Jetihad is born. Jet Airways completes 24% stake sale to Etihad Airways

Abu Dhabi-based Etihad Airways and Mumbai-based Jet Airways today announced that they have closed the transaction of a 24% equity stake by Etihad Airways in Jet Airways.

Jet Airways' Boeing 777-300ER

In a release they said

"All requisite Indian regulatory approvals had been obtained by November 12th, 2013. Jet Airways has, on November 20th, 2013, issued and allotted 27,263,372 equity shares of a face value of Rs. 10 each at a price of Rs. 754.7361607 per equity share on a preferential basis to Etihad Airways.

Consequent to the above allotment, the paid up share capital of Jet Airways stands increased to 11,35,97,383 equity shares of Rs. 10 each. Following this issue and allotment of the said equity shares on a preferential basis to Etihad Airways, Etihad Airways holds 24 per cent of the post issue paid up share capital of Jet Airways (on a fully diluted basis)."

Mr. James Hogan, CEO, and Mr. James Rigney, CFO of Etihad Airways have been appointed as additional directors on the board of directors of Jet Airways as from November 20th, 2013.

Mr. Goyal and Mr. Hogan confirmed that the collaboration between the airlines would commence immediately with a view to delivering network and service benefits to customers as soon as possible.

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A detailed behind the scene insight on the making of the Jet Etihad deal

by Devesh Agarwal

The aviation enthusiast community may not have too much respect for The Economic Times newspaper when it comes to technical accuracy when reporting aviation related stories, but hats off to a great article that goes in to the depths on how the deal for a 24% stake by Etihad Airways in Jet Airways was negotiated and struck.

The article goes behind the scenes, giving insight in to the motivations, events, players, and tactics involved in the negotiations. A definitely must read.

One crucial observation, Jet Airways first met Etihad in June 2012, a full three months before the government announced the new liberalised policy of allowing foreign airlines to invest in Indian carriers. Quite clearly, Mr. Naresh Goyal's connections served him well.

Read the article here.

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Analysis: Air India sells Boeing 777-200LRs to Etihad. Aircraft ill-suited for its operations.

by Devesh Agarwal

Air India Boeing 777-200LR.

Two days ago, when gulf major, Etihad Airways, announced its intention to fly between Abu Dhabi and Los Angeles, we at Bangalore Aviation were the first to indicate that Etihad's announcement was a pre-cursor to its purchase of Boeing 777-200LRs from Air India.

Yesterday, it was confirmed that Air India will indeed sell five of its eight Boeing 777-200LRs to the gulf carrier.

As per an Etihad statement

the aircraft will be delivered to Etihad Airways from the beginning of 2014 and each will be re-fitted in a three class cabin configuration consistent with similar aircraft in the Etihad Airways fleet. It is expected the first aircraft will enter service in April 2014.

Etihad currently does not have any 777-200LRs in its fleet. On its 777-300ERs, Eithad follows the lead of its fellow UAE carrier Emirates and has a bone crunching ten abreast 17 inch wide economy class seating. For the LR, Etihad has announced a configuration of eight first class suites, 40 business class flat beds, and 189 economy class seats. This is similar to Air India's current configuration of 8/35/195 which features a more comfortable nine abreast 18.5 inch wide economy class seating. Emirates which has the narrow ten abreast seating even in its LRs has 42 business class and 216 economy class seats. So it appears that Etihad will continue with the nine abreast seating.

Etihad is expected to pay an estimated sum of $500 million. For aircraft that are about six years old, while this is a reasonable price, for Air India it is a distress sale. We should thank a former civil aviation minister, for whose failed flights of fancy, we tax-payers, are ultimately paying for.Despite the haircut, this is a beneficial development for Air India as it will help the carrier reduce about $60 million a year in expenses, but this is a drop in the veritable ocean of losses for the mismanaged carrier whose debt now tops a whopping $6.7 billion, well ahead of the entire health department's budget of the nation for this year.

Etihad Airways Boeing 777-300ER

For reasons best known only to it, Air India will still retain three 777-200LR aircraft. One is hard pressed to understand why, since Air India had these five LRs on the tender list for a long long time.

Most likely, to operate Newark, which is essentially the only long haul flight in Air India's system that is profitable. Air India also operates LRs to Tokyo, Osaka, Seoul, and Hong Kong, which is akin to taking our money and setting it on fire.

The 777-200LR is a niche aircraft, called WorldLiner because of its ultra long haul (ULH) mission profile. It can fly close to 20 hours non-stop. However, to fly so long, the LR needs to carry a lot of fuel which takes up the weight of fare carrying passengers. The Air India LRs have the same engines, GE90-115B, as bigger brother, the 777-300ER, and hence similar fuel burn characteristics, yet the LR is about one-thirds smaller than its bigger brother. Additionally, the LR sacrifices weight and cargo space for the additional fuel tanks required to carry that additional fuel. The LR carries only around 235 passengers which is only 58% i.e. almost half, of the 400 carried in the ER. All these factors force an airline to earn more per passenger-kilometre flown.

To achieve this income, the plane has to be virtually filled to capacity with high fare paying passengers. Part of the higher fare comes from the "front of the bus" i.e. premium class passengers. Unfortunately with years of sloth, indifferent service, and unreliable schedules, Air India has completely lost the trust of the corporate flyer who pay for these premium seats.

For the shorter missions like Delhi Hong Kong Japan or Korea, the additional fuel tanks, become dead-weight, further burdening the carrier, which requires the airline to fill to at least 95% of the seats just to break-even. An impossibility for an inefficient state carrier like Air India. So one should ask why is the carrier burning money operating these routes? and what are the solutions?

As to why the carrier operating these routes with a clearly mismatched aircraft. From within Air India the answer is likely to be, "We need to operate this route and we do not have any other wide body medium capacity aircraft". So why not lease an A330 or a Boeing 777-200 which will provide better economics? Here the ugly head of corruption rears itself. The carrier's record is poor to say the least.

Another solution could be with Jet Airways, India's other wide body carrier. Jet has its fleet of A330s parked and under-utilised. Some are due to be leased to Etihad. Air India can outsource these routes to Jet on a wet lease? May be Jet, with its Etihad partnership, is not too keen at this moment, but more likely, Jet knows that such a proposal will not be able to overcome the farce of sympathy that will be created by the politicians?

Then of course is the much hyped Boeing 787 Dreamliner. However, as Boeing boss Dinesh Keskar told us "the 787 is not the airplane to go to Dubai and back", the 787 delivers fuel savings only when flying medium to long distances. Not short regional routes like New Delhi Dubai or New Delhi Hong Kong or onwards from Hong Kong to Korea or Japan.

What are your thoughts on the 200LR situation? Share them with a comment.

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Sudheer Raghavan leaving Jet Airways?

by Devesh Agarwal

The rumour mill has that Jet Airway's Chief Commercial Officer Sudheer Raghavan will be leaving the airline soon and is expected to be succeeded by Mr. Wayne Pearce, currently the CEO of Oman Air.

Pearce reportedly enjoys a good rapport with Etihad CEO James Hogan. Etihad which is in the process of completing a 24% stake purchase in Jet Airways for $379 million, has been strengthening its hold within Jet Airways management, steadily taking over key management positions in planning, strategy, and operations.

If Raghavan quits, he will be the third high level exit from Jet following the Etihad investment in April. In June, CEO Nikos Kardassis resigned. Recently, Mr. K. G. Vishwanath, Vice President – Commercial Strategy and Investor Relations resigned. It is understood that he was considered close to Jet Airway's Chairman Naresh Goyal, in an function where Etihad wants its own people.

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Qatar Airways offers discounts for HSBC credit card holders

by BA Staff

Qatar Airways cabin crew. Photo copyright Devesh Agarwal

Qatar Airways is offering discounts to HSBC Bank India debit and credit card holders. The airline is offering 10% savings in Economy Class and 15% in Business Class valid for sale ­­­until September 15, 2013 with all travel to be completed on, or before, March 31 2014.

Card-holders should make bookings online at www.qatarairways.com/in-hsbc using their debit and credit cards. From past experience, we can inform our readers to use this specific URL as the offer does not normally show up on the airline's website.

The airline’s Indian operations cover daily services to Doha from Mumbai, Ahmedabad, Amritsar, Goa, Hyderabad, Kolkata, Kozhikode, Trivandrum, Chennai and Bengaluru, together with 11-flights-a-week from Cochin and double daily flights from Delhi. It offers onward connections to an exciting array of over 100 destinations across Europe, Middle East Africa, North America and South America. Qatar Airways also serves the Far East and Australia from Doha.

Qatar Airways Country Manager, India, Henry Moses said, “We value this partnership with HSBC Bank, which is one of the leading banks in the world. This provides the India customers base of HSBC the unique opportunity to enjoy savings in both Business and Economy Class in addition to accumulating Qmiles on their debit and credit card purchases. We are confident that we will receive a great response and the partnership will be a valuable addition to varied offerings by Qatar Airways to provide a truly rewarding travel experience.”

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Your opinion: Question of the week: Is Jet Airways too financially weak? What should existing investors do?

by Devesh Agarwal

Majority of Jet's A330 fleet parked at New Delhi's IGI airport

In what is not a very uncommon development, The Economic Times reports, India's financial markets' watchdog, the Securities Exchange Board of India, better known as SEBI, has written to the Foreign Investment Promotion Board (FIPB), the approver of FDI proposals, expressing concern on the agreement to sell a 24% stake by Jet Airways to Etihad Airways PJSC. SEBI feels that the agreement structure allows India's largest private airline by revenue, to pass into foreign hands, which is not allowed as per the existing law.

Over the last one month the deal has been question by various ministries, regulators, boards, authorities, stake-holders, and members of Parliament, amongst others. Putting aside partisan motives, one obvious fact is emerging; the agreement appears to be extremely lop-sided in unduly favouring Etihad. You can read our earlier analysis highlighting some of the lop-sided provisions of the agreement.

While the debate on these provisions continues, we want to question the financial condition of Jet Airways itself. Without doubt, the debt levels of Jet Airways are high enough to be classified as scary.

However, the question at hand is; what insight does this agreement offer in to the situation at the Indian carrier? Is the situation so dire that the promoters of Jet willing to let go of their airline for a mere $379 million? or did Mr; Hogan's team simply out-negotiate that of Mr. Goyal's?

As its possible control of Jet Airways is whittled away, by the regulators, at point would Etihad walk away from the deal? There are already rumblings, that come July 31, the first deadline for the deal, Etihad might reduce the amount of premium it is willing to pay for Jet. In which case, will Goyal still be interested?

And surely, exiting investors must be watching the scene nervously and wondering what should they do? Hold on? Or jump ship?

Share your thoughts via a comment.

Disclosure: Devesh Agarwal is a shareholder in Jet Airways.

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Have your say: Question of the week: Will the Jet Etihad deal fructify? Will Jet survive?

by Devesh Agarwal

We welcome your feedback and comments on the Jet-Etihad deal.

Without a doubt the humongous increase in seat capacity offered to the Abu Dhabi government by India has some quid-pro-qua links to the Jetihad deal. There is also talk that the bilaterals seat increase was to pacify the UAE government after their telecom company allegedly lost over $1 billion in the recent 2G scam, and get foreign investment flowing in to India from that country.

Regardless of the reasons, the new proposed bilateral air services agreement (ASA) has come under severe flak from many political quarters. At the focal point of attacks is the Prime Minister, who had given his approval to the Group of Ministers (GoM) comprising P. Chidambaram (Finance), Anand Sharma (Commerce), Salman Khurshid (External Affairs) and Ajit Singh (Civil Aviation), to proceed and conclude the ASA.

Dr. Manmohan Singh is regarded as an honourable man, but his reputation has taken a hit following the 2G telecom scam and Coalgate, where national resources like spectrum and coal were doled out to political supports for cheap. A weak Congress, facing a multitude of elections, is now desperately trying to protect the image of the Prime Minister and the memorandum of understanding (MoU) signed with the UAE government on the ASA is now being questioned. To help weather the political story, give cover to the Prime Minister, and justify the deal, a note from the civil aviation ministry is being prepared for perusal and overall approval of the MoU, the Cabinet.

The suave and politically connected Naresh Goyal is reportedly pacing the corridors of power, and doing all he can to keep the Jetihad deal alive.

On the side, news reports indicate Etihad is waiting for the outcome of the cabinet meeting, and the decision on the MoU. Indirectly, it has been reported, that if it does not get the massive increase in traffic rights, Etihad make walk away from the deal.

Jet is facing a debt of over 12,000 Crore ($2 billion), higher than even Kingfisher Airlines, and its very survival is at stake.

Do you think the Jetihad deal will fructify? Under what circumstances? If the deal does not fructify, will the baniya Naresh Goyal be able to prevent Jet Airways experiencing the same fate as Kingfisher Airlines?

Share your thoughts and views via a comment.

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Analysis: Will Jetihad lop-sided deal favouring Etihad be corrected or be an eye-wash?

by Devesh Agarwal

Last week's deferral by the Foreign Investment Promotion Board (FIPB) of the proposal of Abu Dhabi based Etihad Airways to buy a 24% stake in Jet Airways has brought to light how the middle-eastern carrier will have an equal or higher say in the functioning of Jet despite owning just 24%.

The deferral has also shed light on the lack of clarity in the government's rules with regards to permitting foreign direct investment (FDI) by airlines in Indian carriers.

The Economic Times reports, the existing shareholders' agreement between the two airlines is structured in a manner to give Etihad the upper hand in the decision making at Jet. Without giving Etihad any specific rights or veto power, by requiring approval of two-thirds majority of the board for even routine decisions, the agreement equates the 24% owning airline to the 51% owning promoter, Naresh Goyal.

In normal circumstances, under the Companies Act, 1956, two-third majority is only required in matters such as capitalisation and dividend declaration issues. Any joint management of an Indian company automatically invites additional regulatory scrutiny, like from the Securities and Exchange Board of India (SEBI).

Some of the aspects of the agreement that were questioned by the FIPB include

• Re-location to Abu Dhabi and co-location of the network and revenue management functions of Jet
• The vice chairman will be nominated by Etihad but no mention on nomination of chairman's post
• If Goyal ceases to be chairman, new chairman to be nominated by the board, not selected by shareholders
• Chairman will not have a casting vote
• Two-thirds majority approval required for appointment and removal of CEO, independent directors, and senior management, and to pass any resolution in the board meeting i.e. for routine issues, contrary to existing law

Operational control too

Operationally too, the agreement shows how Etihad is dominating its Indian 'partner' right from the word go. The agreement stipulates that Jet will, at its expense, re-locate and co-locate its network and revenue management operations to Abu Dhabi. In the first phase functions that will shift include, international and domestic network planning, international pricing for non-India points-of-sale, and management of joint fare filing, and inventory control of the Abu Dhabi hub routes. In the second phase, all functions will shift to Abu Dhabi, including, international revenue management, domestic scheduling and pricing, international pricing for Indian points-of-sale, and inter-line pricing.

Many legal analysts feel the Jetihad deal has been constructed in this manner to afford Etihad almost complete management and operational control of Jet, while helping the middle east carrier to avoid triggering the 'takeover code'. The code is activated either when the investment crosses 25% of a company's shareholding or when the investing company gains ‘control’ of the target company. It is the definition of ‘control’ as per the Companies Act which is now becoming the bone of contention in approving the deal.

All of this is hardly surprising. Jet was in dire straits when it went around looking for whoever was willing to invest, and has acceded to virtually every condition demanded of it.

Policy confusions

Another legal issue muddling the deal is the word "effective control". The new FDI guidelines allowing for investment by foreign airlines say that 'substantial ownership' and 'effective control' should be vested with Indian nationals. There is confusion since the term 'effective control' has never been officially defined. The Companies Act, SEBI's takeover code, and the overall FDI policy, have defined the word 'control, but are silent on 'effective control'.

To prod the Jetihad deal along, the civil aviation ministry has reportedly submitted a long list of comments to the FIPB clarifying what it means by 'effective control'. A copy of this has been marked to the ministry of corporate affairs (MCA), the final arbiter of all matters related to company affairs.

For the Indian government, plagued by reforms policy paralysis, this is fast becoming a desperate situation. On one hand, to prove the progress of the few new policy reforms it has announced, it is bending almost every rule in the book, even going so far as to plan allowing foreigners to bypass FIPB approval for investment in the country. On the other hand the Jetihad deal is so lop-sided favouring Etihad, approving will set a bad precedent in law, allowing foreign companies to completely disregard the rights of Indian shareholders.

Jet is in a hard place. Its need for funds is desperate and no one can fault Etihad for trying the most bang for its buck. Even with the most intense lobbying, Jet and Etihad will need to re-work parts of the agreement to make it more palatable, but will this be a real change protecting all shareholders or just an eyewash to get this lop-sided agreement through the scrutiny of an equally desperate government?

Please share your thoughts on this subject via a comment.

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Emirates' business class sale

To boost flagging passenger loads, Dubai based Emirates airline, has announced a sale on its’ Business Class fares worldwide ending on June 6, 2013 for travel between July 12, and August 4, 2013.

Ex Bangalore, tickets prices start at Rs. 72,356 for Dubai, Rs. 141,916 for London, and Rs. 206, 871 for New York.

Mr. Essa Sulaiman Ahmad, Vice President, India and Nepal, said

“Emirates provides specially tailored products and service to its Business Class passengers to accommodate their requirements while on the move; from priority check-in to baggage handling, chauffeur drive service and dedicated lounges and excellent onboard catering"

"This Business Class sale offers added extra value that further enhances the entire premium package making it even more rewarding to choose Emirates.”

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