PMO queries merger of Indian, Air-India

The Prime Minister's Office has objections to the civil aviation ministry's proposal to merge the two state-owned carriers, Indian Airlines and Air-India, into a holding company with two operating divisions.

According to a composite note prepared by the PMO, which includes comments from the finance and commerce ministries, the proposal in its current format is not viable because the two airlines were set up for different purposes and a merger will weaken their position in the domestic and international markets.

The finance ministry has said the carriers operate different aircraft -- Indian Airlines flies Airbus and Air-India Boeing -- and integrating the two fleets will result in higher costs of multiple maintenance facilities and spares. It will also cause the new entity to lose its focus.

The finance ministry maintains that Indian Airlines is required to fly to a number of loss-making destinations, which, after the merger, will hobble the airline as it competes against international airlines that have no such social obligations.

The commerce ministry has argued that Indian Airlines gets certain subsidies, such as during Haj, which could be questioned by the World Trade Organisation.

However, plans to list the two carriers will be taken forward to raise funds to finance fleets and route expansion. The government is likely to dilute up to 20 per cent equity in the carriers through initial public offers.