As talks of a possible buyout of Jet Airways by the Abu Dhabi-based Etihad Airways gather steam, this is a good time to look at the reasons why the deal makes sense for both parties.

First Etihad Airways. In a bid to expand its global presence and counter the threat from its neighbours’ fast expanding global airline Qatar Airways and the Dubai-based Emirates, Etihad has, in the last year or so, either acquired or raised its stake in at least three international airlines. In June this year, the airline acquired a four per cent stake in Virgin Australia for close to $35.6 million and indicated that it was keen to raise its holding to 10 per cent.

Size matters

This was followed with Etihad raising its stake in Germany’s Air Berlin to 30 per cent, acquiring a 40 per cent holding in Air Seychelles and a three per cent stake in Ireland’s Aer Lingus.

Industry analysts say that the Jet-Etihad match is a perfect one, especially for the cash-strapped Jet Airways. “Should the deal go through, it will be a win-win situation for both the airlines and passengers. The Indian carrier will get access to much-needed funds, a global network, latest technology and best management practices. The global carrier will get access to traffic originating from India’s interiors. Indian passengers will gain from increased competition that is expected to lead to better offerings, seamless travel through code-shares and cheaper airfares,” says Amber Dubey, Partner and Head – Aviation, KPMG.

At the same time, the tie-up will provide Etihad an opportunity to tap into the fast growing Indian outbound market. In addition, it will mean that Etihad will not need to wait for the Indian Government to allow it to operate more flights into India because of a cap on bilateral air service agreements with other countries.

Familiar investors

The benefits of tapping into the outbound Indian market will be huge for both Etihad and the Indian economy. For instance, a recent Emirates-commissioned study highlighted the economic advantages for the domestic economy if the Government allows it to operate up to 80,000 seats a week from India from its current entitlement of about 57,000.

Many point out that the tie-up, if it happens, will cement old ties that Jet’s promoter, Naresh Goyal, has with the region. When Jet Airways took to the skies, Kuwait Airways and Gulf Air invested in the airline. It was only when policies here changed that Jet purchased those stakes from these two foreign companies. Now that foreign airlines are allowed to invest in Indian carriers, Jet Airways can again turn to this region for the financial support it needs.

Incidentally, Jet is not the only carrier looking to partner with a foreign airline. Low cost flier SpiceJet is also said to be in talks with foreign airlines. It was rumoured that another low cost airline, Air Asia, was eyeing SpiceJet.

Cash infusion

The Malaysian airline has, however, said that it is neither in talks nor is it interested in picking up stake in an Indian carrier. SpiceJet had earlier also said it was in talks with airlines in the Gulf region.

There are various reasons why Indian carriers are looking at possible tie-ups with foreign airlines. To begin with, Indian banks are refusing to lend them any more funds. It is expected that the latest policy change will help bring in much-needed funds into the cash-strapped and deep-in-the-red Indian carriers. In Jet Airways’ case, Eithad is expected to be issued fresh shares with the money so raised bolstering the carrier’s finances.

A look at the latest finances of Jet and other listed carriers shows why such tie-ups are essential. Jet Airways’ net loss shrunk to Rs 100 crore in the September quarter from Rs 714 crore in the year ago period backed by a forex gain of Rs 70 crore and a jump in operating income. Similarly, SpiceJet posted a net loss of Rs 163.52 crore for the quarter ended September 30 against a loss of Rs 240 crore in the comparable previous year period. Incidentally, after five consecutive quarters, all Indian airlines posted a net profit of Rs 56 crore in the first quarter of the current financial year. Though these are positive signs, they still have a long way to go before they start making money.

The Public good

Of course, the fit between an Indian carrier and a foreign one has to be perfect. This is why many feel that unlike the Jet-Etihad tie-up, the one between SpiceJet and Air Asia would not have worked. “The operating model of the two airlines is different. Air Asia deploys a single aircraft fleet while SpiceJet has a two-aircraft fleet. Besides with the current financial health of SpiceJet, this might not be the right time for Air Asia to invest in it,” said an aviation analyst.

Government officials further point out that any stake sale is unlikely to provide any immediate benefit for the flying public. “The reason behind the policy change was to provide some comfort to the airlines. It is hoped that with the policy change the airlines will not only get access to funds but will also be able to tap in to international airlines’ management expertise,” said a senior Government official. Of course, it will be a while before all this translates into any benefits for flyers.

(This article was published on December 2, 2012)
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