Due diligence on, Etihad likely to approve Jet deal next week

New Delhi: The acquisition of a minority stake in Jet Airways could be crucial for Etihad Airways in expanding globally this year.

Etihad claims to have become the fastest growing airline in the history of commercial aviation and the largest out of the Gulf.

[caption id=“attachment_613141” align=“alignleft” width=“380”]  A file photo of an Etihad exhibition kiosk. Reuters[/caption]

In a large measure, this growth has come about through making smart equity investments in other airlines - Etihad made four such investments in the last two years. So the impending equity deal with Jet Airways, which is expected to be approved by the Etihad board next week, is crucial for the Abu-Dhabi based airline to leave its other Gulf cousins, Emirates and Qatar Airways, behind.

As of now, Etihad is conducting due diligence of Jet Airways. Earlier reports have suggested that Etihad will initially pick up a 24% stake for about $330 million and then perhaps raise it to 49 percent in due course.

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Speaking during a conference call from Abu Dhabi, Etihad CEO James Hogan said he and his team were in India last week where they met the Indian ministers of Civil Aviation, Finance and Commerce. “We wanted to understand the new rules under the Foreign Direct Investment (FDI) scheme. We also wanted to understand the issues that have impacted Indian domestic aviation and how these are being addressed in the coming years.”

“Next week, we will present (the results of due diligence) to our board which will take a view,” Hogan said.

Hogan referred to the four equity investments Etihad has made in 2012: in Air Seychelles (40 per cent), airberlin (29.21 percent), Virgin Australia (9 percent) and Aer Lingus (2.987 percent).

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Etihad has seen its second year of net profit in 2012 with 200 per cent jump from $14 million in 2011 to $42 million in 2012. Revenue grew from $4.1 to $4.8 billion, with partner airlines contributing 19 per cent of passenger revenue or about a fifth.

Equity and codeshare partners delivered more than 1.2 million passengers onto the Etihad Airways network during last year.

Hogan said that while expanding the Etihad Network through such equity investments, the airline is always on the lookout for a common management philosophy and synergies, specially with respect to cost. And this is something which may be a crucial factor in any association between Etihad and Jet.

Hogan did not make a specific reference to Jet Airways in this context but the inference can surely be drawn that cost synergies will drive such an alliance. On its part, Jet has already been on a massive cost rationalisation exercise. Apart from cutting down unprofitable routes (both international and domestic) and constant efforts to raise ancillary revenues, it is making itself fitter and leaner in other ways as well.

Chief Operating Officer Sudheer Raghavan said in the conference call with analysts on Monday that the airline has been able to lower staff costs by deciding to not replace a large number of cabin crew and ground staff who left the airline in the last nine months.

Also, the number of expat pilots (who charge much more than Indian ones) has been steadily reduced. The airline has not given any increment to its employees this past year and right now, labour trouble is brewing with pilots unhappy with proposed salary hikes. All in all, Jet’s stringent cost management coupled with rising yields (revenue per passenger) have helped it turn the corner in the December quarter.

But worries remain.

How will Etihad’s arrival on the scene change things for those who work for Jet? Though unrelated to the Jet deal, Hogan of Etihad mentioned that when his airline took over Air Seychelles, it bagged management control for five years. Under this provision, it has downsized Air Seychelles and moved its headquarter functions to Abu Dhabi.

All these measures have meant Air Seychelles, which was losing $25 million in 2011, declared a turnaround last year. Again, there is nothing which points to Etihad thinking along similar lines for Jet. But the Indian airline carries debt of over Rs 11,000 crore, has been shutting down unprofitable routes, downsizing capacity (domestic capacity was reduced by 11 percent in the December quarter alone, year on year) in an year where it lost market share to IndiGo and even Air India. So perhaps Etihad could look at some drastic measures to bring Jet Airways back to continued profitability. Any deal with Etihad would anyway perhaps allow Jet Airways to get cheaper Aviation Turbine Fuel and explore other cost synergies such as marketing and even shifting its hub to Abu Dhabi.

Next week should bring some clarity to a deal which will not only be complex because of the shareholding pattern of Jet’s promoter Naresh Goyal but also because it will become the test case for any future aviation deals in India.