Jet-Etihad deal: A win-win

Last Updated: Wed, Jan 30, 2013 04:51 hrs

On Tuesday, commerce minister Anand Sharma, who has played a key role in shaping the country's foreign investment policy, said that the top management of Etihad Airways would be meeting him this week. Analysts were quick to conclude that Etihad was very close to picking up a stake in the Naresh Goyal-controlled Jet Airways. The possibility of a deal, naturally, pushed up Jet Airways share price. While no financial details of the deal have been forthcoming, experts say that the Abu Dhabi-based airlines will pick up a 24 per cent stake in Jet Airways for over $300 million.

If it fructifies, the transaction will be the first investment by a foreign airline in the Indian skies after the government liberalised the foreign direct investment policy a few weeks ago. Under the new policy, it has permitted foreign carriers to invest directly up to 49 per cent in an Indian domestic carrier. The liberalisation comes at a time when the Indian market is trying to extricate itself from a serious financial crisis, and airlines are looking for fresh cash infusion to grow.

After all, the market last year shrank 8-10 per cent due to high fares, and full-service carrier Kingfisher Airlines had to close its service as it was unable to face the onslaught of low-cost carriers which have grabbed over 65 per cent of the market. Even Jet Airways, a full-service carrier, in order to maintain its market share, was impelled to revamp its operations moving nearly 60 per cent of its domestic capacity and offer it at low fares under Jet Konnect. The only silver lining has been that airlines have temporarily cashed in on the vacuum left by Kingfisher Airlines' exit by increasing fares. But the question is how long can it last if passenger growth continues to falter?

Clearly, the sector is not out of the woods. So why is Etihad so keen to put in its money into Jet Airways, especially when the global aviation industry, too, is under a cloud? The answer is simple: Etihad wants to expand in a slowdown when valuations are low; once the market booms, it will be ready with expanded capacity. The airline has always been a pygmy compared to the big boys like Emirates and Qatar which rule the West Asian market. It has a fleet of 67 aircraft, which is nearly a third of Emirates and half of Qatar. In India, too, with less than 2 per cent of the international market, it is a minor player compared to Emirates (over 13 per cent share) and Qatar (over 5 per cent). Etihad has 52 weekly flights to and from India, which is way below Emirates (185 flights) and Qatar (95 flights).

This is why Etihad has always followed a different track from the big boys – to survive and expand. The first key element of its three-pronged strategy is to go in for a bevy of code share agreements. Thus, Etihad has signed up such agreements with over 41 airlines across the globe (compared to only ten by Emirates), which has helped it get additional passengers on its network. Two, it has taken its relationship with these partner airlines to the next level by jointly marketing routes with them. And three, it has taken equity stakes in some of its key airline partners. It has already done so with four: 10 per cent in Virgin Australia, 29 per cent in airberlin, less than 3 per cent in Dublin-based Aer Lingus and, the latest, 40 per cent in Air Seychelles. These alliances have, of course, paid good dividends. For instance, airberlin generated over 300,000 additional passengers on the network of the two airlines and also revenues of over 100 million pounds.

It is a similar gain that Etihad and Jet hope will happen when they eventually tie the knot. Etihad's chief executive, James Hogan, has made no bones that Asia, particularly India and China, would be the key markets in the days to come. And he has already hinted that he will be looking at "one or two strategic investments" which could be in Asia. He also has in-house talent to help in understanding Jet Airways, as his new CEO of airberlin is none other than Wolfang Prock-Schauer who was earlier hired by Goyal to run Jet Airways.

Cementing ties
Jet Airways already has an ongoing relationship with Etihad: a code share agreement in India for seven cities and also on the Paris route. This relationship would now be strengthened as part of the airline's overall global strategy. Etihad can feed in passengers seamlessly from Abu Dhabi across the country by using Jet Airways' wide coverage of over 53 cities in India. Currently, Etihad operates to only ten cities in India. Similarly, Jet could bring in passengers from Indian cities to Abu Dhabi, from where they could travel to any destination in West Asia and Africa where Etihad has excellent connectivity.

Jet Airways can also leverage Etihad's strong presence in Europe by bringing in Indian passengers through Abu Dhabi. That is a win-win for both sides as Jet currently operates only to Brussels, Milan and London in Europe on its own. (Through code-share agreements with Brussels Airlines and Thalys, it offers seamless connectivity to another 14 cities.) Etihad, on the other hand, has a huge network in Europe; it directly flies to over 17 destinations and through its elaborate code-share agreements with around 13 airlines offers seamless connectivity to over 88 cities. That, of course, is not the only route which could be an advantage to both the airlines. The India-North America market is one of the largest and most lucrative in terms of business. Jet Airways currently flies only to Newark and Toronto and through its code-share with United and Air Canada offers connectivity to all key markets in North America. But Etihad can provide an alternative to Indian flyers – they can fly seamlessly from Abu Dhabi to Chicago, New York and Washington, apart from Toronto. And through its code share agreement with American Airlines, it would allow Indians to fly all over the US.

Adding bulk
The agreement could also save costs. The two airlines could leverage their clout while buying fuel; they could also leverage their bargaining power with Boeing as Etihad has just ordered 50 aircraft from the American company, the bulk of which include the Dreamliners, in association with Air Berlin. Jet Airways, of course, also has a fleet that comprises mostly of Boeings aircraft and could therefore work out similar integrated deals in the future. Also, the two could pare costs by using each other's ground operations at their hubs. Of course, Etihad would also need to resolve a key problem which it will soon face: to expand its operations in India, it will require more bilaterals as currently as much as 85 per cent of the seats have been exhausted. Also the tie up analyst say could eat into Air India's business in the Middle East as well as in the US and Europe. Analysts say that the Indian government has been chary in opening up the bilaterals with Dubai as well as other West Asian states in order to protect Air India. However, a friendly Indian partner could always be of help in convincing the government, say analysts.

It is clearly a marriage where everyone will be a winner.

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