Economy, Domestic Economy
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Airline Mergers Seen as Sole Option

Airline Mergers Seen as Sole Option Airline Mergers Seen as Sole Option

Iran’s civil aviation industry has undergone serious challenges in the past decades, mainly because of the sanctions imposed by the West after the 1979 Islamic Revolution and later on due to disputes over its nuclear activity. These limitations have in turn given rise to issues such as low quality of services and high airfares.

As a solution to the problem, some experts believe it is necessary to merge small airlines. “Merging small airlines can increase their competitiveness,” says former chairman of the Civil Aviation Organization (CAO), Hamid Reza Pahlevani.

Experts also believe that forming large holdings could reduce overall costs and cut the airfares, which have increased for many routes after the government deregulated the airfares in May last year. The benefits of airline mergers have been studied in a report by Tabnak news.

  Too Many Small Airlines  

While in many parts of the world, small airlines are best known for their low costs and modest services, in Iran they are notorious for offering poor quality services and have at times even cost the passengers their lives.

Small airlines have mushroomed due to lack of appropriate regulations in the CAO, the report points out, noting that: “Of the total 16 active airlines in the country, 12 are small companies, most of which started their operations with less than 10 airplanes.”

These carriers, which according to Minister of Roads and Urban Development, Abbas Akhundi, “were born old”, started off by buying used airplanes with an average age of over 15 years from some East European and Asian dealers.   

Some of these companies even added extra seats to the aircraft to increase profitability, thus reducing the passenger safety and comfort.

Larger airlines, on the other hand, have also been facing difficulties in recent years. Shortage of funds and spare parts has pushed some airlines to ground more than 10 aircrafts at a time, leading to reduced capacity of air transport in the country.

  Lack of Alternatives

After all, Iranian passengers do not have many choices when it comes to aviation services in Iran, as the industry lacks a balance between supply and demand, Pahlevani noted.

“All newly established aviation companies, regardless of the quality of their services, receive public recognition due to lack of alternatives,” he added. “This is while the customers pay relatively high fares for the poor quality airline services.”   

  Benefits of Mergers

Experts believe that airline mergers can improve the quality of services provided by the airline, and increase its financial capabilities.

Once small companies are merged, they are bound to adopt a regulated financial and administrative system, which in turn will improve their financial status, experts argue.   

Most small airlines currently have difficulty selling tickets, providing catering services and paying for repair and maintenance costs. Unable to survive on their own, they often seek help from larger companies for such services.

The issue of airline mergers was raised for the first time by deputy road minister in aviation affairs, Alimohammad Nourian.

Suggesting that the 12 small carriers should merge and form two big companies, the deputy said it would enable the new companies to pay for the high costs such as airport fees and repair and maintenance among other things. “The move could help the airlines reduce costs and increase passenger security,” Nourian concluded.

  Two Ideas for Mergers

Two theories have been put forward by experts and authorities regarding the issue of airline mergers.

The first theory states that small carriers should not be merged with big airlines, noting that the move would not be ‘economical’.

The second suggests that instead of entirely merging companies, only some of their activities, such as baggage handling and catering, should be merged.   

However, taking any measures to merge airline companies requires considerable investment by the government and the private sector, aviation expert Aboreza Mousavi noted.

But years after the issue of airline mergers was first brought up by the government, no clear-cut solution has been suggested by concerned authorities.

Even though the ministry of roads and urban development has not compelled the airlines to go ahead with mergers, the deputy minister recently warned airlines that if they fail to comply with the international standards the ministry will cancel their license.

“As the authority responsible for passing regulations and ensuring compliance with international standards, the road ministry will stop the work of airline companies whose services do not meet the required standards,” he said.

Financialtribune.com