The merger is proposed to be implemented in a phased manner beginning with the amalgamation of various departments like operations, engineering and so on.

The Ferguson report has recommended a two-tier structure consisting of a holding company and a joint management group for control and management of Air India and Indian Airlines. The report was accepted by the joint board of directors of the two airlines at its meeting on Monday.

In an exclusive interview with The Financial Express, Indian Airlines and Air India chairman PC Sen said, "The board has set the ball rolling for the eventual merger of the two airlines. As the report states, we will first form a holding company, followed by a fitment programme in which key departments will be merged. The merger of the two airlines will take place after three years."

According to the report, theholding company should be formed as an apex body of which Air India and Indian Airlines will be 100 per cent subsidiaries. A holding company is defined as one which is incorporated under the Companies Act, 1956, holding more than 51 per cent of the share capital of another company.

The holding company will have a common memorandum of understanding and its two subsidiaries will have back-to-back pacts. It may present consolidated accounts of the two state-run airlines, which will be submitted along with individual balance sheets. Such a practice is currently followed by companies like Hindustan Lever and Coal India.

The consultants have found that the consolidated accounts of the two airlines reflect a loss of around Rs 247 crore and a return on capital employed of 9.7 per cent.

A joint management group ought to be formed to support the holding company, the report said. A joint management group will be an extra- statutory body set up by the management of the two airlines to implement the integration ofspecific areas. It will also jointly decide specific aspects of operations and strategy.

The group, unlike the holding company, does not require to be created through a statute and can be set up through a resolution of the board. It can commence operations immediately along with the launch of the incorporation procedures for the holding company.

The holding company can be incorporated within six months. However, the granting of approvals and execution of transfer of shares by the government will have an impact on its formation.

The board of directors of the holding company will include the two airlines' chairman and managing directors, two government nominees, one or two `aviation sector specialists and three or four industry representatives such as head of a navaratna, a large private sector industrialist, head of a leading bank or financial institution.

The report has stated that a consolidation of accounts of the two airlines will shift focus from individual to common bottomlines. The consultantsfound that Indian Airlines reflects a profit of Rs 9 crore and a return on capital employed of 27 per cent. Air India shows a loss of Rs 340 crore and a negative return on capital employed of 2 per cent.