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Jet-Etihad alliance may face ministry headwind

Expansion of Etihad through Jet in India may be restricted to existing city pairs, say government officials
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First Published: Fri, Jan 25 2013. 12 09 AM IST
A stake in Jet could help Etihad compete with rival Emirates. Photo: Ramesh Pathania/Mint
A stake in Jet could help Etihad compete with rival Emirates. Photo: Ramesh Pathania/Mint
New Delhi: The aviation ministry may want to protect state-run Air India Ltd ’s business prospects if Etihad Airways PJSC buys a stake in Jet Airways (India) Ltd and the combine pursues an aggressive expansion programme, two government officials said.
Air India chairman and managing director Rohit Nandan had raised concerns over the potential threat to the airline from a deal between Jet and Etihad, which are in talks about a possible stake sale, in a letter to aviation secretary K.N. Srivastava, Mint reported on 10 January.
If a deal takes place, the airlines could schedule their flights to funnel passengers from India headed for the US and Europe through Etihad’s Abu Dhabi hub. Etihad is the national airline of the United Arab Emirates.
“They can’t use Jet as a spoke to the hub in Abu Dhabi,” said an aviation ministry official, one of those cited above. “Nothing will be allowed to be done which jeopardizes some other airline.” Both officials declined to be named.
The official said the expansion of Etihad through Jet in India may be restricted to existing city pairs. Indian regulatory authorities have to approve flights schedules despite the opening up of the sector to foreign airlines. Schedules are cleared every season.
“Let’s say Jet goes from five places in India to Abu Dhabi, then you give them 10 cities to fly from. There cannot be an unhealthy development taking place in the country. Who approves the schedule? We do.” the official said.
The Naresh Goyal-led Jet, controlled from the Isle of Man tax haven through Tailwinds Pvt. Ltd, needs money to fund expansion and cut debt after several years of losses.
Tailwinds controls 80% of Jet and is an overseas corporate body. As per rules, Jet is, therefore, already more than 49% controlled by a foreign holding company but has been granted special exemption by the government. The government allows overseas investment of up to 49% in airlines. In September, it said such stakes could also be picked up by foreign airlines.
The ministry official cited above said that Goyal, as a London-based non-resident Indian (NRI), may have to transfer the Tailwinds shareholding to his name first and then sell a stake to Etihad. NRIs are allowed 100% airline ownership.
This could be a complicated transaction, according to an aviation analyst, who declined to be identified. When a structure is changed to an NRI holding, UK laws may apply. There may be tax implications to the change, besides which Jet may face more stringent disclosure guidelines on the shareholding structure as mandated by the Indian capital market regulator.
When Jet confirmed it was in talks with Etihad on 3 January, it added the caveat that any deal would require the resolution of such issues. “Various structures are being explored by the legal and commercial teams and care is being taken to ensure that all the Indian regulatory requirements are fully complied (with),” Jet told BSE at the time.
Jet’s stock has risen 59% from Rs.368.35 in September, when the decision to allow foreign airlines to pick up stake in Indian airlines was cleared, to Rs.586.85 on Thursday. Jet stock was trading at Rs.244.55 last January.
Both sides are bargaining hard, with Etihad looking at long-term benefits, said a person familiar with the negotiations, who requested anonymity.
Until the 3 January clarification, Etihad was said to be in talks with Kingfisher Airlines Ltd as well for the possible purchase of a controlling stake. Kingfisher promoter Vijay Mallya told employees in a letter soon after this that no investor was looking to pick up a stake in the grounded airline and the promoter group will invest Rs.650 crore to revive it.
A stake in Jet could help Etihad compete with rival Emirates, based in neighbouring Dubai, said the person familiar with the negotiations. Among all overseas carriers operating in the country, Emirates gets the largest chunk of Indian traffic.
“Etihad may want Jet to offer it increased India coverage by way of bilateral rights that are controlled by the civil aviation ministry with a potential clause in the stake sale agreement to escalate its stake in Jet Airways if those demands are not met by Jet,” said the official.
Etihad has 59 services to India in a week while Emirates operates 185 flights from 10 Indian cities.
An Etihad spokesperson didn’t reply to an email seeking comment. Jet didn’t offer comment on the ongoing negotiations.
The Directorate General of Civil Aviation is likely to issue guidelines on investments by foreign airlines by the first week of February, after which formal applications can be submitted.
Jet now has 99 planes and 500 daily flights compared with 117 aircraft and 620 daily flights in 2011, after having pulled out of several international destinations, including Milan (Italy) and South Africa, because they weren’t popular enough.
“If the deal goes through, it will become a strong partnership between Etihad and Jet Airways,” said Steve Forte, former CEO of Jet Airways, in an email. “So it is plausible to think there will be a partial fusion of the networks with common interests being served at each end.”
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First Published: Fri, Jan 25 2013. 12 09 AM IST