Kingfisher, Jet Air enter into code sharing pact

Kingfisher Airlines and  Jet Airways have entered into a code sharing alliance. The two companies made a pact for common fuel management, ground handling, network rationalisation and cross-crew use. The two airline rivals have also joined hands for cross sales and staff training. The pact would come into effect immediately and it has no equity implication. Kingfisher and Jet are in a reciprocal frequent-flier plan arrangement and the two will consider co-branding opportunities.

Kingfisher Chairman Vijay Mallya said, "We both (Kingfisher and Jet) recognise economic realities and this is a path-breaking alliance between India's leading carriers. We would be respectful and mindful of Indian regulations." Mallya added that the alliance would help save money and pass on the benefits to consumers. "The Jet-Kingfisher alliance will result in substantial cost saving. We have got together for a sustainable long-term future," he said.

Naresh Goyal, Chairman of Jet Airways, said the Indian aviation industry has been going through trouble for the last few years and has already seen some consolidation. "The aviation industry is seeing irrational pricing and if losses continue, the sector will return to be a monopoly," Goyal said, adding that the alliance is not a cartel but has been brought together keeping in the mind that costs are going up.

Earlier, CNBC-TV18 had reported that the two airlines majors were likely to announce a major tie-up in domestic and international routes and that the synergies would be worked out in sales, ground handling and yield management. The sales and marketing teams of Jet Airways will work with Kingfisher.

Kingfisher Airlines has suspended its US operations. The tie-up may be a precursor to a possible merger between the two companies in future.

On the face of it, it (a merger between the private airline rivals) looks a little hard to be possible. That is because one is a very established brand. Sources said that, as part of the alliance, Kingfisher will at least shut down its international operations and go for a code share.

If that is the case, Jet Airways will be able to command a premium when the merger valuations take place. Industry sources said that if Jet were to go for a merger, it will pitch for a USD 2-2.5 billion valuation whereas Kingfisher is looking at USD 1 billion valuation.

But both stock prices have not been something to give them hope at this point of the year. Starting January, Jet was trading at Rs 1,000. Today, it is at Rs 290. Similarly, Kingfisher has fallen by 70% odd. So both CEOs would be starting on a difficult keel to push for high valuations.

Secondly, their respective market shares are different. Jet Airways has a higher market share whereas Kingfisher along with Kingfisher Red has a lower valuation. To top it, the kind of revenues that Jet Airways gets from international revenues will give it a better valuation. So, on three different keels, Jet stacks out better than Kingfisher Airlines. So, a direct merger - whether it is going to be based on cash or share swap - would be difficult at this point for most analysts to look at.

But it all started the same way with Kingfisher Deccan. Firstly, there was an investment that Kingfisher made in Deccan and they started operationally synergising both together, integrating, and then finally Kingfisher landed up and said you have an operational synergy taking place but you have two sets of shareholders you are supposed to get back to. So, you cannot keep them financially different. This is the same path process that they may go through.

In case Mallya gets a stake in tailwinds, what price would that be would be the key thing to watch out for.

CNBC-TV18 Disclaimer:

This information is source-based and has not been provided to the stock exchanges.