Mumbai: The board of directors of Jet Airways (India) Ltd, the country’s second largest carrier by passengers carried, is expected to meet this weekend to approve a proposal to sell a 24% stake to Etihad Airways PJSC, according to two persons familiar with the development.
A formal announcement of the deal is expected by the first half of next week in Abu Dhabi, they said.
“As has been widely reported, we have been in discussion with Jet Airways. As part of this process, a senior delegation, including the president and chief executive officer James Hogan and board members, flew to India last week and met with senior Indian aviation officials,” Etihad Airways said in an emailed statement on Friday. “We are currently undertaking due diligence, which will be presented to the Etihad Airways board. If, or when, we make an investment decision, we will announce this in line with the appropriate regulatory and commercial requirements.”
The Indian government had in September allowed foreign airlines to buy up to 49% in domestic airlines. Jet Airways and the United Arab Emirates (UAE) airline have been in talks since then.
“As a preliminary step, Jet Airways and Etihad Airways will sign a definitive agreement towards this investment. The sale will be formalized after securing necessary approvals from the Foreign Investment Promotion Board and other regulatory agencies,” said one of the persons on condition of anonymity.
He said that Jet Airways had been valued at $1.25 billion (around Rs. 6,750 crore), which works out to Rs. 750 a share, which is at a premium to the current price. He did not provide details about the likely Etihad Airways representation on the Jet board.
Jet Airways rose 3.83% to Rs.618.35 on BSE on Friday, while the benchmark Sensex declined 0.15% to 19,468.15 points.
On 4 February, Mint reported that Jet Airways would not cede management control to the UAE firm, citing Jet Airways founder-chairman Naresh Goyal, a non-resident Indian.
Goyal-owned Tailwinds Pvt. Ltd controls 80% of Jet Airways, but is an overseas corporate body. Jet is, therefore, already more than 49% controlled by a foreign holding company, but has been granted a special exemption by the government.
The airline is working on a deal structure that will avoid all possible tax implications, according to an executive at a consulting firm who is aware of the development.
Goyal will transfer shares from Tailwinds to his own name and hence there won’t be any tax implications as there would be no sale in this case, the consultant said.
Jet Airways’ spokesperson did not offer any comment for the story.
Etihad Airways, which began operations in 2003, serves 86 cities in West Asia, Africa, Australia, Asia, Europe and North America, with a fleet of 70 Airbus SAS and Boeing Co. aircraft. It has at least 90 aircraft on firm order, including 10 Airbus A380s, the world’s largest passenger aircraft. The UAE airline has stock in Air Berlin, Air Seychelles, Virgin Australia and Aer Lingus. Jet Airways currently operates a fleet of 99 aircraft and flies to 73 destinations in India and at least 20 overseas.
On 4 February, Mint reported Etihad chief executive Hogan as saying that his airline was conducting due diligence of Jet Airways and it would send its board a proposal for consideration in a week’s time.
Consultancy firm Capa India, in a report released on Thursday, said the Jet Airways-Etihad deal has the potential to be a game-changing combination.
“It brings together one of the most successful airlines in India, a market expected to be the fastest growing in the world over the next 20 years, with a well-capitalized Gulf carrier with global ambitions, and its growing network of partners,” Capa said in its report. “Between the two airlines, they have a fleet size in excess of 180 aircraft. Critically for Jet, this deal will provide it with the capital that it requires at this time.”
Jet Airways has numerous positive attributes ranging from its brand equity, strong market presence, access to scarce infrastructure and experienced management. But in recent times, it has been starved of the capital it requires to be able to leverage its strengths, Capa said.
Girish Shirodkar, a partner who leads the infrastructure and resources practices at Strategic Decisions Group, a strategy consulting firm, said, “It will provide Jet Airways with the funding required to reduce its debt levels and further expand its network. Another positive aspect could be the potential synergies it may gain with Etihad Airways on the international network. Jet has had limited success with using Brussels as a base for its international operations. It could now become a feeder airline to Etihad Airways and then link up to the world from Abu Dhabi.”
Shirodkar said it is a great deal for Etihad as it provides a toehold into the high-potential Indian market to help it consolidate travel for India to the US, Europe and Africa, by using Jet Airways as a feeder and Abu Dhabi as an international hub.
Though the deal will strengthen one key player and in that sense enhance competition, Shirodkar cautioned that the move may not be good for Indian airports as Jet Airways’ plan to use either Mumbai or Delhi as a hub will get diluted going ahead.
Some experts disagree about the deal’s merits for Jet Airways.
“I believe Jet engaging in this deal is short-sighted, while for Etihad it is a very good investment,” said Saikat Chaudhuri, an assistant professor of management at the Wharton School, University of Pennsylvania.
“Jet Airways is getting a cash infusion now, but is sacrificing longer-term management influence and probably even membership in Star Alliance. Witness how Etihad has made a similar investment in Air Berlin, and has essentially taken over management control in route planning, onboard seat installation, and even chief executive officer succession,” said Chaudhuri, who has studied the Indian aviation scene closely.
“Lufthansa Airlines is particularly wary of the Middle Eastern airlines and may well balk at now including Jet Airways in Star Alliance, not to mention that Jet Airways anyway will now probably use Abu Dhabi as a hub and thereby curtail some West-bound flights,” he said.
Etihad Airways is picking up stakes globally at low prices in airlines that are hurting, and also challenging the existing dominance of the alliance networks, which, Chaudhuri said, was a smart strategy for it.
“Regarding Indian aviation, what will truly help both the industry to grow again and the airlines to compete profitably is structural reforms: reduction of airport fees, lowering of fuel taxes and improvement of infrastructure,” he said.