The “King of Services and high end customers” (Vijay Mallya) in the air industry enters into strategic alliance with the “Father of low cost airlines” (Capt. Gopinath). The most aristocrat man in the aviation industry acquires 26% stake in Air Deccan through preferential issue after the approval of shareholders. He will sit on board as the vice chairman presided over by Captain Gopinath as the chairman. The business model of Deccan may also undergo a change as Mr. Mallya unlike Capt. Gopinath is more worried about yield than market share.

This deal also gives the deep insight of the way Corporate moves. It started with Mr. Mallya showing interest in Deccan and then Captain Gopinath coming heavily on him. Both of them denied of any marriage between them and finally Mallya ended up buying a stake of 26% in spite of unwillingness of Captain Gopinath. It is interesting to note that Captain Gopinath ruled out any possibility of alliance between the two and denied of synergies too. Just compare the statements made by the two honchos after the deal and you may end up smiling.

Captain Gopinath before the Deal

“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. They can’t co-exist (in any merged entity)…One airline will only kill the other. We are here for a long haul. We are not for sale…We are three times bigger (than Kingfisher) in routes and operations. We are from the opposite ends of the business spectrum, consumer models and consumer space. We are mining the bottom of the pyramid; he is picking the cream off the top.”

Later Capt Gopinath in his speech did a smiling face and said men and women maybe from Mars and Venus respectively, but “they get into bed together, though they fight.” He added: “Somebody said politics is the art of the possible, we say business is the art of possible too, not that we are looking at getting into bed.”
But it was the closing words that took the cake: “I wish Vijay that sooner or later, he becomes the largest airline in the full service segment.”

What’s in store for Shareholders ?

The deal is welcomed by the shareholders of Deccan which was marked by a rise in share prices as the news of alliance started making rounds. This alliance will also make them a goliath in the air industry controlling the market share of 33%. Mr. Mallya is further expected to buy 20% market share from the open market. He does not like losses on his balance sheet and in near future he may get rid of it from the balance sheet of Deccan. At this juncture, it (Shares of Deccan) is a good buy which will definitely start producing results in short time in the form of goodies like surging market prices and dividend. This can be another turnaround story for the shareholder.

Consumer – Will he remain the king ?

It seems a bit odd to derive synergies between kingfisher and deccan as it is a unique model where two ends (high cost service and low cost service) are meeting. The consolidation is first of its kind in aviation industry in the sense that two companies having different target customers are coming together. While the target customer for Deccan is low end common man, Kingfisher ropes in executive customers basically from corporate world.

First of all, thanks to Captain Gopinath who made the Air Industry literally bleed in just four years and brought the fair down by 75%. Till date Deccan has carried 11 million customers and they are none but the ‘aam aadmi’. Now the big question is, “Will Deccan continue to operate as low cost airlines or the prices are expected to soar?” I reiterate that Mr. Mallya is very particular about yield and this may bring a bit of increase in the flight tickets. It may also make the life of other low cost operators (Spice Jet, GO Air, Indigo) a bit easier as price stability may come in air industry due to formation of Cartel. I hope Mr. Lalu Yadav can also breathe a bit easier as Air Deccan was giving a tough competition to railways too.

Synergies of Alliance

Nobody gets into a deal unless it helps in pushing EBITDA or is beneficial in monetary terms for each of them. Though this deal may seem to be a bit unique but it has too much in the offing for both Deccan and Kingfisher.

So far as Deccan is concerned, it was looking for a financial assistance since a long time to write off the loss of 200 crore posted in the balance sheet in last quarter. This alliance will provide the much required finance to them. Along with it, Mr. Mallya will also bring about a change in strategy of Deccan and thus increasing its yield.

On the other hand, Captain Gopinath will provide operational synergy to Kingfisher in the form of cutting cost cutting. Both of them can share pilots, ground staffs and service men. Needless to say, it will also help kingfisher in increasing its market share.

After the deal

Contradicting his earlier statements Captain Gopinath said “I had earlier thought this “marriage” will not work as nowhere in the world has there been such an alliance between a full service carrier and a low-cost airline. This alignment, though different, does not restrict our freedom. I firmly believe that as an entrepreneur I must not run the company, we must bring professionals to run the operations. I will oversee larger aspects of the company like the setting up of an independent MRO, charter and training entities. Remember, Mr Mallya is coming in as an independent investor and not as a part of Kingfisher Airlines.

Mr. Mallya further added “He’s in a different space; I’m in a different space… Gopi is going to get the guy from the village to fly. Once he flies and once he prospers, he’ll come to me in any case.”

So next time you fly Deccan you might see beautiful chicks of Kingfisher waiting for you on flight. No, it is going to be so as Mr. Casanova (Mr. Vijay Mallya) is not going to part with his air hostess. Jokes apart, don’t mistake this deal as a merger; it is just a strategic alliance where both the companies will operate separately. Thus we can conclude that this is a good deal for aviation Industry as it will bring price stability and also bring goodies for the shareholders of Deccan which is awaited since long time.

Popularity: 1% [?]