New Delhi/ Mumbai: Etihad Airways PJSC chief executive James Hogan said his airline is conducting due diligence of Jet Airways (India) Ltd and the Abu Dhabi-based carrier will send its board a proposal for consideration in a week’s time.
Jet Airways, the nation’s second largest airline by passengers carried, is said to be in advanced talks with Etihad to sell it a 24% stake for around $300 million.
Hogan, who met India’s finance, commerce and aviation ministers in Delhi last week, said he had sought clarifications from the government on certain issues. Jet founder Naresh Goyal and other executives also attended the meetings.
“We wanted to understand the new rules under the foreign direct investment (FDI) scheme. We also wanted to understand the issues that have impacted Indian domestic aviation and how these are being addressed in the coming years,” Hogan said during a webcast of Etihad’s financial results on Monday from Abu Dhabi. “Next week, we will present (the results of the due diligence) to our board which will take a view.”
To be sure, talks between Jet and Etihad have been on since mid-September, when India allowed international airlines to acquire up to a 49% stake in domestic airlines.
Etihad, owned by the government of the United Arab Emirates, said net profit jumped to $42 million in 2012 from $14 million in 2011.
Despite Monday’s announcement indicating that a deal could be unveiled next week, the Jet stock fell after the webcast. It closed 2.87% down at Rs.604.80 on the BSE; the Sensex shed 0.15% to end at 19,751.42 points.
“Markets are disappointed because of the expectation that it was to be announced today and hence the correction,” said Kapil Kaul, South Asia CEO for aviation consultancy Capa.
Etihad’s attempt to bring Jet into its fold follows a similar strategy by it in other parts of the world. Hogan referred to the model as “an equity alliance”.
These include minority stakes in Air Berlin Plc, Virgin Australia Holdings Ltd, Aer Lingus Group Plc and Air Seychelles Ltd.
A deal with Jet could see the Indian carrier feeding the UAE carrier’s network.
“Etihad needs to build a more robust competitive scale and any investment must satisfy two critical issues—feeding their long-haul network and building Abu Dhabi as a hub for intercontinental travel. Investment in Jet has to address both these objectives,” Kaul said.
Goyal-owned Tailwinds Pvt. Ltd controls 80% of Jet Airways but is an overseas corporate body. Jet Airways is, therefore, already more than 49% controlled by a foreign holding company, but has been granted a special exemption by the Indian government.
A Jet official said on a conference call following its earnings that it will stick to its cost-cutting plan without impacting profitability and pay off $400 million of debt in the next financial year.
The carrier had a total $2.16 billion of debt as of 31 December 2012, down from $2.6 billion at the end of March that year.
The airline is steadily paying off debt and has got commitments from banks for working capital, K.G. Vishwanath, vice-president, commercial strategy and investor relations, told analysts during the call on Monday.
The airline has repaid nearly $400 million in the current fiscal and another $400 million will be paid next fiscal, said Vishwanath, who added that the average cost of debt for the airline is around 6%.
Jet executives on the call declined to divulge details about discussions with Etihad.
The carrier has reconfigured its wide-bodied planes to increase profitability, said Sudheer Raghavan, chief commercial officer. The airline gets 56% of its revenue from international operations and the rest from domestic operations, Raghavan said. Asked about the competition faced by Indian low-fare carriers, he said they have had to pull out from many international routes, including Singapore while Jet Airways is doing better owing to its network strength, he said.
Jet Airways swung to a profit in the third quarter, it said on Friday. It reported a net profit of Rs.85 crore in the quarter ended December against a net loss of Rs.101.22 crore in the year-ago period. Sales rose 6.76% to Rs.4,205.77 crore.
The airline had been expected to post a net profit of Rs.34.01 crore in the third quarter on revenue of Rs.4,720.70 crore, according to a Bloomberg survey of six analysts.
On Monday, Mint reported that Jet Airways will not cede management control to the United Arab Emirates firm, citing Jet’s Naresh Goyal.