The merger is proposed to be implemented in a phased manner beginning with the merger of various departments such as operations and engineering of both the airlines.

The Ferguson report has recommended a two-tier structure consisting of a holding company (HC) and a joint management group (JMG). Speaking to The Indian Express, P C Sen, chairman, IA and AI, said: ``The board has set the ball rolling for the eventual merger of IA and AI. 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.''

As per the report, the HC should be formed as an apex body of which AI and IA are 100 per cent subsidiaries. A HC for the above purpose is a company incorporatedunder the Companies Act, 1956, which holds more than 51 pc of the share capital of another company.

The HC may present consolidated accounts of the two state-run airlines. These will be presented along with individual balance sheets. Such a practice is currently followed by companies such as Hindustan Lever Ltd 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 (JMG) should be formed to support the HC. A JMG is an extra statutory body set up by the top management of the two airlines to implement the integration of specific areas. It will also jointly decide on specific aspects of operations and strategy.

The JMG, which unlike the HC does not require creation through statute, can be set up through resolution of the board. It can commence operations immediately along with the launch of the incorporation procedures for the HC.

The HC can bereasonably incorporated within six months. However, the time taken for HC formation will be significantly impacted by the time taken by the government of India in granting approvals and executing transfer of shares.

The board of directors of the HC will include the chairman of IA and AI, managing directors of the two airlines, 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 A F Ferguson report has stated that a consolidation of accounts of IA and AI will shift focus from individual to common bottomlines. The consultants found that IA reflects a profit of Rs 9 crore and a return on capital employed of 27 per cent. AI reflects a loss of Rs 340 crore and a negative return on capital employed of two per cent.