Jet-Etihad deal: Why it reeks of crony capitalism

The Jet-Etihad deal is further proof that India and Indians are losing the aviation war. And this coming defeat is the result of whimsical policy driven not by consumer vision but crony capitalism.

This is not to say that the deal is per se bad. In fact, by boosting competition on Gulf routes, it will benefit consumers. We can expect more fare wars. But the deal appears to be the result of cosy bargaining between promoters and policy-makers. It is being sold in the name of consumers , but it was conceived with business interests in mind, not consumers.

The consumer benefits may be short-term and illusory without a broader policy articulation on open skies. A case-by-case approach will mean dead airlines (Kingfisher), or perennially bleeding ones (Air India), and arbitrary air fare and route construction depending on whose policy clout works. The rest of the domestic airlines are sitting ducks for acquisition.

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Let’s begin with the basics of the Jet-Etihad deal and then go on to the macro picture.

The deal allows Etihad to pick up a 24 percent stake in Jet for $379 million (Rs 2,060 crore) - but the pound of flesh Etihad has extracted in return is a policy change whereby it has obtained a huge increase in weekly seat capacity on the India-Abu Dhabi sector to 50,000 (which is a nearly four times the current 13,000). The deal will thus funnel Indian passengers to a hub in Abu Dhabi - which means the only job of our airports is to send business over to the Sheikhdoms of West Asia.

The idea is to use Jet’s domestic capacity and feeder routes from cities beyond Mumbai and Delhi to funnel traffic to Europe and the West through Abu Dhabi. Effectively, the most vibrant part of the Indian international traffic has now been handed over to Gulf airlines - earlier Emirates out of Dubai, and now Etihad out of Abu Dhabi.

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There is, of course, commercial sense in this your-beauty-and-brains partnership. India has the traffic, and Gulf carriers from the oil-rich sheikhdoms have cash. Indian promoters of airlines have been living on borrowed time and money. Their time is up. Hence Etihad.

The matter, of course, won’t end here. Why would Emirates, which now handles a significant chunk of the west-bound traffic, want to let Etihad steal its market? It, too, will demand more weekly seats and possible tie up with some other domestic airline. After that, why should the same not happen to Indian traffic headed to south-east Asian hubs? Air Asia should be asking for that, and so will many other Asian airlines.

The reason why the Jet-Etihad deal smacks of crony capitalism is the linkage of the Jet equity deal to the Abu Dhabi bilateral rights deal and increase in seat capacity. The former is a commercial arrangement between Jet and Etihad; the latter is a policy issue that ought not to have been tied to bilateral issues.

Consider the signals on why this is more than just a commercial deal.

Etihad is paying a 32 percent premium for 24 percent of Jet compared to the airline’s market price on Tuesday. Why pay such a huge premium in a business with wafer-thin margins, and that, too, for an investor stake of 24 percent? Remember, Jet has nearly Rs 13,000 crore of debt, a negative net worth, and losses of Rs 1,236 crore in 2011-12.

This premium is, in fact, higher than what Jet was demanding earlier in negotiations - around Rs 1,780 crore. In an interview to the media in February, Sheikh Hamed bin Zaved al-Nahayan, Chief of Etihad Airways, said that this price was too high, and said he wanted to “revise it.”

[caption id=“attachment_727683” align=“alignleft” width=“380”] The problem with the Indian aviation sector is simple: all policy-making has been driven by vested interests, and any opening up has been selective and intended to benefit only a few. Reuters[/caption]

Who would have thought he wanted to revise it higher? Unless, something else has been delivered quietly.

The increase in bilateral traffic rights and allocation of more weekly seats to Abu Dhabi is the obvious answer. This is probably what Jet chief Naresh Goyal has swung in return for the higher valuation of Jet.

Not only that, Business Standard reports that Naresh Goyal may sell some of his shares (he owns 80 percent) before the Etihad deal to bring his holdings down to 75 percent, as per Sebi listing requirements for public floats. Since the Etihad deal has pushed up Jet shares by over 10 percent today, no prizes for guessing who will benefit from this.

As we noted earlier, the deal has consumer positives that are blighted by narrow considerations. This writer is not against higher seat allocations on any route, but they have to flow from the logic of a general opening up of the skies and a clear policy on promoting competition on all routes - domestic and foreign.

The problem with the Indian aviation sector is simple: all policy-making has been driven by vested interests, and any opening up has been selective and intended to benefit only a few.

Consider some of the key developments over the last 15 years.

In the late 1990s, Jet and other domestic players pressured policy-makers to restrict foreign ownership of airlines to non-airlines. This was meant to specifically stymie the Tata-Singapore Airlines deal. But it simply stunted the growth of Indian aviation.

In the 2000s, the main obstacle to the growth of private players was the public sector Indian Airlines. Under Praful Patel, not only did we get an unviable merger of Air India and Indian Airlines, but also a crippling decision to increase an order for aircraft from 28 to 68 without any revenue plan. Net result: an airline with Rs 7,000 crore of revenues in 2004 took on Rs 50,000 crore of debt and killed its own viability. Even today, the airline is on life-support, with the government giving it a Rs 30,000 crore bailout.

Guess who benefited from Air India’s hara-kiri?

Two years ago, when Kingfisher was on the ropes, the civil aviation ministry could have thrown up the industry for foreign investment right away. But it waited 18 months to do so - till Kingfisher went into rigor mortis.

But now, with Jet itself sinking, bilateral traffic rights are renegotiated to benefit the airline and consummate the Etihad deal. Much as Ajit Singh, the Aviation Minister, may talk of consumer benefits, the driving logic isn’t that. If it was, he could have said seats will be increased on all routes out of India - and not just Abu Dhabi. And wasn’t this the same Ajit Singh who seemed less than enthusiastic about the Air Asia decision to enter into Indian aviation with the Tatas in tow?

This will be the net result of this selective policy change:

One, the other domestic airlines will have to sell out to international investors sooner or later. Nothing wrong in that. But the policy should be deal-neutral. Bilateral rights in all sectors should be equally liberalised, and not just Abu Dhabi. Foreign airline investment should be 100 percent - and not just 49 percent.

Two, Air India is now going to bleed further - unless the government decides to privatise it. But who will buy an overstaffed airlines with bloated losses?

Three, India has lost whatever chance it had of becoming a global airline hub itself. We have clearly given up on making our own airports competitive.

Four, barring Air India, all domestic airlines will ultimately be owned by foreign airlines. This includes Jet, too. Etihad is not getting into Jet just to play a minority role. The airline business needs deep pockets, but domestic interests with deep pockets - the Tatas, etc - were deliberately kept out in the last 15 years. Now, the survivors have no option but to sell out.

The only plus we have in aviation is a huge market. According to the International Air Transport Association (IATA), Indians make 0.1 air trips a year, against 1.8 in the US. If we get to even a third of the US level we would have 700 million air travellers annually. Currently, the annual traffic is a tenth of that.

We can leverage this to either make cosy deals like Jet-Etihad, or we can open our skies to all comers and let consumers benefit fully.

India may have already lost the aviation game by making it too costly to operate an airline out of this country. Our airports are expensive, our fuel is too expensive and our policy is wayward.

But we can at least make a virtue of our large market and let consumers come first. Not domestic promoters or global players.

Crony deals are not the way to go.