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Why Does a Merger Fail? A Case Study on Air India and Indian Airlines Merger

ET Cases, 10 Pages
AUTHOR(S) : Pragyan Dash, Research Scholar, School of Management, and Dr. N. M. Leepsa, Assistant Professor, School of Management - National Institute of Technology Rourkela

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Why Does a Merger Fail? A Case Study on Air India and Indian Airlines Merger


“Indian Airlines merger has caused Air India’s downfall”, remarked Ashwani Lohani, the Chairman and Managing Director of Air India, on account of the poor performance of Air India.1 Since long, the financial performance of the leading public sector aviation company of India had been unsatisfactory. Air India has also been facing numerous other problems like pilot issues, managerial issues and operational issues. The merger created discontent and frustration among the employees and the customers lost their trust in the company. What were the reasons behind the Air India crisis? Did Air India actually benefit from the merger? Was the merger of Air India with Indian Airlines the reason behind all the crisis at Air India? Was the merger a success or failure and was it able to achieve all the anticipated synergies?

In 2007, both Air India and Indian Airlines, two public sector aviation companies of India, merged with each other to form one of the largest airline under the company, National Aviation Company of India Limited (NACIL), which was later renamed as Air India Limited. After the merger, the merged company has been working as Air India and it is the largest public sector aviation company of India. The merger of these two aviation companies was equally important for the Indian and the global aviation industry along with Indian public and private aviation sectors. To achieve some common synergies along with individual synergies was the principal motive behind the Air India and Indian Airlines merger.........................

Air India: Company Overview

Air India, was founded in 1932 as Tata Airlines and was launched by JRD Tata who is considered as the father of Indian civil aviation industry. After the Second World War, in 1946, Tata Airlines changed its name to Air India and was converted into a public sector company. This conversion made Air India, the national carrier of India. In 1947, the company signed an agreement with the government of India to operate internationally under a new company named, Air India International Ltd. The government of India acquired 49% of the airline post-independence in 1948. In 2000-01, the government attempted to reprivatize Air India but it did not work................

Indian Airlines: Company Overview

Indian Airlines6 was set up in 1953 under the Air Corporation Act, with an initial capital of INR32 million. Seven domestic airlines named Deccan Airways, Airways India, Bharat Airways, Himalayan Aviation, Kalinga Airlines, Indian National Airways and Air Services of India were merged to form a company named Indian Airlines Corporation. Indian Airlines Corporation changed its name to Indian Airlines in 1993. It was a government owned domestic company administered by the Ministry of Civil Aviation (MCA), India.............

Reasons Behind the Merger Deal

Both Air India and Indian Airlines were the two most important air service providers in India. In 1986, both the companies made an attempt to merge internationally but failed. Later in 2007, the companies went ahead with the process of unification. The Performance Audit Report of Indian Civil Aviation, on March 22nd 2006 prepared a presentation for the then Prime Minister, which highlighted the reasons for the merger of Air India and Indian Airlines.

Due to the consolidation in the global airline industry, it was necessary to work together for Air India and Indian Airlines to achieve the strength to compete effectively in the international market. Accenture India Private Limited (Accenture) facilitated the merger process as a consultant for both the airlines..............

Details of the Merger Deal

The unification deal between Air India and Indian Airlines became a great topic for speculation in the Indian corporate scenario. The procedure of the deal started much earlier than the announcement date. Some important events of the unification of these two public sector Indian aviation companies are given in Exhibit I.............

Financial Ratios of the Combined Firm

For the determination of financial performance of the merged company after the merger, Paired T-test14 is applied with the financial data. It is used to determine the level of difference in the pre and post-merger performance of the individual and combined entities. Exhibit II shows the financial analysis of the combined firm, three years before and three years after merger period.................

Businesses are done to generate profit and net profit is the actual amount of profit which a business gets after excluding all its expenses. Business entities use the net profit margin for upgrading their future business plans.............

Anticipated and Achieved Synergies

The deal between Air India and Indian Airlines was based on a particular blueprint, in which some anticipated synergies were mentioned to achieve. Exhibit III contains a comparative analysis on the projected-synergies of both Air India and Indian Airlines along with the achieved-synergies...........

An Inharmonious Corporate Marriage

The post-merger scenario of the two national flag carriers of India was full of challenges along with unsatisfied financial performance. The merged company did not achieve the expected synergies because of numerous issues. Many times, leadership and human resource issues were reported as crucial disputes as a result of this unification. Tough competition from the competitors in the aviation industry, poor infrastructure and buying unnecessary fleets after the merger were cited as the prime reasons for unsatisfactory performance of the unified entity by several industry analysts..............

Reasons for which merger strategy could not benefit the companies

Though M&A is a famous and widely accepted corporate restructuring activity, many research reports mention it as a failed strategy with statistics of approximate 50% of failure. Most of the time the transactions fail to achieve its actual synergy and the same happened with Air India and Indian Airlines merger. Here, are some suggestions for other companies to make their deal successful one:

• The process of integration should not be too late after the M&A deal as happened in Air India case. Incomplete integration creates performance issues and raises the operating expenditure.

• ................................

Assignment Questions

I. What were the important reasons that lead to the merger of Air India and Indian Airlines?
II. ....................


Exhibit I: Details of the Merger between Air India and Indian Airlines

Exhibit II: Financial Analysis of the Companies in the Pre and Post-Merger Period

Exhibit III: Anticipated and Achieved Synergies of the Deal

Teaching Note Preview

Why Does a Merger Fail? A Case Study on Air India and Indian Airlines Merger



The two national carriers of India (Air India and Indian Airlines) merged in 2007, to fulfil certain goals but, failed to achieve the desired result. The merged company faced numerous financial and operational problems after the completion of the merger. Before their fusion, both the companies aimed to become one of the biggest airlines in the Indian as well as international skies. This wishful thinking suffered financial instability, human resources issues along with operational inefficiencies as soon as the merger completed. Several factors (financial/non-financial, company related, industry related) played negatively for the defined deal and changed the result of the entire merger game. This case study describes the motives behind the deal and the procedure of the deal and also explores the achieved synergies along with the anticipated synergies. It can be used to analyse the success and failure factors of M&A. Besides the above, this case study can be used for discussing whether the transaction between Air India and Indian Airlines was a failure or success?

Prerequisite Conceptual Understanding (PCU)/Before the Classroom Discussion

Before studying and analysing the case, the students/participants should have a prior knowledge regarding M&A, motives behind M&A, trends of M&A in different sectors and industries. Sound knowledge on the aviation industry will make the learning even more interesting. The students/participants or case readers can visit several websites to gather information on Air India and Indian Airlines. News articles regarding the deal can provide significant insights for the better analysis of the case. The students/participants can also be asked to go through the annual reports of Air India to analyse the year-wise financial performance of the pre and post-merger scenario of the company.

Case Positioning and Setting

This case study can be used in the BBA, MBA and Executive MBA program in “Corporate Restructuring Course” or Merger and Acquisition Course” – To get a basic idea regarding the concept and motives of M&A, factors affecting M&A and problems facing by companies at the time of M&A. This case study will be also helpful in improving the analytical skills of the students.

Assignment Questions

I. What were the important reasons that lead to the merger of Air India and Indian Airlines?
II. Determine the company related, industry related, financial and non-financial factors those had their impact on the merger of Air India and Indian Airlines?


Preamble to the Case Study Analysis and Suggested Orchestration

This case study provides an opportunity to understand the reasons or motives behind M&A deals along with the problems faced by companies after the deal. The factors affecting the transaction and the financial ratios to measure the performance of the companies can be learnt from this case study. Students can get ideas on the industry specific (Aviation Industry) transactions from this case study. This case study analysis can be carried out as mentioned in Exhibit (TN)-I...........

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Best Selling Case Study

Inorganic growth in terms of Mergers & Acquisitions (M&A) has been achieving remarkable popularity among the business organizations across the world. The pros of M&A transactions have been a boon for corporate bodies, however, the cons of these transactions are unavoidable. Various research papers and economic surveys represent the evidence regarding the failure of M&A transactions. After M&A transactions, many companies face managerial issues, cultural issues and financial issues in the post-M&A period. This case study is based on a prominent Indian merger in the aviation industry which provides an idea on various aspects of M&A and reflects a number of merger-related issues in the real corporate environment. In the Indian Aviation industry, Air India and Indian Airlines were two famous aviation companies, which went for a merger deal in 2007. The merger has been a topic of discussion among financial analysts and business experts from the date of its completion. According to several corporate professionals, it is a failed merger and a few are of the opinion that, it is a corporate affair between two unsuited parties. Was the merger actually a failure? What were the reasons/motives behind the merger and the reasons of failure? What were the anticipated synergies and the actual synergies achieved by both the organizations in this merger?

Pedagogical Objectives

  • To understand the motives and reasons of the merger deal between Air India and Indian Airlines
  • To compare the anticipated and achieved synergies of the merger between Air India and Indian Airlines
  • To determine the reasons behind the problems faced by both the airlines after the merger

Case Positioning and Setting
This case study can be used in the BBA, MBA and Executive MBA programs in “Corporate Restructuring Course” or “Merger and Acquisition Course” – To get a basic idea regarding the concept and motives of M&A, factors affecting M&A and problems usually faced by companies at the time of M&A. This case study will be also helpful in improving the analytical skills of the participants.

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