Two decades after his aircraft took to the Indian skies demolishing a government monopoly and paving the way for private sector dominance in aviation, Jet Airways’ Naresh Goyal is back to refashioning the domestic airline industry, concluding what experts says is a game-changing transaction with Etihad Airways.
Jet has agreed to sell a 24% stake to Abu Dhabi-based Etihad for $369 million (Rs.2,061 crore), valuing the Indian company at Rs.8,545 crore, a 72% premium to its market capitalisation of Rs.4,954 crore. If one includes the $150 million that Etihad is investing in Jet’s privilege programme and the $70 million that it paid for the Indian carrier’s Heathrow slots, the investment from Etihad rises to $599 million.
The Middle-East carrier will pay one of the steepest premiums among recent aviation deals, a significant fact considering that it is buying a minority stake. Etihad, which competes with Emirates for flying more passengers out of India, wants a bigger share of the local market and plans to use the expanded quota of weekly seats from India to Abu Dhabi to become one of the largest passenger carriers from India to overseas destinations. The deal was always contingent upon the government liberalising the weekly seat quota, and Wednesday’s announcement of 36,670 extra seats (Jet had asked for 41,000) means that India-Abu Dhabi will become one of the busiest routes for airline companies.
Jet and Etihad can plan routes better, do code-sharing, and route flights to target passengers in select cities through the deal. But it could be hugely disruptive for certain segments of the aviation industry. Struggling national carrier Air India, which received a government bailout amounting to Rs.30,000 crore, and low-fare carriers IndiGo and SpiceJet may have to strike similar alliances or risk losing share to Jet-Etihad on international routes. Private airport operators such as GVK and GMR, which own the four airports in Delhi, Mumbai, Bangalore and Hyderabad, could find their dreams of becoming national hubs fading, and may have to think of innovative means to stay competitive.
Emirates, which competes with Etihad, could face increased competition from the rival combine and may have to look for a local partner. It has already exhausted its quota of seats from India.
The Indian aviation industry’s troubles may also worsen if airlines start another fare war due to the transaction. Competition from the yet-to-be launched AirAsia, which could launch operations next year, could mean the recent upswing in financial fortunes may not last long.
Investment appetite in Indian aviation could, however, increase if domestic airlines try and strike more deals with foreign partners. Passengers, especially in tier-II cities such as Coimbatore and Thiruvananthapuram, could benefit as they would be able to fly directly to American and European destinations without stopping over to take an international flight in one of the metros. For example, a businessman travelling to the US from Trichy would not have to travel to Chennai, the nearest international airport. Under the Jet-Etihad plan, he would be able to board a Jet flight to Abu Dhabi from his hometown and transfer to a connecting flight to the US. Jet has retained some freedom under the deal to operate its own flights to select destinations from Abu Dhabi. The Airports Authority of India (AAI), which has already supported the increase in quota, could benefit from the higher traffic at its smaller airports.
Jet will use the money from the deal to pare its $2.1-billion debt, easing concerns of investors who had driven down its shares to a 52-week low of Rs 275 in May last year. Etihad’s 31.7% premium for Jet is higher than the 5% premium Singapore Airlines paid to raise its stake in Virgin Australia to 19.9% in a separate deal announced on Wednesday. “The Indian market is fundamental to our business model of organic growth partnerships and equity investments. This deal will allow us to compete more effectively in one of the largest and fastest-growing markets in the world,” said James Hogan, chief executive officer of Etihad.
Etihad is not a stranger to Jet Airways or Goyal. In 2003, when Etihad was set up with funding from Abu Dhabi’s sovereign fund, the promoters of the Middle-East carrier had approached Goyal for help in setting up systems for the fledgling airline. Goyal had responded enthusiastically then, leading to a chemistry that some believe could have helped consummate the deal.
Goyal started Jet in 1991, and it started flying in 1993. The period since then has coincided with the collapse of Indian Airlines (which was merged into Air India) and expanded flying opportunities for a number of Indians. But Jet’s recent troubles meant that it could not hold on to its No. 1 position, losing it to newcomer IndiGo. Bank of America Merrill Lynch and Credit Suisse advised Jet on the deal while HSBC was the advisor for Etihad.
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