services has grown by 8.5% in 2005 and is estimated to have grown by 6% in 2006. The strong growth in the traffic and recovery of higher fuel cost through surcharges resulted in strong revenue growth for airline companies. However, this did not translate into a recovery in profitability, primarily on account of a significant increase in fuel costs. According to IATA, the combined losses posted by the world's scheduled carriers amounted to US$ 6 bn in 2005, following a cumulative loss of US$ 36 bn in the previous four years.
Future Outlook: As per the estimates of aircraft manufacturers and other industry bodies, the world passenger traffic is expected to grow at 5% p.a. in the medium to long-term. The growth will however be slower in matured economies, but faster in...
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