Strangely, a day after Vijay Mallya announced his plan to merge Kingfisher into Deccan, the budget carrier's stock fell more than six per cent to Rs 277, even as the BSE Sensex gained 70.61 points.

Airline experts say Mallya has a tough job on his hands. "I don't know if this would work. Mixing everything in one company doesn't work. It will have a full-service airline, a no-frills airline, plus international operations under one umbrella,'' said an airline expert and investor.

History is not on Mallya's side. Full-service carriers and low-cost carriers (LCC) belong to separate worlds, and their DNAs seldom match. Whenever they have tried to merge or work together under one umbrella, they have nearly failed.

It happened when British Airways tied up with budget carrier Go, and when Delta Air acquired budget carrier Song. This, despite the fact that these were subsidiaries, whose operations were independently managed.

''Analysts and investors are paranoid about the features of the LCC model. They don't like even the smallest deviation,'' said a former airline executive who requested anonymity, as he was employed by one of the two airlines.

In fact, when Deccan planned an inflight magazine (to communicate with its customers and earn through advertising), investors were paranoid. ''They said why do you want to do it - it has a management aspect,'' said a former Deccan executive.

''The key question is whether you can successfully run a full-service airline, an LCC and international operations under one umbrella. It has been seen for many years that it doesn't work,'' said an industry expert.

Only four LCCs like Southwest Airlines (in the US), RyanAir and easyjet (Europe) and Goal (Brazil) that have stuck to the LCC model have been successful.

There have been exceptions to the rule. Jetstar Asia, a no-frills carrier promoted by Qantas, was successful initially, but is now struggling to expand. Experts say the Qantas model worked because Jetstar's operation was independent.

"Earlier experiments have not worked because they were not planned well. Qantas was successful because it maintained a distinction between the two operations,'' Kapil Kaul, CEO, Centre for Asia Pacific Aviation, told this reporter.

''One hopes Mallya keeps the operations of the two airlines independent even if they have a common balance sheet,'' said an executive with a private equity firm which has been investing in Indian carriers.

Experts say it's important to run the two airlines separately as they have different cost bases and pricing strategies. ''At best, there can be a sharing of resources for maintenance, ground-handling, engineers and pilots,'' said an airline expert.

But not everyone thinks it won't work.

''It will depend on management experience, knowhow and, foremost, the ability to act and react without interference from their respective boards,'' said Steve Forte, former CEO of Jet Airways [Get Quote].

"If you are talking about incorporating a Deccan-like carrier into Air-India it's a different matter. But neither Kingfisher nor Jet Airways are 60 years old and the younger an airline is, the easier it is to change its footprint," Forte said.

Mallya is aware of these challenges. Which is why he's been trying to blur the differences with the makeover of Deccan.

Given that Deccan acquired its aircraft at a cheaper price than Kingfisher did, it should not be a surprise if Mallya one day says no-frills airlines won't work in India and we will have just one airline, Kingfisher Airlines.

Mallya riding on Deccan

With combined accumulated losses of around Rs 2,000 crore (Rs 20 billion), the new entity created by the merger of unlisted Kingfisher Airlines with Deccan Aviation will have many strengths, but its balance sheet will not be one of them.

According to sources, the merged airline will look at equity rather than debt to raise funds going forward.

"Debt will not be easy to raise on the existing balance sheet," said an investment banking source, who was of the view that the losses of Kingfisher Airlines would not be brought into Deccan either.

Vijay Mallya holds 13.57 per cent in Kingfisher Airlines and 77.52 per cent is held by UB Holdings. While actual numbers are hard to come by for Kingfisher, it is estimated to have lost Rs 577 crore (Rs 5.77 billion) in 2006-07. 

In 2005-06, when it started its operations, losses were about Rs 250 crore (Rs 2.5 billion), mentioned in a docket submitted by the airline to the US department of transportation.

Most of its losses have been funded through loans taken either from UB Holdings or loans supported by UB Holdings.

Kingfisher Airlines' former CFO A Raghunathan, in response to a query some time ago, had said that the airline had got Rs 500 crore (Rs 5 billion) in equity, loans and guarantees from the group. "Obviously, our own balance sheet is not strong enough. The group's backing is a pillar for us," he had said.

Air Deccan, which has been struggling with growing losses ever since it started, is running out of cash almost as soon as it raises it.  Following its initial public offer in May 2006, it had raised $100 million through Investec Bank in September 2006 and Rs 300-350 crore debt. As the airline's losses continued to mount, it was forced to sell a 26 per cent stake to Vijay Mallya for Rs 550 crore (Rs 5.50 billion).

"However, at the rate it is going, I suspect it will soon need more funds infusion," said an aviation industry analyst. The combined entity will also need large capital infusion for the proposed international forays by the two brands.

How the two mega airline deals stack up

When Jet bought air Sahara in April 2007

The Deal: Jet Airways paid Rs 1,450 cr to buy the entire airline, in addition to Rs 600 cr paid earlier by Jet as advances and interest

Enterprise value of Air Sahara: Rs 2,050 crore

Market Share of Air Sahara (now Jet Lite): 8%

Fleet with Air Sahara: 27

Combined market share: 33%

When Kingfisher bought Air Deccan in May 2007

The Deal: Vijay Mallya paid Rs 550 cr to acquire a 26% equity in Deccan. Subsequently, he paid an additional Rs 418 cr for a further 20% stake through an open offer

Enterprise value: Rs 2,115 cr when Mallya acquired 26%

Market Share of Air Deccan: 18%

Fleet with Air Deccan: 43

Combined market share: 29%