India's biggest budget carrier, Deccan, announced last week that it will merge with Kingfisher Airlines in January to create the country's largest domestic airline.
Both airlines are dealing with major losses. They say they hope the merger will improve their profit margins by cutting costs.
The Deccan-Kingfisher deal is the latest step toward consolidation of India's fragmented airline industry. Earlier this year, Jet Airways purchased another low cost airline, Air Sahara, and the government decided to merge state-run carriers Air India and Indian Airlines.
Kapil Kaul, head of the Center for Asia Pacific Aviation in New Delhi, says the mergers have been triggered by the huge losses that most airlines are suffering. He estimates that the industry lost $500 to $700 million in the last year.
"Consolidation was inevitable last year because most of the airlines had lost their pricing power, the industry was so fragmented that almost everybody had lost hope," said Kaul. "I think consolidation will help the industry to restore profitability, which is the most essential need of the industry right now."
India's aviation industry is crowded. The government opened the sector in the late 1990's, but until 2003, there were only three airlines. Now the number is closer to 10.
Most of these airlines, like Deccan, are budget carriers. They brought air travel - once a rich man's privilege - within the reach of an expanding middle class, and created millions of new travelers.
But the boom in air travel has not translated into profits for airlines. Intense competition has forced them to slash airfares. At the same time, rising fuel costs have cut into their profitability. The industry is also hampered by overcrowded airports, and a shortage of pilots and engineers.
However, although the industry is struggling at the moment, Kaul points out that aviation in India is expected to expand at a frantic pace in the coming years.
"The long-term story remains intact?Our estimate is by 2020 almost $150 billion of investment could be attracted in this sector, so the long-term story continues to be bullish," Kaul said.
Air passenger traffic grew by more than 25 percent last year. The airlines have emerged as big buyers of aircraft to accommodate the new passengers - about 480 new aircraft are due to be delivered by 2012.