The merger between Indian Airlines and Air India is the latest shake-up in the Indian aviation sector. For almost a decade, various governments at the centre have talked of merging the two former monopoly carriers, only to shy off under pressure from airlines' unions and rival politicians.

The decision to merge the two is based on compelling logic. The merger will create one of the largest airlines in the world in terms of the number of aircraft as the two currently have a combined fleet of 122 aircraft and over 34,000 employees, including 1,315 pilots.

The government expects the merged entity to save around Rs5,000 crore ($113 million) annually from synergies in operations and sharing common facilities.

However, the two carriers have suffered from years of under-investment in their fleet and services and over the years they have been steadily losing market share to private and overseas rivals; with the domestic carriers' market having shrunk to 20 per cent.

After the empowered group of ministers' decision to merge the two entities yesterday, civil aviation minister Praful Patel had said, "The government will create a mega carrier with the precision and reliability of Lufthansa and in-flight service of Singapore Airlines."

The combined entity could emerge as a potent force only if the merger is treated as just the first step. There is no denying that a merged entity has the potential to create a strong global player, as Patel hopes, but the merger alone will not lead to the emergence of a mega carrier.

It would need to be followed through with a thorough overhaul of operations and, as suggested by an industry expert, privatisation with a listing on the stock exchanges to attract finance and professionals required to run it profitably.

Kapil Kaul, chief executive, South Asia for Centre for Asia Pacific Aviation, an airline industry think tank, has recommended a partial sale of equity through an initial public offer to begin with to help induce professionalism and market dynamics, followed by privatisation over the next five years or so.

By 2010 the merged entity would have a combined fleet of 125 new generation aircraft after new ones are inducted and some of the existing ones phased out to emerge. The turnover of the merged entity is projected to exceed Rs15,000 crore ($3.3 billion).

But analysts warn that the merger would also pose serious challenges in the months ahead, especially in integrating of 34,000 employees of the two carriers that have had completely divergent operations.

Moreover, the two carriers have a different fleet composition, posing challenges for inventory management, maintenance and repair establishments, and pilot training. For instance, while Air India has placed order for 63 Boeing aircraft, Indian plans to induct 43 Airbus.

According to a FICCI study, the various airlines flew 25.5 million air passengers in the domestic sector in fiscal 2006, up 27.9 per cent over 2005, just ahead of the 22.4 international passengers (up 15.1 per cent over 2005).

The study noted that despite the bullish growth potential, overseas experience shows that it would extremely difficult for a market to absorb so many new entrants, particularly in such a short space of time. It also noted that the losses by the airlines industry is expected to exceed $500 million in the current fiscal year.

Ttill 2003, there were only three scheduled domestic carriers, Indian, Jet Airways and Air Sahara. But today, they are all embroiled in competition with Air Deccan, Kingfisher, Go Air, SpiceJet, Paramount, IndiGo and Indus, with Easy Air, Trans India and Air Dravida waiting in the wings for government approval.

The merger between Air India and Indian can also be expected to usher a consolidation among private airlines in India, the fastest growing aviation market in the world - ahead of China, Indonesia and Thailand.

Last year Naresh Goyal's Jet Airways had foreseen the need for consolidation when it attempted to acquire Air Sahara. Kaul forecasts Kingfisher and SpiceJet are expected to look at consolidating their positions.