Single team to run Kingfisher-Deccan combine
By having just one team, tapping synergies become a lot easier with a common head for engineering, operations and every other function. Fly your way to work
By Cuckoo Paul, TNN |
MUMBAI: Vijay Mallya is trying to turn conventional aviation wisdom on its head. India’s new aviation czar is putting in place one common management team to run the newly-merged Kingfisher-Deccan combine.
Globally, the two airline industry models, low-cost carriers and full service airlines, are considered incompatible and airlines typically insist on separate teams, lest one contaminate the other. Of course, Mr Mallya is taking a leaf out of his mainline liquor business.
“It’s like my whisky brands. United Spirits sells whisky for Rs 5,000 a bottle and also for Rs 200. You don’t need separate managements to sell or understand these markets,” he says.
Mr Mallya says he was swayed by his experience with Deccan in the past six months. “Having two separate teams does not work. On paper, the synergies seem easy to identify, but the minute you start to change things, people become fiercely protective,” he says.
By having just one team, tapping synergies become a lot easier with a common head for engineering, operations and every other function. Yet, in 2005, when Australian carrier Qantas spawned its own low-cost airline Jetstar, one of the few such successful examples in aviation history, it had two different operational teams. What’s more, the overlap in terms of routes and operations is just about 10%.
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“Our situation is completely different from the typical cases where large legacy carriers, with huge staff costs, have spun off low-cost airlines. Kingfisher is a relatively young airline without legacy costs,” says Mr Mallya. And to help matters, both the airlines have common aircraft types (Airbus and ATRs). Creating a common pool of pilots, crews and engineers across both airlines may not be that difficult. Kingfisher-Deccan have a 65% overlap in terms of routes and operations, perhaps signalling the relative ease in merging the two operations.
Of course, aviation experts aren’t convinced by Mr Mallya’s logic. Kapil Kaul, the India head of aviation think tank CAPA (Centre for Asia Pacific Aviation) said the success of the merger hinges on taking out costs from the operations and putting in an appropriate management structure.
“There is a huge difference in the two business models. And the two have to be managed differently. The biggest challenge will be the people,” he says. Mr Kaul estimated that the airline will be able to save between $80 million and $100 million, as a result of the merger. The two airlines will have to be run as separate brands with a common back-end, he says.
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A senior executive at a rival airline says most of the synergies will come from lower costs. Consulting firm Accenture has recommended that savings could accrue from common spare inventory, better route planning and improved aircraft utilisation. Though no one is quite sure at this stage, but a possible reduction in headcount could be also on the cards. Eventually, airline industry analysts say the key to the success of the merger lies in smart execution.
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Clearly, there’s a lot riding on the merger. The Kingfisher-Deccan combine has accumulated losses of about Rs 2,000 crore so far. Investment banking sources say airline companies are at the bottom of the pile in terms of investor interest. Almost every airline in the country is in the market, trying to raise money, but they have been simply unable to get the right valuations. If Mr Mallya is able to nurse the combined entity back to profitability over the next one year, the liquor baron may well prove his friends in the aviation industry wrong.
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