by Devesh Agarwal
Two days ago, two Times of India group newspapers, The Bangalore Mirror and The Economic Times reported UAE national carrier Etihad buying a 48% in financially disabled and grounded Indian carrier Kingfisher Airlines. The Bangalore Mirror may be a tabloid, but The Economic Times is no slouch when it comes to financial matters.
This went against the news of on-going and advanced discussions between Etihad and India’s Jet Airways for a possible stake sale by the latter, discussions on which Vinay Bhaskara has posted an analysis.
There were reports on Tuesday in certain section of the media that Etihad would pay Rs 3,000 crore for a 48% stake in Kingfisher.
and the question on everyone’s minds – what is going on with this love triangle of sorts? Etihad, the groom, is being wooed by two brides, both of whom need Etihad’s money; one for expansion, one for revival. Is it a done deal between Kingfisher and Etihad or not? What about Jet and Etihad? Who will Etihad choose? Who should Etihad chose? When Jet and Etihad have been in talks for a while, and there are signs of significant progress, why is Etihad talking to Kingfisher about a stake sale?
Before we go further, in the interests of full disclosure, I own shares, albeit a very small number, in all three publicly listed airlines in India – Jet Airways, Kingfisher Airlines, and SpiceJet.
Firstpost hints at a possible reason why Kingfisher has suddenly popped up in middle of the Etihad Jet courtship. The aggressive demands and arrogant approach by Jet Airways, led by its Chairman Mr. Naresh Goyal, is well known in aviation circles. Despite being publicly ambivalent about foreign direct investment in civil aviation (some say even opposing), Mr. Goyal has been trying his hand out, trying to drum up investors and partners. Nothing wrong there. As a shareholder of Jet, I would want the company’s leadership trying to get the best deal. However, it is possible that Jet started discussions and partnerships with one too many a partner, without sealing and fructifying previous deals, and this has soured the situation in more than one boardroom, from the middle east to Europe.
Reports also suggest Jet has been demanding a huge 65% premium, from its current share price, meaning Etihad will have to fork out almost $300 million for a measly 24% stake in Jet, and still get no management control. Furthermore, it appears that Jet has demanded Etihad pay over 50% of the planned investment upfront. These demands, and a possible arrogance of “we are the only airline worth dealing with in India”, have queered the pitch, somewhat, prompting Etihad to consider Kingfisher.
So, who should Etihad choose? Jet Airways or Kingfisher Airlines? We welcome your comments and thoughts.
In my humble opinion Etihad should choose Kingfisher.
Etihad is a relative new comer to the airline world, having started just nine years ago, on November 12, 2003, but it is one of the fastest growing airline in the entire history of commercial aviation, under the leadership of James Hogan.
For strategic growth, Etihad has taken stakes in airlines in key markets around the world. 29.21% stake in Air Berlin, a member of oneworld, 40% in Air Seychelles, 2.987% in Irish carrier, Aer Lingus, and 10% in Virgin Australia.
Like the other two of the famous MEB3 (middle east big 3) carriers, Emirates airline of Dubai, and Qatar Airways of Doha, Etihad heavily depends on sixth freedom traffic, connecting passengers across the world, in and out of its Abu Dhabi hub, but due to its late entry, Etihad though does not enjoy the sheer seat volumes in the air services bilateral agreements, Abu Dhabi has signed with various countries, India especially, and in South Asia generally.
At 54,200 seats in over 189 wide body flights a week, Emirates is sarcastically considered the ‘unofficial flag carrier of India’. India contributes almost 11% of Emirates’ 33+ million annual passengers. Qatar Airways at 101 flights is not too far behind. Now Emirates is trying to renegotiate its India capacity to cross 89,000 weekly seats. The situation is similar in Pakistan, Bangladesh and Sri Lanka.
Etihad needs India for its growth story. Abu Dhabi is limited to about 25,000 seats a week, and Etihad has maxed it out.
Unlike Dubai, which is well served by Indian carriers, IndiGo alone offers 72 weekly flights with 12,960 seats, SpiceJet is at 48 flights and 9,072 seats, Air India, Air India Express, and Jet Airways too having a large number of flights, Abu Dhabi does not see much service by Indian carriers.
With Kingfisher, Etihad will get a 49% stake, and unquestioned management control. It can easily leverage Kingfisher to feed Indian and South Asian passengers to its Abu Dhabi hub, and in a fell swoop, can double its India capacity. From a network perspective also, Etihad today, needing to broad-base its India network, still flies A320 narrow bodies to most of its Indian destinations, Ahmedabad, Bangalore, Chennai, and Hyderabad. Only Delhi and Mumbai are served by wide-body aircraft. Etihad can deploy Kingfisher’s A320s which are well equipped with in-flight amenities on these routes, while increasing wide-body capacity at strategic Indian destinations to better compete with both Emirates and Qatar.
Unlike Jet, Kingfisher also does not have an international network, especially to London, a prized destination for all the MEB3 carriers.
With Jet, Etihad gets a running airline, but only a non-controlling stake, and a stake sale will involve untangling the knotty issues of Naresh Goyal Jet Airways’ ownership, which is routed through Tailwinds in the tax haven of the Channel Islands, and which is currently in violation of Indian securities laws.
By choosing Kingfisher, Etihad will have to essentially revive the airline, but it has significant assets, routes and slots. With total control, Etihad can remould Kingfisher to closer suit its strategic goals. Keeping in mind its stake in airberlin, control of Kingfisher would also allow Etihad an additional entry in to the oneworld alliance, something that Qatar Airways may not like too much.
On the financial front, while Etihad will get a controlling stake for not much money, it will have to deal with the significant accumulated losses and over Rs. 7,000 Cr. debt, of Kingfisher, owed to banks. This debt though, can be dealt with. Dr. Mallya will use some of the gains from the sale of United Spirits to Diageo to pay down that part of the debt for which he has given personal guarantees. On the whole, lenders will be relieved to see Kingfisher revive, which will enable them to slowly recover their money. Better to get a 50% haircut, than being shaved bald.
To pull this recast of Kingfisher Airlines off, Etihad will need political clout, and that is where Dr. Vijay Mallya scores over Naresh Goyal. While there is no doubt Goyal is THE formidable political force in the Indian airline industry, Mallya has the clout of the liquor industry, the grease pipe of Indian politics. National elections are coming in 2014, and the Indian politicians know they need to dance with the person who brung yah.