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Etihad raises stake in Jet Airways

January 17, 2019 | Expert Insights

Etihad Airways PJSC has agreed to lead a rescue of cash-strapped Jet Airways India Ltd. in a move that will see the Abu Dhabi-based carrier double its stake to 49 percent.

Jet Airways founder Naresh Goyal has agreed to reduce his stake to 20 per cent and step down from the post of Chairman.

Background

Jet Airways is a major Indian international airline based in Mumbai. In October 2017, it was the second-largest airline in India after IndiGo with a 17.8 per cent passenger market share.

Incorporated in April 1992 as a limited liability company, the airline began operations as an air taxi operator in 1993. It began full-fledged operations in 1995 with international flights added in 2004. The airline went public in 2005 and in 2007, it acquired Air Sahara. It became the largest carrier by passenger market share in the country by 2010, a position it held until 2012.

On 24 April 2013, Jet announced that it was ready to sell a 24 per cent stake in the airline to Etihad for US$379 million. The deal which was expected to be signed in January 2013 was postponed and was completed on 12 November 2013. In November 2018, Jet Airways has been reported as facing a negative financial outlook due to increasing losses. Therefore, cost-cutting measures, as well as talks, have been initiated with potential investors or buyers.

Analysis

Etihad is in talks to lift its holding from the current 24 per cent which is expected to force Jet founder Naresh Goyal’s stake to drop to 20 per cent from 51 per cent. He is also expected to stand down as chairman.

Shares of Jet Airways closed 16 per cent higher in Mumbai, where it is based. The company ranks as India’s biggest full-service airline but has failed to post a profit in nine of the past 11 fiscal years. Cash is running short as fare wars depress revenue and turbulent oil prices increase costs.

An increase in Etihad’s Jet stake would come at a time when the Persian Gulf carrier is cutting thousands of jobs and shrinking its fleet amid mounting losses from over-expansion and failed investments. India remains an attractive prospect because of the size of its travel market and the pace of growth. Etihad has made no official announcements of the latest bailout to Jet Airways. However, Jet Airways has been actively looking for investors to fund the cash-strapped airlines for a few weeks now.

The deal, if it goes through, will give the third-biggest Mideast carrier more say over Jet’s operations and its day-to-day management, with Goyal’s voting rights capped at 10 per cent, BTVI said. Indian regulations cap airline ownership by foreign operators at 49 per cent and also prohibit them from taking control.

Etihad, which lost $3.5 billion over two years, last week scrapped orders for 10 Airbus SE A320neo aircraft and revealed plans to cut 50 pilot posts this month. Chief Executive Officer Tony Douglas has put the brakes on a costly bid to challenge bigger Gulf rivals Emirates and Qatar Airways, saying he’ll focus more on local needs rather than carrying passengers between continents.

Etihad has also sought exemptions from the Securities and Exchange Board of India (SEBI) from making an open offer and preferential pricing guidelines stating that the fair price for Jet Airways shares is in the region of Rs. 140 to 150, a share, far lower than the current market price. In addition, Etihad is also demanding that Mr. Goyal’s future role as “Chairman Emeritus” should be “well defined,” stressing that no board seat should be given for Mr. Goyal himself and no rights for him or his family and affiliates to act or represent the airline.

Etihad has also sought that the CEO and CFO should be named in the resolution plan with final decisions on the CEO and CFO to be taken by the reconstituted board of the Company. The selection criteria for the appointment of independent directors should be clearly defined and the reconstituted nomination and remuneration committee should have representatives of both the lenders and Etihad.

Assessment

Our assessment is that Etihad could help Jet Airways reduce loses and return to profitability by means of its extensive experience in running a successfully multi-national airline network. We believe that Etihad’s own financial troubles may prevent any significant expansion of Jet Airways by the Middle-Eastern airline.