The Hindu Business Line : Jet to fly higher on Sahara deal, but not without air pockets

IF everything goes well, Jet Airways' $500-million buyout of Air Sahara will, at a stroke, expand its fleet strength by 50 per cent, seats flown by 33 per cent, and ramp up its share of domestic passenger traffic to a dominant 50-per cent plus. The other large player, Indian Airlines, now controls just over a third of the market.

Capacity addition will certainly help Jet take full advantage of the sharp upsurge in domestic passenger and cargo traffic that is now under way in the aviation market.

Capacity apart, access to Air Sahara's cabin crews, parking bays and prime landing slots will be crucial at a time when airport infrastructure and staff shortages are proving to be the main stumbling blocks for airlines looking to push into a higher growth trajectory.

Seen in this context, Jet may have viewed the purchase consideration of $500 million (about Rs 2,100 crore) for the deal as reasonable.

The valuation for this deal appears to have factored in a significant discount to Jet's own stock market valuation, if one goes by relative revenues of the two companies.

Jet Airways enjoys a market capitalisation of about Rs 9,200 crore with a market share of 42 per cent.

If you apply the same valuation to Air Sahara based on its market share of 12 per cent, it would be valued at roughly Rs 2,700 crore.

Jet has paid much less than this for the buyout.

An earlier valuation exercise by Ernst and Young for a strategic stake sale in Air Sahara to private equity investors had pegged its enterprise value at $750 million-$1 billion. Jet has stated that Air Sahara's debts are not to be transferred and this is a positive.

If everything falls into place quickly, the merger of Air Sahara's operations with Jet will no doubt strengthen the latter's dominance over the domestic market and endow it with greater pricing power.

But Jet will first have to smooth over several regulatory as well as integration issues that are bound to crop up.

On the regulatory side, Air Sahara's parking slots and international rights will not automatically revert to Jet; the latter will instead have to re-apply for securing these rights.

On the operational side, too, Air Sahara's hub-and-spoke model is at variance with Jet's point-to-point operations. Air Sahara has a fully leased fleet while Jet prefers to own aircraft.

And the addition of Sahara's Bombardier aircraft may further reduce Jet's fleet commonality. The former's staff costs are also said to be higher than Jet's.

Until now, Jet has managed to contain the impact of rising fuel costs on its bottomline by keeping a tight rein on fixed and personnel costs.

After the merger, costs are bound to balloon, and Jet will probably be under pressure to extract operational synergies from Air Sahara's fleet as quickly as possible.

With the stock underperforming the market by a significant margin over the past six months, investors are likely to be short on patience.

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