by Devesh Agarwal
|Jet’s A330 fleet is expected to be deployed to Abu Dhabi|
The 24% stake sale by Jet Airways to Abu Dhabi owned and based Etihad Airways is a bonanza for both the airlines.
For Jet Airways it gets a significant amount of cash it desperately needs to reduce part of its massive two billion dollar debt, since it is issuing fresh shares. Apart from this cash Jet gets from the stake sale, Etihad will also inject a further $220 million in to Jet.
The gulf carrier has already paid $70 million to purchase Jet Airways’ three pairs of Heathrow slots through a sale and lease back agreement, which Jet Airways will continue to operate flights to London utilising these slots, for now.
Etihad will also invest $150 million to gain a majority equity investment in Jet Airways’ frequent flyer program Jet Privilege, expected to be completed within the next six months. This is a major coup for the gulf carrier as it gets controlling access to the top frequent fliers in the country. Since Etihad is essentially owned by the rulers of Abu Dhabi just like all other major institutions, Jet Airways will also get access to low interest loans, estimated a 3% per annum, which it will use to retire high cost debt.
What does Etihad get in return? Much as the leadership at Jet or their many government supporters may deny, Etihad will get control of Jet Airways’ international operations. As of now, the planned shareholding will be Naresh Goyal 51%, the public 25%, and Etihad 24%. Any future issue of shares or dilution of share-holding by Naresh Goyal will be offered on a basis “right of first refusal” to Etihad. To remain a publicly listed company, a 25% public shareholding is required.
I have been advocating a new name for Jet Airways on its 20th anniversary. Jetihad Airways.
Our analysis of Jetihad
The speed at which the bi-lateral air services agreement (ASA) with the United Arab Emirates, excluding Dubai, was re-negotiated shows the sheer political muscle of the promoters of Jet Airways. In the blink of the eye, without Etihad even asking for it, the capacity between India and Abu Dhabi has been almost quadrupled. Anyone who believes this is not a direct quid pro-quo is naively denuding themselves.
The main beneficiary of this capacity increase will be Jet Airways from India and Etihad from Abu Dhabi. Jet Airways, very recently, sought additional rights of 41,600 seats a week from 23 Indian cities to Abu Dhabi for the next three years. That’s more than the 26,600 seats a week available for all Indian and Abu Dhabi-based airlines put together to fly between the two countries. The capacity from Abu Dhabi is of course, reserved for Etihad.
Based on the seat capacity requests Jet will more than double its share from 31% to 76%, as will Etihad in reverse.
|Market share of Indian carriers to Abu Dhabi|
The ASA also allows for gauge-change and code-sharing and this will allow Jet to leverage its domestic network and ferry passengers from India to Abu Dhabi on a combination of narrow bodies from smaller cities and wide-bodies from larger cities, which will then be fed on to Etihad’s network of 87 passenger and cargo destinations in 55 countries served by its 66 aircraft operating 1,300 flight per week. This will allow Etihad to leap-frog ahead of fellow UAE carrier and competitor Emirates airline, in one fell swoop. Emirates already deploys more than 12% of its capacity to India, and is asking for a doubling of its 50,000+ existing weekly seat capacity.
India’s west bound international traffic is growing at 10% per year and is expected to reach 40 million from the current 28 million soon. Assuming Jet will try and target about 10% market share, but since Etihad will carry passengers the longer distance from Abu Dhabi to destinations in Europe, North America, Africa, and South America, expect that airline to earn bulk of the Indian passengers’ money, not Jet.
The partnership with Etihad will also allow Jet to lease many of its wide-bodies to the carrier who needs aircraft capacity right now, as well as utilise the large Boeing 777 fleet, much of which has spent its life being leased to other carriers. With the rulers of Abu Dhbai owning Etihad, Jet can use its A330 fleet to ferry passengers from India to Abu Dhabi and onwards using fifth and seventh freedom rights.
With Etihad covering the west, will Jet be allowed to focus east to Japan and Korea? What about down under to Australia? One cannot say for certain at this moment in time.
On the alliance front, Jet can now kiss goodbye to the Star Alliance which is vehemently opposed to Gulf carriers, and this is now further compounded with the growing size and clout of existing member Turkish airlines. Turkey wants to construct the world’s largest airport.
Apart from traffic and operations, the main question still remains, who will head the board of directors and who all will run it operationally? We can expect the nominal executive leadership to remain with Jet, but all effective operational control will pass to Etihad despite rules in India requiring management to be Indian. These are all very easily “handleable”. The middle management of Jet faces significant uncertainty on their future career prospect.
Jet Airways – the powerful Gemini
The Jetihad deal and the events surrounding it are a revealing insight to the enormity of the political clout commanded by Jet Airways and its promoter Mr. Naresh Goyal, a former travel agent. Goyal’s influence is widely regarded as the catalyst for forming aviation and financial policy, many times contrary to the national interests of India, but well suited to the needs of private airlines like Jet Airways. This included a policy preventing foreign airlines to invest in Indian carriers, which was done to block the Tatas and Singapore Airlines starting a domestic Indian airline.
He is also believed to be responsible for passage of rules requiring Indian carriers to operate a minimum five years and have a fleet of 20 aircraft, before they could fly internationally. Again to benefit a very nascent Jet Airways at that time, but one which allowed foreign carriers, not required to follow these rules, to come in to India and establish market share, while Indian carriers could only look on.
Till about February last year, Jet Airways and its subsidiary JetLite (the former Air Sahara) were the largest airline in India, both domestic and international. Then upstart and irreverent low cost carrier, IndiGo, usurped the crown of largest domestic carrier. There were some months when, even the hopelessly inefficient Air India, topped Jet Airways in the market share standing. Losses mounted, debt ballooned.
Also, influenced by the imploding Kingfisher Airlines and its promoter and Member of Parliament, Dr. Vijay Mallya, the Indian government started talking about liberalising the airline sector by permitting foreign airlines to invest up to 49% stake in Indian carriers.
When he saw the writing on the wall, in a very smart move, Goyal switched tact, leveraged his middle-east connections, and commenced negotiations with Etihad, which, after many a false start, has culminated in the deal at hand.
Given the history of Jet Airways and its promoters over the last 20+ years, one has to take a huge pinch of salt to digest Goyal’s statement
“I would like to thank the Government of India, especially the Ministries of Civil Aviation, Commerce and Industry, and Finance, for having the foresight to introduce the historic reform of allowing foreign direct investment into civil aviation in India. Infusion of FDI in the domestic sector will result in the improvement of the economics of aviation, grow traffic at our airports and create job opportunities.”
India – UAE (Abu Dhabi) Bi-lateral air services capacity
Normally negotiations of bilateral air services agreements take years, and are normally commenced only after existing capacity is exhausted.
In 2011, the Comptroller and Auditor General of India, indicted the government and aviation ministry officials for their liberal policy of doling out bilateral seat capacity like candy. The CAG even suggested a roll-back of the capacities. Yet, barely 18 months after that report, political clout is amply demonstrated by the haste with which the Indian government enhanced its ASA with Abu Dhabi.
This despite the vehement objections of the operators of Delhi, Mumbai, Bangalore, and Hyderabad airports, and virtually all airlines, who fear their expensive investments will be now rendered uncompetitive, as another hub is created in Abu Dhabi, with Jet Airways ferrying passengers from even the smallest cities to the Emirate.
Even a strong letter, against expanding capacity, by former minister Dinesh Trivedi seems to have had no effect.