India's Jet Airways said on Thursday it had agreed to buy Air Sahara for INR14.5 billion rupees (USD$340 million), about 34 percent cheaper than an earlier deal it had abandoned.

The price includes INR5 billion that Jet had paid its smaller rival last year as a bank guarantee pending an acquisition, as well as INR4 billion that Jet will pay on or before April 20, said Harish Salve, a legal counsel for Jet.

The balance will be paid in equal, interest-free annual installments from March 2008 to 2011, he told reporters.

"Commercially, it is good," Jet Chairman Naresh Goyal said.

"Keeping in mind the present condition in aviation, it is good commercially, as well as for the shareholders," he said.

He did not say whether operations of the two airlines would be merged or if Sahara would be relaunched as a discount carrier, as some local media reports have indicated.

But analysts still remained unconvinced of the lower price.

"It's cheaper than last year's price, but it's not exactly cheap even at this price," said Hemant Patel at Enam Securities. "If the industry had been at a better point, it would've made sense, but it is a difficult time, payback periods are long and Jet is barely breaking even itself," he said.

Jet, which has about a third of India's fast-expanding domestic market, has a fleet of 61 aircraft and also flies to some overseas destinations. It had struck a deal in January 2006 to buy Air Sahara from the Sahara group, whose interests also include financial services, real estate and broadcasting.

After the deal failed to get regulatory approvals, Jet said last June it had decided not to pursue the acquisition for commercial reasons and in the interest of its shareholders.

Sahara had argued that the deal should have been completed, and asked for compensation. An arbitration panel, which held hearings in January, had deferred a final decision to April.

Jet returned to profit in its fiscal third quarter to end-December after losses in the previous two quarters on account of higher aviation fuel costs and discounting by new carriers.

Sahara, which began operations just months after Jet in 1993, has also been steadily losing share to the new carriers in a fiercely competitive domestic market which is forecast to grow at more than 20 percent a year over the next four years.

The combined entity will have a market share of about 40 percent. Low-cost carrier Deccan Aviation has a little more than a fifth of the domestic market, just ahead of state-owned Indian.

The UB Group's Kingfisher Airlines, SpiceJet and GoAir also compete, besides a handful of smaller carriers.