Business Today

In Privilege Class

Etihad's investment is the lifeline that may help debt-laden Jet recover.
K R Balasubramanyam        Print Edition: May 26, 2013

The irony couldn't be more startling. When the rulers of Abu Dhabi were putting together their own airline, Etihad Airways, in 2003, the founding team took tips from Indian airline tycoon Naresh Goyal, who had made Jet Airways India's leading carrier. Ten years later, the tables have turned and Jet has been forced to turn to the deeppocketed Etihad for help. Last month, the UAE flag carrier announced plans to invest about $750 million in the indebted Jet Airways through both equity and debt, which includes $379 million for a 24 per cent stake.

The deal, which came after months of negotiations, is the first investment by an overseas operator in an Indian airline since the government liberalised airline investment rules last September. It's also a win-win situation for both sides.

Goyal will be the biggest beneficiary of the deal struck at a 32 per cent premium over the stock's closing price before the agreement. He controls Jet through Tail Winds Ltd, a company registered in the Isle of Man which holds 80 per cent in Jet Airways.

The listed carrier is struggling with losses and is saddled with a debt burden of more than Rs 13,000 crore. The fresh flow of funds will save Goyal's airline some Rs 230 crore in interest costs annually, according to an Edelweiss Research note. Etihad will also invest $220 million in a frequent flyer programme and slots at Heathrow airport, and will arrange another $150 million to help Jet pare its high-cost debt. "One of the key challenges was that the prevailing stock price of Jet Airways did not reflect its fundamental value," says Raj Balakrishnan, Managing Director & Co-head of Investment Banking at Bank of America Merrill Lynch, which advised Jet on the transaction.

"The key focus was to get buyers to recognise the strategic value of the airline."

For Etihad, the deal doesn't just give the Gulf carrier a foothold in one of the world's fastest growing aviation markets . It also helps the airline build the sheikhdom into an intercontinental transfer hub. Etihad, which has a fleet of 73 aircraft, flies to nine cities in India. But it can now access 23 cities, thanks to Jet. It can also use the Jet connection to tap the huge international traffic going through Dubai and route it through Abu Dhabi instead. "In the coming years, Etihad and Emirates will tap the same constituency of passengers flying beyond the Middle East, while Dubai and Abu Dhabi will compete as transit hubs," says an industry expert.

Some experts say Jet will now focus on its Abu Dhabi hub. "With India's largest carrier now moving its hub to Abu Dhabi, Air India struggling, Kingfisher grounded and all other airlines being point-topoint low cost carriers, there is no longer an Indian carrier with the capability to support the development of hubs at Delhi and Mumbai airports," adds Kapil Kaul, South-Asia CEO of Centre for Asia Pacific Aviation (CAPA), an aviation consultancy. "Jet will now focus on feeding its new Abu Dhabi hub."

Industry experts say the Jet-Etihad agreement is likely to put domestic carriers such as IndiGo, SpiceJet and Air India on the backfoot, and even force foreign carriers to rework their India strategy. US and European carriers may lose passengers to the Jet-Etihad combine. But, eventually, the deal will revive India's troubled airline sector. Mark D. Martin, Managing Director of Dubai-based consulting firm Martin Consulting, says the investment by the UAE flag carrier will help India's market grow and connect the country more strategically with the Middle East. "This is the first major FDI investment in an airline. It will strengthen our aviation sector," says Sidharath Kapur, Chief Financial Officer at the GMR Group-controlled Delhi International Airport Ltd.

Industry executives think fresh equity participation by foreign airlines was inevitable due to the poor health of Indian carriers, but they say the Civil Aviation Ministry's decision to approve a new bilateral agreement with Abu Dhabi was a quid pro quo for the investment in Jet. They say the ministry increased the number of weekly seats to Abu Dhabi almost threefold at lightning speed to pave the way for the Jet deal. "The short-notice negotiations have displeased some in the Indian industry, but it is another example of India's ad-hoc policy implementation," says Kaul. "Goyal got a higher valuation for his airline because India granted more seats to Abu Dhabi, not because of Jet's balance sheet," adds a senior executive at another airline.

The ministry's decision is expected to open the floodgates for similar demands from other countries, especially from the Gulf and Europe. India has not, so far, allowed Lufthansa and Emirates to operate A380s. Emirates has the world's largest fleet of A380s - 31 in operation and 59 on order - and is building a business strategy around these giant planes. "It is high-time India did away with bilaterals for good and moved towards an open sky environment," says aviation consultant Martin.

Either way, most experts expect Etihad's partnership to cut Jet's operating expenses and lift its bottom-line. They cite the example of four other carriers that Etihad has minority stakes in - airberlin, Air Seychelles, Virgin Australia and Aer Lingus - which posted impressive profits in January-March. Once the capital infusion is complete, Jet Airways too is likely to undergo a management revamp. "As well as increasing top-line revenue, our equity partnerships will improve bottom-line results, through cost savings delivered by operational synergies," Etihad CEO James Hogan said, while announcing the quarterly results.

Hogan has transformed Etihad from just another small airline into a global carrier with his strategy of equity investment and code-share agreements. Although the 10-year-old airline lacks the scale of Emirates Airline or Qatar Airways - they have 190 and 124 aircraft respectively - Hogan and his team are working to narrow the gap.

Until he took over in 2006, Etihad had about nine aircraft; today, it's a global carrier with 73 planes and 42 code-share agreements. The Australian who began his career as an executive at the checkin desk of the now defunct Ansett Airlines at Melbourne airport stunned the industry in 2008 when he ordered 205 aircraft worth $43 billion at the Farnborough International Air show in one of the largest deals in aviation history.

Will Hogan transform the airline business in India in a similar manner? The founder of India's first budget carrier, G.R. Gopinath, says Etihad will introduce new routes, create hundreds of new jobs and a new flyer experience. And passengers can look forward to great bargain fares.

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