Jet Airways, which has acquired Air Sahara for Rs 1,450 crore (Rs 14.5 billion), needs to shell out Rs 800 crore (Rs 8 billion) immediately to rejuvenate the loss-making airline and take charge of it.
Of this, Rs 400 crore (Rs 4 billion) will go into turning it around operationally -- by investing in aircraft maintenance, engineering support, spare parts and re-branding. The rest will be part of the payment for the acquisition.
Jet executives said today that the Sahara fleet was poorly maintained and might not meet the safety standards.
"It will be an uphill task to revitalise the fleet of Air Sahara," they said. Jet will also have to relaunch Air Sahara, which will be operated as subsidiary.
Earlier, Jet Airways chairman Naresh Goyal said he would disclose the fund raising plan on April 16, the day it is slated to re-launch its international brand.
"The acquisition will further affect Jet's strained balance sheet (its current debt-equity is more than 2). Moreover, Jet plans to acquire 20 aircraft with a total outlay of $2.1 billion. This outlay will result in further leverage. Timely and effective integration of Air Sahara remains a key risk factor referring to employee retention is key in this industry, with its acute shortage of pilots and technicians," said Citigroup, which maintained a "buy" on the scrip.
Air Sahara executives pointed out the integration of human resources would be another key challenge as Sahara's salaries were higher than Jet's. The culture too is different.
Airfare for Rs 100 and less!
Surbhi Chawla, research analyst with Angel Broking, said:
"This deal will result in a negative impact for Jet Airways in the short and medium term, since the overall competitive environment has not improved. Jet has started feeling the pressure."
She added: "At the current valuations, we believe the merger will strain the profitability and the balance sheet of Jet Airways in the near to medium-term, before the merged entity can fully realise the benefits."
Brokerage house SSKI India Research, which maintained negative status on Jet during its bid to buy Air Sahara last year, now feels that Jet has effectively got an incremental market share of 8 per cent at Rs 550 crore.
"For Jet Airways, the worst is over in the domestic operations and profitability in the business will be driven by rapidly surging international operations. Acquisition of Sahara strengthens the case for Jet Airways in the domestic market," SSKI added.
Airfares to rise 5-10 per cent Domestic airfares are set to go up 5 to 10 per cent as a fallout of Jet Airways merging Air Sahara into it. Air Sahara will be forced to stop its huge promotional offers in metro routes as well as non-metro routes, that was even lower compared to budget carriers in some routes. Travel agents pointed out that all airlines will now start testing the market by increasing the fares in popular routes.
Travel Agents' Federation of India General Secretary Ajay Prakash said it was bound to happen as the current fares offered by airlines are "unreal".
Air Passenger Association of India National President and founder D Sudhakara Reddy said the Jet-Air Sahara merger will eliminate one of the players offering low fares and this will lead airfares northwards.