ANALYSIS . The many hurdles for Tatas in a Jet Airways deal

Tata Sons may have to shell out over $1 billion if it were to buy out a majority stake in Jet Airways and invest an additional ₹1,000 crore immediately to stabilise the airline’s operations.

The parent of the Tata Group will also have a major task on hand to convince the joint venture partner, Singapore Airlines to participate in the deal if Jet Airways were to be merged with Vistara.

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Another issue which is bound to come up during the merger talks would be the 24 per cent stake of Jet held by Etihad. The airline bought the stake for a little over ₹2,000 crore and with the current market value at ₹3,940 crore, the value of its investment has gone down further. It is unlikely that Singapore Airlines would want Etihad as one of the prominent shareholders even with a reduced stake.

Also, any additional stake over and above 26 per cent will trigger off an open offer, industry sources said. The open offer price should be attractive enough for shareholders to subscribe to it.

Late on Friday, Tata Sons released a statement that the talks with Jet Airways was at a preliminary stage and no proposals had been made.

While carrying out the due diligence, Tata Sons may also have to deal with the issue regarding claims about the initial funding of Jet Airways when it was set up. There have been reports about the source of some part of the funding which put the airline under a scanner.

Change in value

The total enterprise value of Jet Airways is about ₹12,000 crore (market cap+debt-cash) with the total debt of the airline being ₹8,000 crore and the market value at ₹3,940 crore. If Vistara’s joint venture partner, Singapore Airlines were to be roped in, then the airline will need approvals from the regulator in its home country.

Analysts have said that the total losses during FY19 will exceed $500 million or more excluding assets sales or other income. One of the core challenges that the airline finds itself in is not its international operations but the domestic one which contributes about 50 per cent of the total revenue.

Increase in debt

A merger with Vistara will only add to the total debt and losses as well. Vistara’s annual net loss during FY18 as per regulatory filings was ₹514 crore on revenues of ₹2,137 crore which grew 54 per cent compared with the previous year.

What is significant to note is that while Jet Airways’ domestic operations are suffering, Vistara’s business model – with a 3-class configuration – is not suited to domestic operations, according to aviation consultancy firm, CAPA.

Vistara itself is in need of additional funding. In July 2018 Vistara placed an order for 50 A320neos (in a combination of direct orders from Airbus and via lessors) and six 787-9s, signalling its long-term strategic intent to pursue both domestic and international expansion. “Vistara will have to prepare for a long-term horizon to achieve profitability. Given the competitive dynamics on domestic routes, and the significant costs that will be incurred in building up international operations, Vistara’s promoters will need to commit a large war chest and demonstrate significant patience,” CAPA said in its mid-term review of the Indian aviation industry.

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