May 18, 2019

Resuscitating Jet Airways:~ Waiting for Godot?

UAE-based Etihad Airways lodged a non-binding and the only formal bid for a minority stake in India’s struggling Jet Airways before the 10 May deadline.

Lenders to grounded Jet Airways, led by state-run State Bank of India (SBI), are in the process of selling the airline to recover over $1.2 billion.

Uphill battle

With top management of Jet Airways resigning en masse, lead lender SBI may seek a court-appointed receiver to manage the affairs of the debt-ridden airline.

In mid-May, Vinay Dube, chief executive officer (CEO) of Jet Airways, along with Amit Agarwal, chief financial officer (CFO), handed in their papers, citing personal reasons.

It is estimated that over $1 billion will be needed to resurrect the airline, which is shouldering debt of almost twice that amount.

So far, over half of the Jet Airways fleet has been deregistered, with slots temporarily given to other airlines.

Of the 118 plum slots vacated by Jet Airways at Delhi, low-cost carrier IndiGo walked away with 38 slots.

Grabbing 127 slots out of the 766 in total vacated by Jet Airways, IndiGo got hold of the second-highest number of slots after rival SpiceJet, which has 130 slots, mostly of Mumbai.

Vistara is third on the list, with a total of 110 slots.

Jet Airways, the oldest surviving Indian private airline, which broke a monopoly held by Air India until the early 1990s, controlled 13.6% of the local market as recently as January.

Jet Airways, in which Etihad owns 24%, shut operations on 18 April after lengthy talks with the carrier’s founder Naresh Goyal, external investors and Etihad were not successful.

(In 2013, Etihad bailed Goyal out when he sank into a financial quagmire by taking the 24% stake for $397 million.)

Before temporarily suspending flights, Jet Airways folded most operations due to the grounding of around 90% of the fleet by lessors, as lenders refused to extend loans to the cash-strapped airline.

Etihad sets conditions

Etihad maintains that its bid is subject to certain conditions.

While SBI invited expressions of interest for up to a 75% stake in Jet Airways, Etihad cannot acquire a controlling stake on its own as foreign direct  investment rules allow foreign carriers to purchase only up to 49% stakes in Indian airlines.

Among conditions, Etihad has put the onus of reviving Jet Airways on the SBI-led lenders.

While Etihad is offering only about $240 million to retain the 24% stake in Jet Airways, the Gulf carrier wants lenders to find a majority buyer.

Etihad also wants an exemption from an open offer that may be triggered by a change in ownership structure of Jet Airways, as well as a commitment from banks on additional loans, once it infuses equity into the company.

In April, three additional companies — Indian sovereign wealth fund National Investment and Infrastructure Fund (NIIF) and private equity firms TPG Capital and Indigo Partners — submitted expressions of interest for bidding for a stake in Jet Airways, but none submitted a bid by the 10 May deadline.

Before Jet Airways was grounded, NIIF had been in talks with lenders to acquire a 20% stake in the carrier.

So far, Etihad has not been able to find a local partner and lenders may need to take a 70% to 80% haircut on outstanding loans, possibly opening the door for NIIF to partner with Etihad in picking up a controlling stake in Jet Airways.

Etihad and the lenders are said to have approached India’s Hinduja Group offering a stake in Jet Airways.

The group globally runs 10 businesses in sectors, such as automotive, oil and speciality chemicals, media, IT, power, healthcare and real estate.

Hinduja Group also owns Ashok Leyland, India’s second-largest truck-maker by sales.

In 2001, the Hinduja Group was sole bidder apart from a consortium of Tata Sons and Singapore Airlines for Air India, 40% of which was up for sale.

The conglomerate also bid in partnership with Germany’s Lufthansa for a 26% stake in Indian Airlines, competing with Videocon International.

Both initiatives failed.

India is a key market

For Etihad, India is a key market in a bruising battle for supremacy in West Asia against Emirates, which is far ahead in the race.

Etihad’s aggressive acquisition strategy to build a global network has fumbled, except in India, where it has been able to hold onto Jet Airways.

In other parts of the world, Etihad has been in trouble; the carrier pulled the plug on Alitalia, in which it had a 49% stake, putting it into liquidation, and it closed down Germany’s Air Berlin where it had a stake.

In 2017, Air Berlin filed for insolvency, after Etihad announced that it was no longer in a position to provide financial support to the airline which had run into losses of close to $1 billion over six years.

In the Indian-West Asian market, it is Emirates that dominates and despite attempts by Etihad, Dubai still remains the largest hub for Indians travelling to the US.

Emirates, with an 8.4% share of the international market from India (in the quarter ended December 2018), is far bigger than Etihad, which had a 3.2% share during the same period.

Even Oman Air surpassed the Abu Dhabi airline in terms of passenger share.

Etihad chases market

Etihad saw its market share in India reduce from a peak of 5.0% per cent in the June 2017 quarter to 3.2% in the December quarter of 2018.

Goyal decided to push a different strategy, creating an alternative hub to Abu Dhabi in Amsterdam and Paris by tying up with Air France-KLM and Delta Air lines to bring passengers seamlessly from India to the US.

Control over Jet Airways could change the equation for Etihad.

Jet Airways would get access to over 45 cities from where the carrier could seamlessly bring traffic to Abu Dhabi and beyond.

Emirates has taken the initiative by signing a codeshare with Indian low-cost carrier SpiceJet to bring passengers from India to Dubai and beyond.

If Etihad is able to bring the Jet Airways operation back on track (even to the level of the December 2008 quarter), however, Etihad could together with the `Indian carrier capture 15% of the international passenger market, overtaking Emirates and even posing a challenge to Air India’s 16.9% market share (including Air India Express).

Etihad, however, is no longer the cash-rich airline of former days.

Etihad was forced to shut down unprofitable routes, trim aircraft orders, and close down Air Berlin owing to a huge loss over the last two years of operations.