On May 31, 2007, United Breweries Holdings Limited (UBH), the parent company of Kingfisher Airlines (Kingfisher), a 'value carrier'1 based in Bangalore, acquired a 26 percent stake in Deccan Aviation Private Limited (DAP), which owned Air Deccan (Deccan), the pioneer of low-cost airline in India, also based in Bangalore. UBH paid Rs. 5.5 billion2 to acquire the stake, which made it the largest shareholder in DAP.3UBH said that it would subsequently make an open offer to all the shareholders of DAP, for an additional 20 percent stake.4

Vijay Mallya (Mallya), the Chairman of UBH (and Kingfisher) who became the Vice-Chairman of Deccan after the acquisition (Ramki Sundaram became the CEO and Capt. G. R. Gopinath - formerly the Managing Director of Deccan - became the Executive Chairman of Deccan after the acquisition), said that the Kingfisher-Deccan combine would cover both low and premium fare segments. It was announced soon after the acquisition that Deccan would continue with its low-cost business model.5 The airline would also focus mostly on Tier II and III city routes, while Kingfisher would operate on the high density metro routes.6

The Kingfisher-Deccan combine became the largest domestic airline in India in terms of fleet size, with 71 aircraft.7 The combined entity offered 537 flights to 69 cities daily.8 In addition to this, the combined market share of Kingfisher-Deccan was estimated to be about 30 percent, positioning them in the second place after Jet Airways, a full service private airline, whose market share was estimated to be about 34 percent in mid 2007.9

After the acquisition, both the airlines formed a team to study their operations and suggest areas in which costs could be pruned. The team would also suggest how the two airlines could share each other's infrastructure to achieve maximum synergies

• Mallya said that Kingfisher and Deccan expected to save Rs. 3 billion, through combined operations, in the first year.
• Synergies were expected to arise in the areas of ground staff, aircraft, operation and maintenance, ground handling, baggage handling, increased connectivity, feeder services, and distribution penetration. Mallya indicated that the airlines could achieve savings by sharing reservation services, engineering services, service stations, spares, pilots, other crew, and parking bays at airports.
• Also, both Kingfisher and Deccan operated identical aircraft (the Airbus A-320 family and ATR-72-500). This was expected to save engineering and maintenance costs for both the airlines.

• Earlier, Deccan had posted a loss of Rs. 2.13 billion during the quarter ending March 31, 2007.12 Kingfisher was also reportedly losing an average of Rs. 120 million, on average revenues of about Rs. 22 billion, every month.13 It was expected that the synergies achieved through combined operations would improve the financial health of both the airlines.

• Vijay mallya He felt that consolidation among the airlines would lead to less competition and stable fares.
• The alliance was also expected to allow Kingfisher to achieve its goal of operating flights on international routes. As of mid 2007, the Indian government issued international operations permits only to those airlines that had completed five years of domestic operations. As Kingfisher was only two years old (it started operations in May 2005), it would have had to wait for three more years to fly on international routes. But acquiring a stake in Deccan, which would reach the stipulated condition of five year of operations in 2008 (Deccan started its operations in August 2003), could allow Kingfisher to fly to international destinations starting in the second part of 2008. Mallya said that he would have an internal arrangement to lease out Kingfisher aircraft to Deccan 'to maximize the benefit of overseas routes'.14

In a report released in March 2007, the Center for Asia Pacific Aviation (CAPA), an airline industry consultancy based in Sydney, had predicted that increasing losses and excess capacity would result in consolidation in the Indian aviation sector.15
Financial details:
The Board of Directors of the Companies also approved the Share Exchange ratio recommended by independent valuation firms, KPMG and Dalal & Shah. Based on the recommendation by the independent valuation firms, shareholders of Kingfisher Airlines Limited will be allotted 3 shares in Deccan Aviation Limited for every 7 shares held in Kingfisher Airlines Limited (7:3) ratio