As Competition Commision clears Jet-Etihad merger, it is goodbye Jet and hello Jetihad

by Devesh Agarwal

On Tuesday, beleaguered Indian carrier, Jet Airways cleared its final hurdle in its $397 million quest to sell a 24% stake to Abu Dhabi based Etihad Airways PJSC, when the Competition Commission of India (CCI), cleared the deal paving the way for the Naresh Goyal promoted Jet to receive desperately needed cash from the deal.

The Union cabinet had already cleared the deal last month on October 4, the CCI approval now means that the deal, the first since the government announced a liberalised policy allowing foreign airlines to invest in domestic carriers, can be fully operational within, as little as, the next fortnight.

Keeping public sentiment on the fear of the two airlines monopolising the India Abu Dhabi routes, the CCI has cautioned

"This approval should not be construed as immunity in any manner from subsequent proceedings before the Commission for violations of other provisions of the Act. It is incumbent upon the parties to ensure that this ex-ante approval does not lead to ex-post violation of the provision of the Act,”

This deal could not have come a moment too soon for Jet Airways, which is literally running on fumes. The airline which is reeling under a debt of almost $2 billion, desperately needs cash to retire high cost debt.

In addition to the cash from the stake sale, Etihad has purchased Jet's landing slots at Heathrow, will buy the airline's frequent flier programme JetPrivilege, and will provide/arrange for loans under soft and discounted rates, which will used by Jet Airways to retire its high cost debt.

The measure of financial need at Jet is visible in the performance of the carrier in the second quarter of this fiscal, where it posted an eye-popping loss of nearly Rs. 1,000 Crores.

Jet Airways A330-200s grounded at New Delhi IGI airport. Photo copyright Devesh Agarwal.

The operations performance analysis show an airline which is seriously lacking clarity. The international operations which were the bulk of revenue, have seen much of the airline's Airbus A330-200 fleet grounded as non-profitable routes were withdrawn or curtailed. In the second quarter alone, the airline lost over Rs. 123 Crore ($205 million), or the cost of one new wide-body,  just keeping the aircraft grounded.

The airline was expecting to lease a couple of aircraft to Etihad, but could not do so due to "various reasons". Can we attribute this lack of clarity to the transition in operational control from Jet to Etihad?

Etihad is extracting its pound of flesh for its money. While both Jet and Etihad may publicly say otherwise, there is a clear re-alignment and re-organisation of operational strategy and divestiture of control to Etihad. Senior executives have resigned, including the CEO Nikos Kardassis, and Vice President Network Planning K.G. Vishwanath.

Recently the Business Standard reported that Rajeev Nambiar, sales head of Etihad, is likely to replace Sonu Kripalani, Jet’s vice-president (Sales). We had Bangalore Aviation had earlier reported the expected departure of Jet's Chief Commercial Officer, Sudheer Raghavan. The Business Standard report confirms our report saying

In another move Willy Boulter, Etihad’s vice-president (commercial and network planning), is likely to take over as Jet’s chief commercial officer, replacing Sudheer Raghavan. Sources say Raghavan is leaving the organisation, as his powers and responsibilities are being curtailed.

The commercial cooperation agreement (CCA) between the two airlines places enormous burden on Jet, requiring it to re-route its profitable and short-haul direct India-Dubai and India Sharjah routes via Abu Dhabi. One has to ask, why would someone replace a two or three hour direct flight with a four to five hour one-stop one? The CCA further goes to require Jet to re-route most of its international destinations via Abh Dhabi, with the exception of London, South-East Asia, and Australia-New Zealand.

Reports are of Jet mounting flights to Newark, Toronto, and Chicago via Abu Dhabi. Agreement aside, Abu Dhabi Chicago is almost 7,300 miles just 50 miles less than New Delhi New York, a route, that the Jet Airways Boeing 777-300ER was not flying non-stop due to its ultra-heavy first class suites. Is Jet going to modify its cabins to achieve Etihad's dreams?

The agreement will also require Jet to dilute its scissor hub at Brussels, not operate flights in competition to Etihad, with the reverse not being true, not operate and discontinue existing bilateral relations and code-shares with other airlines which may be in competition to Etihad.

In another Business Standard report

According to the terms of the CCA-a copy of which has been reviewed by Business Standard-Jet would have to route its services from India to Sharjah and Dubai through Abu Dhabi as soon as it becomes economically viable.

In what may additionally water down Jet's operations out of its hub in Brussels (Belgium), the Indian airline would have to develop Abu Dhabi as an exclusive hub for flights to North America, South America, Africa and the United Arab Emirates ('exclusive territories'). Canada too would be included in the list of "exclusive territories" once relevant amendments are made to bilateral air-services agreements to permit Jet to fly to Toronto via Abu Dhabi. Jet currently flies to New York and Toronto via its hub in Brussels.

The agreement, however, says exceptions can be made to allow Jet to mount non-stop operations between India and destinations in the 'exclusive territories' if Etihad agrees that it would be economically viable to do so. A Jet spokesperson, while declining to share details of specific plans, says, "As the Jet and Etihad alliance is being examined by the concerned regulatory authorities and their consequent approvals are awaited, it would be inappropriate for Jet to respond at this stage."

The CCA also restrains the Indian carrier from entering into code-share arrangements with third-party airlines, the impact of which may result in Abu Dhabi being bypassed as a hub for traffic to and from the exclusive territories.

According to the terms of the CCA, Jet would have to exit existing joint ventures or code-share arrangements with other airlines which can adversely impact business prospects of the alliance it has forged with Etihad. Jet can form code-share arrangements with third parties to destinations within exclusive territories not served by Etihad or its affiliates - but only till such time as they do not commence operations on these routes.

The two airlines have set up a coordination committee to "study" and implement "better cooperation" between themselves.

Quite clearly, it is goodbye Jet Airways and welcome to Jetihad Airways.

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Opinion: Approving AirAsia-Tata airline will derail goals of FDI in aviation policy

by Devesh Agarwal

The announcement that AirAsia is joining hands with the Tatas and Bhatias with the intention to start a new airline in India will put the a significant policy dilemma in front of the Government of India related to foreign direct investment (FDI) in civil aviation by foreign airlines, and might just land-up derailing the goals of the fledging policy.

While the policy is not explicit, so as to avoid any problems before the Competition Commission of India (CCI), the policy is framed to help the weak balance sheets of existing India airlines, and more importantly the banks, many of them government owned, who have already loaned vast sums of money to this sector.

When the cabinet approved the policy on September 14, 2012, the press statement said

"......there has been a need to consider financing options available for private airlines in the country, for their operations and service upgradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure"

Two weeks after the policy was announced, India's civil aviation minister, Ajit Singh, told the Business Standard

“We are not giving licences for greenfield airlines. As of now, FDI (foreign direct investment) in aviation can come only through existing airlines."

Indian civil aviation minister Ajit Singh.

The statements and policy are logical.

Thanks to years of regressive policies of the Indian government, and the ludicrous taxation structure, especially on aviation fuel, Indian carriers carriers' balance sheets are awash with red ink.

Air India has over $10 billion (over Rs. 55,000 Crore) in liabilities, while Kingfisher Airlines is in for over $3 billion ($16,000 Crore).

Even the country's more "financially stable" carriers like Jet Airways and SpiceJet has are stress situations with skewed financial ratios, and growth strongly hampered by a lack of capital.

With much of the money being siphoned in to Air India, and the financial implosion of Kingfisher, Indian financial institutions neither have the funds, nor the appetite, to lend any more to the airline sector. FDI is needed.

However, if foreign airlines are allowed to set-up new greenfield airlines, they need not risk investing in the existing airlines. They can start fresh, with no liabilities, benefit from not making or suffering past mistakes of operations or policy, bring in expertise and massive financial strength, and blow away the fledgling domestic sector.

We have already seen this happen in the international sector, where the government in its infinite "wisdom" required Indian carriers to operate for five years before they could fly international, while allowing even newly formed foreign carriers to operate to India, thus giving foreign carriers time to establish themselves with nil to minimum competition. Today, Indian carriers are restricted to the sidelines, while the unofficial national carrier of India is not Air India, but Emirates; with India contributing over 11% of the airline's total capacity. No small feat, considering Emirates is the world's third largest airline by seat capacity.

India's largest private carrier, Jet Airways, is negotiating with Abu Dhabi based Etihad to sell them a 24% stake for about $300 million (Rs.1,600 Crore), which is a premium considering Jet's total market capitalisation (mcap) is just Rs.4,575 Crore. Just as a comparison, AirAsia Berhad mcap is Rs. 12,842 Crore.

Jet leads Indian companies with a sky-high debt to equity ratio of 84 times, almost 1,000% of the next company in the list, or 4,300% of the 1.95 of AirAsia). Its total debt is in excess of Rs 11,030 crore. Thanks to losses over the years, the company's reserves have depleted almost 50%, thus declining equity, and leading to the increase in the company's debt to equity ratio. The airline needs to raise equity capital by inviting FDI from foreign airlines.

Earlier this week, the Chairman of Etihad, Sheikh Hamed bin Zayed al-Nahyan, delayed the deal citing concerns on policy flip-flops by the government. How will Etihad view an approval to an "India AirAsia"?

That will have to be gauged in the time to come, but, for certain, allowing foreign airlines to set up greenfield airlines will have a negative impact on the attractiveness of existing airlines, and by extension the health of their debts, and the health of the Indian financial sector.

Even as an unabashed believer in capitalism, in my humble opinion, while an "India AirAsia" will lead to lower fares and more competition, ultimately it will be we tax-payers who will be left holding the proverbial bag as the government will be forced to bailout the banks.

Allow foreign carriers to set-up greenfield airlines, but after a period of time, may be three years, for now, get them to invest in Jet, IndiGo, SpiceJet, GoAir, and if the government ever comes to a logical sensibility, Air India.

I am advocating the same approach as of Mr. Ratan Tata, a leading member of the "Bombay Club" which over 20 years ago, proposed a similar go slow approach on liberalisation.

As usual, your thoughts, comments, feedback and counter-views are welcome.

The video below is a panel discussion on FDI in civil aviation, soon after the policy announcement, from NDTV. If you cannot see it on mobile or on the RSS feed, please visit the main Bangalore Aviation website.

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Government's Air India bailout can feed ALL hungry Indians for a year

I recently came across an article by noted Indian journalist T.N. Ninan, titled "Do-gooder economics and the Lokpal".

It got me thinking; by most economic logic, national carrier Air India should have been wound up ages ago. The carrier has annual losses crossing $1.4 billion (Rs.7,000 Crore) and accumulated debt now approaching $10 billion. Now, the government wants to inject another Rs.30,000 Crore ($600 million) in to the airline to "protect" the employment of its 30,000 employees i.e. spend Rs.1 Crore or Rs.10 million per employee of the airline.

I put these numbers in perspective using those of the Akshaya Patra Foundation, which feeds hungry children and widows in India at $23 (Rs. 1,100) per person per year. At present, in India, there are an estimated 231 million (23.1 crore) people who go hungry every day. For Rs. 25,000 crore, a full 20% less, than the planned government bailout of Air India, ALL the hungry people of India could be fed for a whole year.

Does not feeding a hungry populace deserve a higher priority than having a national carrier? Surely the job of one Air Indian is not worth the hunger of 10,000 fellow citizens?

Why then is the government and all political parties across the spectrum, united in keeping Air India on life support? In response to this burning question, I post the article by Mr. Ninan.

It is, in my humble opinion, a beautifully written and courageous article by one of the most respected journalists in India. For the first time, in my memory, someone has publically exposed how those in power, deliberately induce market distortions to keep the gravy train running, and favour not just themselves, but their entire chain of "supporters" all the way down to the city block, and all under the pretext of doing good.

It is a slightly long read, but I promise you, its worth it. I am embedding the whole text, just in case the article is ever removed from the original site. This article needs to be preserved for posterity.

The original article can be read here.

Do-gooder economics and the Lokpal

T N Ninan / New Delhi January 7, 2012, 0:51 IST
Anna Hazare is silent on the root of the corruption problem.

Suzuki did not produce small diesel car engines anywhere in the world, until it set up a plant to make them in Haryana. Honda has been a maker of petrol-driven cars, but is now developing a diesel engine for the Indian market. Firms like Ford and Fiat that initially came into the Indian market with petrol vehicles have switched focus to diesel. Any car company that wants to get volume sales in India has had to take the diesel route.

Why? Because diesel costs Rs 41 per litre (in Delhi), while petrol costs 60 per cent more, at Rs 65. So diesel cars outdo petrol car sales by a wide margin — although environmentalists have argued for years that diesel is the more polluting fuel.

It gets worse. Kerosene costs even less (Rs 17 per litre), and is freely used to adulterate both petrol and diesel. The marketing head of an oil marketing company once confessed that half the petrol sold in Delhi was so adulterated. It’s a safe bet that oil company executives, policemen and local politicians plus sundry mafia types in the trucking business are all in on the scam, or it would not go unchecked. In a city with one-sixth of the country’s vehicle population, this particular scam must be worth many thousand crores of rupees.

The name of the game is market distortion — and it is the central, time-tested feature of Indian socialism. Not just in the 1970s heyday of that socialism, when income distribution was sought to be re-engineered with income taxes that went as high as 97 per cent (result: widespread tax evasion), when inflation was sought to be brought down through price controls (result: black markets), when imports were controlled through licensing restrictions (result: smuggling) and when manufacturing capacity was directed towards products favoured by the Planning Commission (result: shortages of the goods people wanted).

Twenty years after economic reforms began, you’d think that those bad old days are over, but market distortions are once again the flavour of the political season (not that they ever really lost favour). Cooking gas is sold at two prices: Rs 400 per 14.2 kg cylinder for households; Rs 1,250 or thereabouts per 19 kg cylinder for the commercial market. You could have guessed the result: scamsters have stepped in to divert LPG from one market to another. A small army of the kind that a future Lok Pal might employ is deployed to carry out nearly 60 raids every week to detect such diversion — which of course goes on unchecked.

Electricity connections for farmers are free, or virtually free, in many states; so the number of “agricultural connections” has ballooned. Families with cards that declare them to be “below the poverty line” (or BPL) get government-subsidised grain at a fraction of the price that others do; so guess what? While the number of “BPL families” in Karnataka [of Bangalore is the state capital], according to the central government, is 3.2 million, the state government says it is 9.9 million. The total number of families in the state is about 12 million, so 83 per cent of the families in one of the country’s better-off states are below the poverty line! If the Centre wants to conduct a survey to check that claim, the cry goes up that the “neo-liberals” in New Delhi are anti-poor! Karnataka, let it be added, is not alone in achieving the miracle of near-universal poverty.

The scope for market distortion is now growing. Make-work programmes paid for by the government (of which the National Rural Employment Guarantee Programme is the most ambitious example) are driving real work out of the market. As agricultural wages have gone up by more than 20 per cent annually in recent years (by much more in some states), farmers are forced to look for labour-saving options—which paradoxically add to the unemployment problem. In Kerala, many farmers decided long ago to stop paddy cultivation altogether, because it became unviable at the government-determined wages that had to be paid. So real work gets reduced, and make-work flourishes.

Pressure now grows for government-funded labour to be deployed on private farms—but of course only on the farms of people who belong to the scheduled castes and tribes and other socially acceptable categories, for specified kinds of work. Since fake muster rolls already bedevil make-work programmes, it is easy to guess how these nice-sounding stipulations will be observed in practice, and how much of the government-paid labour will be deployed on the sarpanch’s land instead. Start with one distortion, and then create a “solution” that mimics and thereby magnifies the distortion.

What about industrial labour, at a time when the government wants to give a push to India’s manufacturing sector? The minimum wage in China’s town and village enterprises (TVEs), which account for much of that country’s manufacturing and export prowess, is the equivalent of about 64 cents per hour (it is three times as much in a special economic zone like Shenzhen). For a 200-hour working month, the wage in a TVE is therefore $128, or about Rs 6,600. The minimum wage in parts of India is no lower, and in most manufacturing plants is much higher, though India’s per capita income is less than half China’s. Is it any wonder that sectors that China vacates as it moves up the income ladder are being taken up by Vietnam and Bangladesh, more than India?

Even larger distortions are about to be introduced into an already scam-ridden food market. If half the total foodgrain offered in the market is to be picked up by the government, and two-thirds of that is to be sold at prices that are about 15 per cent to 20 per cent of cost or market price, why shouldn’t this lead to a repeat of what happens with kerosene and cooking gas? In some ways, this is already the reality.

Last year’s official Economic Survey said that between 40 per cent and 55 per cent of the foodgrain that goes through the government system leaks into unintended channels. Taking the lower figure of 40 per cent, total government-supplied grain at 50 million tonnes, and on average a subsidy per tonne of Rs 8,000 (i.e., Rs 8 per kg), the size of the annual scam works out to Rs 16,000 crore. That figure will grow once the food security programme is established and the quantum of government-supplied grain increases. Oh for just the Bofors scale of scams!

Could it be that these distortions and scams (all of which are well known and accepted as part of the Indian reality) are the result of well-intended do-goodism becoming counter-productive, of bleeding-heart socialism gone wrong? At worst, the gullible might say, the accusation could be that the ruling alliance is buying the votes of the poor at government cost (a.k.a. populism). But the massive leakages of kerosene, electricity, cooking gas and foodgrain create gigantic vested interests. If you want proof, look at how executives of oil marketing companies get killed when they go after the crooks, and at how officials of electricity distribution companies get attacked when they tackle power theft. The political system is intricately woven into these networks of scamsters.

In an earlier era, politicians, policemen and government officials were complicit in permitting smuggling, and black marketing (and they didn’t do it for love of smugglers and black marketers); they are now active in enabling fake muster rolls at panchayat level when it comes to the make-work programme, and adulteration of petrol and diesel with kerosene when oil-carrying trucks disappear for a while en route to gas stations. This is not one Raja in New Delhi working a solitary scam, it is a broad-based, continuous creaming machine that feeds those in the political hierarchy. The poor provide a convenient cover, because the enabling policies are formulated in their name.

Left-leaning economists like to justify such government intervention in the name of market failure. The poor are often not part of the market and therefore need the state to step in, goes the argument. And liberals feel good about vast fortunes being spent to help people at the base of the pyramid. Trouble is, India’s history of government intervention doesn’t flow from market failure as much as creates it — like excise duty distortions which in the 1980s made this the only country in the world where TV-set assembly was a small-scale business! Research shows that some 85 per cent of the garment factories in India employ fewer than eight people; in China, which is the king of the garment market worldwide, less than 1 per cent of factories are that small. Market distortion has made a volume business into a small-scale business in India; our garment exports have stayed small-scale too.

The essence of the reform programme of 1991 was to attack this approach to policy-making, to reduce if not remove the distortions. Twenty years later, however, the ancient regime is back with a vengeance — it was in the name of garibi hatao earlier, now it is in the name of the aam aadmi.

Why rake all this up now, at the start of 2012? Because the hyper-ventilating leaders of an anti-corruption movement who roiled the waters for most of 2011 have not thought it necessary to say one word about how it is government-induced market distortions that lie at the root of corruption in so many sectors, and how reforms of the 1991 variety might provide solutions — indeed, better and more lasting solutions than sending Lok Pal hounds after every babu who yields to temptation. Not just Anna Hazare and his cohorts, most ordinary people can now see that no political party really wants a Lok Pal. But shouldn’t it be equally obvious that no political party wants reform either — because at the Centre, in the states, in panchayats, politicians of every party hue are the direct or indirect beneficiaries of government-induced market distortions that bring about market failure, and opportunity for scamsters?

Do post your thoughts via a comment.

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