Jetihad.

     If there’s one business sector in today’s corporate world that is known to be a capital-intensive, low-profit and high-risk one, then that sector, without a shadow of a doubt, is civil aviation. The aviation business is by far the only business in the world in which over half of the entrants have already gone out of business. This boils down to the startling fact that the total number of airlines flying today is less than 50% of the total number of airlines that took to the skies in the past. Capital is something that needs to be perennially pumped into an airline, in order to keep its planes in the air and globally, the airline business has the notorious reputation of being a cash-guzzler, one with wafer-thin profit margins.
     India, of course, is no exception. In fact, the business environment for an Indian airline is far less conducive, with high ATF prices, exorbitant landing charges, crippling sales taxes, debilitating price wars and an exposure to the vagaries of the global economy. Most of India’s airlines are starved of cash and one way of addressing this problem is through foreign direct investment (FDI). FDI was always perceived as the panacea for the airline sector but the Indian Government never seemed to be keen on authorizing it. FDI, as a general investment in an Indian airline, was always allowed but FDI by a foreign airline was restricted due to security issues. This rule, however, was ridiculous as no one would be capable of understanding the airline business better than an airline itself. Then, in September 2012, after mounting pressure from Indian carriers and several industry and trade bodies, the Indian Government authorized FDI by foreign airlines, to the extent of 49% in a domestic carrier, and a new day dawned on India’s aviation sector.
     After FDI was given the all-clear, everyone expected foreign airlines to fly in and scoop up stakes in India’s airlines. That, however, did not happen and even today, foreign carriers don’t seem to be enthusiastic about making any investments just yet. Air India and IndiGo seem to be well-funded, GoAir has already stated that it intends to induct a foreign airline investor and SpiceJet is reportedly in talks with Qatar Airways to offload a stake. Furthermore, AirAsia has announced its plans of setting up an airline in India, along with the Tata Group and Telestra Tradeplace but as far as FDI is concerned, the sector seems to be in stalemate mode. Today’s situation seems to be a far cry from that of a few years ago, when the Indian Government didn’t even seem to be close to mulling over the opening of the aviation sector to FDI. At that time, both British Airways and Singapore Airlines had already expressed their individual desires to pick up equity stakes in Kingfisher Airlines. Emirates, too, seemed to be ready to court Kingfisher. But that was back in the day when the airline was still the poster boy (or in Kingfisher’s case, the calendar girl) of the Indian aviation sector.
     Today, with the skies having closed in on Kingfisher, Jet Airways is the sole-surviving, full-service private carrier in India. Jet is the second largest airline in terms of market share and it happens to command one of the largest fleets in the Indian skies. The airline is also one of the few airlines in the green and with its subsidiary, Jetlite, it also has an offering in the low-cost space. It’s no wonder then that a foreign carrier is already in talks with the airline to pick up an equity stake but that said foreign carrier is indeed no ordinary one.
     Etihad Airways, backed by the royal family of Abu Dhabi, is one of the largest and fastest-growing carriers in the Middle East, with one of the largest aircraft order books on hand. Etihad is spreading its wings worldwide and India is one of its most important markets. FDI has opened up an avenue for Etihad to establish a strong foothold in the market and the airline has already confirmed that it is in talks with Jet to buy out a stake. In the recent past, Etihad has picked up minority stakes in airlines such as airberlin, Air Seychelles and Virgin Australia. Even though Etihad is dwarfed by both Emirates and Qatar Airways in terms of both fleet size and route network, it matches up strongly in terms of financial firepower. That financial firepower is precisely what Etihad intends to use to buy into Jet Airways.
     Etihad, which was reportedly negotiating with Kingfisher, is now in talks with Jet to pick up a 24% stake for a sum of a little over $300 million. If the deal goes through, Etihad may even be willing to jump the 25% open offer threshold and buy upto 49% in Jet. The two airlines already have an ongoing codeshare agreement and just over a month ago, Jet sold 3 highly-coveted landing slots at London Heathrow to Etihad for $75 million and leased them back. Etihad will also extend a sizeable working capital loan to Jet. These individual transactions might very well be precursors to the Jet-Etihad deal. The deal, which will enable both airlines to tap into each other’s routes and passengers, seems to be still in the works and the Jet Airways scrip, which more than doubled over the past 12 months, has started cooling off, even as investors speculate whether the deal has indeed hit an air pocket. In the wake of UAE’s Etisalat jettisoning its investment in India, following its telecom licence cancellations, Etihad seems to have developed cold feet too. The airline has sought assurances from the Indian Government with regard to the safety of its prospective investments in India. This has also expedited the proposed India-UAE BIPA (Bilateral Investment Promotion Agreement) and Etihad’s investment should fly in by August. Etihad, however, can afford to bide its time.
     Jet Airways’ balance sheet is saddled with a debt of over Rs. 11000 crores and the airline’s working capital position is nothing to write home about. In recent quarters, Jet has been able to notch up meagre profits, mostly due to one-time gains. Jet Airways may be in the black for now but if oil prices surge or if another price war erupts, the airline will surely fly into turbulent skies again. Besides, Jet has dozens of aircraft on order and the airline will need billions of dollars over the next few years to finance those purchases. Moreover, Naresh Goyal (the chairman of Jet Airways) will be forced to reduce his shareholding in Jet to 75% (from a present level of 80%) by the end of June, in order to comply with SEBI’s norms, which he can do either by going in for an OFS (offer for sale) or by inking a deal with Etihad. Goyal’s entire shareholding is housed in Jet’s parent company, Tail Winds, which happens to be registered in the Isle of Man (a notorious tax haven), with a nominal share capital. Jet’s precarious financial position hints at the possibility that Goyal might be in a hurry to close a deal sooner rather than later. However, recent rumours suggest that Etihad seems to be negotiating for management control of Jet Airways, something that Goyal will not easily relinquish. Etihad, with its investment in Jet, will be able to fly into India in a big way and tap into Jet’s extensive route network. Most of Jet’s revenues and profits now come in from its international operations, which would result in a synergy, along with Etihad’s routes.
     At the end of the day, if the deal does go through, it certainly won’t be Jet’s first tryst with a foreign partner. After all, Jet Airways took to the skies in the 1990s with equity investments from Gulf Air and Kuwait Airways but Goyal was forced to buy back those stakes after the Indian Government cried foul at the investments by the Middle-Eastern carriers. This time around, with a$300 million investment for a 24% stake by Etihad on the horizon, Jet may be able to find a way to trump its rival IndiGo and reclaim the numéro uno position in the Indian skies. Indeed, it may not be long before FDI plays Cupid and a deal is signed. Then, the wedding bells will toll, even as Jetihad will take to the skies, wing-in-wing.   


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