Decoding the Jet-Etihad seat entitlement controversy

New Delhi: When a joint secretary in the Ministry of Civil Aviation lead the Indian delegation to Abu Dhabi in April to conduct negotiations over enhancing weekly seat entitlements for airlines of both countries, his mandate was actually to merely double the seats from 13,300 to about 25,000 a week.

Sources tell Firstpost this was the recommendation made by top babus in the Ministry of Civil Aviation. But when the delegation came back, almost 50,000 seats per week were given away.

What altered the figure so drastically? It is believed that Abu Dhabi officials made it clear during negotiations that unless their flag carrier Etihad Airways gets this hugely inflated number of seats and more ports of call to operate in India, they will not allow the equity deal between Jet Airways and Etihad to proceed. They made no bones about linking the equity deal to the bilateral amendment.



And we succumbed. India agreed to allow a four-fold increase in seat entitlements for airlines of both countries, from 13,300 to almost 50,000 a week by 2015.

As if on cue, on the very day that Indian officials were succumbing to pressure from the sheikhs in Abu Dhabi, Etihad announced it has agreed to acquire 24 percent stake in India's Jet Airways for a whopping 32 percent premium to the airline's share price on 24 April. The premium was a huge surprise, further cementing belief that the bilateral enhancement had pleased the sheikhs no end.

Barely two months after this bonhomie, the Prime Minister's Office is raising a stink over the bilateral entitlements. Now that the deal and the bilateral pact, both are under the microscope, it is a good time to ask ourselves some pertinent questions:

1) Why did India capitulate? In doing so, it went against the recommendations of key babus of the civil aviation ministry, against fierce opposition from airlines and airports and even against members of a parliamentary standing committee on tourism, transport and culture.

2) We must not overlook another key point amid all this furore: Can India, which has been a more than willing signatory to the Air Services Agreement (ASA), now back out because it has problems in its own backyard? Is it feasible diplomatically? ASAdefines how many seats and how many cities can airlines of two countries fly to. It also defines the number of times a day flights can be mounted.

Can India now take the option of keeping the increase in seats in abeyance until the "storm" brewing over it dies down? No one is willing to answer this simple question. A spokesperson of the Ministry of External Affairs declined to comment, saying this needs to be checked with the Ministry of Civil Aviation. And of course, no one in the ministry of civil aviation - from the Minister to the top babus - are willing to come clean on this small matter. A press release this ministry issued on the bilateral agreement categorically states it is an MoU between the two countries, perhaps meaning that it still requires clearances. Any which way, what the PMO has done now could well be some mischief making. If the ASA cannot be out in abeyance or annulled, what point is there in raising all kinds of concerns over security, seat entitlements and other issues?

3) If we do chuck all diplomatic conventions out of the door and annul the ASA or put it in abeyance, why would Etihad continue to be interested in Jet Airways? Simply put, if the ASA goes, so does the equity deal. Can we really afford to return the largest FDI investment in India this year?

Speaking to reporters this morning, Civil Aviation Minister Ajit Singh reiterated how important the Jet-Etihad deal was for the aviation sector. "It is good if the Prime Minister wants the Cabinet to now discuss it," the minister said. To question on whether his party (RLD) would break away from the UPA if the deal doesn't come through, Singh said "What kind of a question is that?"

We must remember that during Jet Airways' long courtship of Etihad Airways, there were many instances when the Abu Dhabi-based carrier expressed apprehensions over India's bullying tactics for joint ventures. Etihad often brought up the failed attempt of Etisalat in the Indian telecom market, pointing out that our own confused laws and the telecom scam engineered by A Raja were in fact to blame, not Etisalat's practices.

India is known as a nation of the corrupt and scams are happening in our country with frightening regularity. Etihad feared its own investment will go down the drain due to this corruption, helped by well entrenched vested interests out to scuttle the deal.

But top UPA ministers, including Anand Sharma and Salman Khurshid, rushed to Abu Dhabi to assuage Etihad's fears, saying any equity deal between it and Jet would not meet the same fate. How false were these assurances! The sudden opposition from the PMO to this deal, which was cleared by the PMO itself, could only happen on intense lobbying by vested interests.

Belatedly, the PMO is trying to bring about a semblance of transparency by asking the deal to be re-examined by a full Cabinet. The Cabinet Secretary has called a meeting of all secretaries this evening for discussing lacunae in the bilateral.

This, after Members of Parliament from different political parties wrote to the PM against this deal. Subramanian Swamy of the Janata Party, Dinesh Trivedi of Trinamool Congress and Jaswant Singh of the BJP have made their concerns public recently.

Before that, the media has highlighted the partisan ways of the Government in many editorials and news reports when the Indian and Abu Dhabi Governments agreed to quadruple weekly seat entitlements by 2015, on the very day that the equity deal between Jet and Etihad was announced.

Etihad is paying over 32 percent premium for 24 percent of Jet. 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."

Yet, he went ahead and paid the obscene price for a mere 24% of Jet. Here again, the media highlighted repeatedly how Etihad stands to gain from the deal and how it was a life-saver for Jet.

Anyhow, the equity deal between Jet and Etihad is already mired in multiple issues. The Finance Ministry has asked it to clearly define if control will be with Indians and whether the corporate governance code of India would be followed by the airline's board of directors. A complete, duly approved shareholder agreement, incorporating answers to all objections from FIPB, Sebi etc needs to be submitted. For Jet and Etihad, it is very long haul.

Updated Date: Dec 20, 2014 22:08 PM

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