Can Jet deal renew foreign airlines' interest in SpiceJet?

Struck deals are valued but those unstruck (and expected to be struck) are more valuable. The higher-than-expected valuation that Jet Airways got from Etihad has prompted investors to push up all aviation shares in anticipation that there are more deals coming their way.

SL Narayanan, chief financial officer, Sun Group, in an interview with CNBC-TV18 said the Jet deal will renew interest among foreign airlines looking to expand in India.

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“It is a very positive development. We’ve had the revised guidelines on foreign direct investment (FDI) for some time now and this is the first and the most significant development after that change late last year,” said Narayanan.

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The 24 percent stake buy by Abu Dhabi-based Etihad in Jet has raised hopes for SpiceJet also getting into a deal with foreign carrier Qatar Airways. With Kingfisher gone bust and IndiGo not showing any interest in offloading stake, SpiceJet is the most likely candidate to attract foreign airlines since its recent equity infusion by promoter has laid the groundwork for foreign equity participation. Also, its market share has risen 51 percent to 20.4 percent since September 2011 while its international segment has clocked an 80 percent load factor after it started operating on three new global routes in November. Even its average yields per passenger has gone up 29 percent year-on-year to Rs 4412 due to higher ticket prices, according to this report.

However, imminent threat from low-cost Air Asia, which has plans to kick off its operations from Chennai (SpiceJet has the same base) andmaintains little time between two flights for each aircraft daily, akin to SpiceJet’s cost-saving strategy has had some investors worried.

However, these concerns may be a bit overdone since SpiceJet flies to 42 Indian cities and has acquired 15 Bombardier Q400 to enhance its connectivity to tier-II and tier-III cities, according to this Economic Times report. “Thanks to this connectivity to smaller cities, SpiceJet is relatively insulated from competition,” it said. It also pointed out that AirAsia may not resort to an immediate price war since it will take time to garner a market share.

According to Sharan Lilaney, analyst at Angel Broking, the valuation of the Jet deal will become the base for others like SpiceJet and GoAir to follow.

However, Saroj Datta, former executive director, Jet Airways, thinks otherwise.

“Jet’s deal with Etihad doesn’t have any immediate relationship to what other carriers could get. Valuations will also depend on what will happen in the future; how they see the airlines growing and so on and so forth. However, foreign deals will not automatically bring in a lot of money to get over the financial problems of the Indian Aviation industry,” said Datta in an interview to CNBC-TV18.

Krishnan also pointed out that the whole idea of foreign direct investment (FDI) in aviation was to deepen and widen the presence of domestic carriers rather than only helps one to extend international forays. “It should help in consolidating the position in the domestic situation. Whether that is going to happen is something that one needs to look at it very seriously.”

At the same time, these developments mean more intense competition among Indian carriers, at a time when they show some signs of emerging from the red.