Consolidation in the air

No matter what the industry, consolidation is usually driven by economies of scale, cost efficiencies and the need to tap other synergies. These should benefit consumers, except for the fact that consolidation also gives new pricing power to the players who dominate a market. In the domestic aviation market, consolidation is following the classic route of taking out of business the unviable players who have been price warriors, so consumers end up paying more in a consolidated market structure""Kingfisher Airlines, for instance, has already said that it will try and raise fares. Conclusion: the happy days of low, low air fares may be coming to an end. Except that the aviation business is prone to surprises.

If any market was ripe for a shake-up, it was domestic aviation since virtually every player had been losing large dollops of money. The rapid entry of new players in the last three years, the quick expansion of the market (50 per cent in 2006), the high fuel costs and the lower fares have created a roller-coaster history, but things had to settle down. Following the Jet-Sahara deal, the coming together of Air India and Indian and, most recently, Kingfisher's acquisition of a controlling stake in Air Deccan, 85 per cent of the domestic market is now accounted by the three merged airlines. The numbers show that Kingfisher-Air Deccan is now close to the market leader with a 29 per cent share of the market, while Jet-Sahara still leads with about 33.5 per cent and Air India-Indian has about 23 per cent. That leaves room only for niche players, and it is far from clear that the obvious niches (the low-cost corner of the market and a regional identity) are viable. Inevitably, this has put pressure on the bit players who remain, and some of these too have been bitten by the consolidation bug. The reports are that Paramount Airways may be eyeing GoAir for a buyout.

It so happens that aviation, like the media or a football club, is an ego-boosting industry""ownership bestows a glamour and profile that being a cement magnate does not get you. Hence, the business case for starting or continuing an airline gets clouded quite often by extraneous considerations. The calculus gets even more complex when, for businessmen like Vijay Mallya of Kingfisher and Subrata Roy of Sahara, the profile and the brand-building that comes from their aviation business has spin-off benefits for their core businesses of beer and para-banking (it is not an accident that both have also dabbled in the media, while Mr Mallya has also invested in Kolkata's football). With Mr Roy exiting and Mr Mallya becoming a significant player in aviation, business logic can now be expected to hold greater sway.

Which is why those who now dominate the skies are likely to focus more than before on the health of their balance sheets. The problem of course is that aviation is not a great money-spinner in any unregulated market, and despite the obvious need for economies of scale, there seem to be no great barriers in the way of new entrants""so a new price-warrior could emerge from an unsuspecting corner tomorrow. Though there are successful examples of profitable airlines, like Ryan Air in Europe and Southwest Airlines in the US, many would argue that it does not make great business sense to be in the airline business in the first place. As for passengers, the computerised models for filling seats with bottoms should ensure a continuing array of choices at different price points.