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How Deccan, Kingfisher plan to draw synergies

For starters, the airlines will draw synergies in spares, engines and distribution, reports Ranju Sarkar.

business Updated: Jun 03, 2007 22:41 IST

With the deal finalised, Air Deccan and the UB-Group owned Kingfisher Airlines are likely to focus their attention on attaining synergies between the two airlines and generate benefits of Rs 300 crore this year.

The immediate focus would be to pluck ‘the low-hanging fruits’, as UB Group CEO Vijay Mallya said on Friday in Mumbai whose firm UB Holdings acquired a 26 per cent stake in Deccan Aviation that runs budget carrier Air Deccan.

The airlines, which fly the same type of aircraft (Airbus A-320s and ATR turbo-props), will immediately start drawing synergies in spares, and in engineering and maintenance that can account for 15-20 per cent of cost for an airline.

“We will cut down on the spares pool and the spare engines we carry,” said a senior Air Deccan executive who didn’t wish to be named. The aircraft engines, for instance, costs $7.8 million (Rs 29 crore – Rs 33 crore) each,” he added.

Typically, airlines have one spare engine for every 4.5 aircraft they fly. With 41 planes, the airlines feel that they can do with one spare for every six or eight aircraft they fly. “Straight away, we will get this benefit,” said the Deccan executive.

Kingfisher, which was in the process of setting up an engineering base after it cancelled engineering and maintenance deal with Indian, is likely to benefit from this synergy. It may choose not to set up a base in airports where Deccan already has one, but build bases in other airports.

Similarly, the two airlines will start drawing synergies in spares — airlines keep a spare pool on lease from manufacturers on which they pay a lease rental of 1 per cent or 0.75 per cent of the value of spares. “When we combine the spares, we need not maintain a high inventory. We plan to save Rs 150-200 crore in spares and maintenance alone,” added a Deccan executive.

At least for now, there are no plans to integrate people, and hence, there won’t be any job losses. “The planes need to be certified as both (airlines) hold different licences. We don’t want to send that kind of signal. Airlines have failed when trying to integrate people because of cultural issues,” said the executive.

“That’s not the intent of this deal. We are trying to draw synergies from the painless aspect of it by bringing down the inventory levels for spares and engines,” he said. For instance, if Kingfisher has a base in Mumbai and Bangalore, Deccan may also maintain a spare pool, but scale it down to bare minimum.

The airlines also plan to draw synergies in distribution. Kingfisher, for instance, uses global distribution systems (GDSs) like Galileo and Abaccus. Deccan can leverage these relationships by ‘marking us on their GDS at a marginal cost per passenger’, said the Deccan official. This would provide travel agents with a link on the GDS, which they can use to access the Deccan reservation system.

Eventually, the airline’s reservation system will get integrated with the GDS.

First Published: Jun 03, 2007 22:39 IST