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Updated: April 28, 2013 22:49 IST
Jet-Etihad deal

The dogfight begins

Raghuvir Srinivasan
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The increased seats will help Etihad, which was started just a decade ago in 2003, to convert Abu Dhabi into a regional hub to rival Dubai. Illustration: Sreejith Kumar
The increased seats will help Etihad, which was started just a decade ago in 2003, to convert Abu Dhabi into a regional hub to rival Dubai. Illustration: Sreejith Kumar

It sounded too good to be true — Etihad paying a huge premium of 32 per cent over the market price to pick up just 24 per cent equity in Jet Airways. Large premiums are usually associated with a transfer of control but Etihad was not getting into the pilot’s seat of Jet Airways. The equity stake was also not big enough to make a difference as an investor as Etihad would still be unable to block special resolutions at shareholder meetings.

Throw in the fact that Jet is not exactly in the pink of health. With accumulated losses of over Rs.1,900 crore and borrowings of over Rs.13,000 crore, the airline is hardly an attractive investment candidate. So, how was Etihad persuaded to part with such a large premium for a small stake?

Devil in the details

The answer came immediately after the deal was made public. The government announced an increase in the bilateral weekly seats between India and Abu Dhabi to 36,670 seats a week from 13,330 at present. That’s almost a three-fold rise and is a huge shot in the arm for the small emirate of Abu Dhabi whose national carrier is Etihad.

In the airline industry, seat capacities between two countries are decided through bilateral agreements with each country then apportioning its share to different airlines registered there. In the case of Etihad, it is the national carrier for Abu Dhabi and will enjoy the whole share of the emirate’s bilateral seats.

The increased seats will help Etihad, which was started just a decade ago in 2003, to convert Abu Dhabi into a regional hub to rival Dubai. Jet plans to fly out of two-dozen Indian cities, predominantly Tier-II and Tier-III, to Abu Dhabi and drive passenger traffic headed onward to destinations in North America, Europe, Africa and the Middle East. Etihad will also be free to increase frequencies into the current destinations in India that it flies to apart from adding new ones, of course, in coordination with Jet.

The increase in bilateral capacity puts the premium that Etihad paid in perspective but should the government have initiated the increase to help a private airline to cement a deal? Though it might deny a connection, it should be evident to any industry watcher that the two events are related. Jet has been the beneficiary of a number of questionable moves by the government in the past decade and more. The denial of permission to the Tatas to start an airline in association with Singapore Airlines in the mid-nineties, the imposition of stringent conditions on domestic operators for flying international routes such as a five-year track record and the mismanagement of Air India have all helped Jet grow in its business. The increase in bilateral capacity with Abu Dhabi is one more in this list.

The silver lining

But competition is not complaining, at least not yet. The simple reason for this is that the increased capacity opens up the market for them too though it remains to be seen how the extra seats are now apportioned by the government amongst the various airlines that might want to fly to Abu Dhabi. SpiceJet and Indigo are likely to stake immediate claim while Air India may join them, its financial position permitting.

The condemnable decision of the government to change policy to aid a particular airline will now be exploited by others. It is well known that SpiceJet has been in talks with some foreign airlines for collaboration on similar lines as Jet-Etihad. Indigo, though it is the healthiest and best run airline in India, is not interested in a foreign tie-up yet but there is no question that it is ripe picking for any foreign carrier.

On the other side, established Gulf carriers such as Emirates and Qatar Airways have been demanding increase in capacities into India and the government may just have opened itself up to pressure by its move with Abu Dhabi. Emirates has developed Dubai as a regional hub and will be loathe to see smaller Abu Dhabi, a newbie to the industry, steal that position. Similar combinations such as Jet-Etihad are therefore a distinct possibility.

India is a large market in the region and has been growing at an impressive pace in the last decade. Aviation consultancy, Centre for Asia Pacific Aviation (CAPA), has estimated that international passenger traffic from India grew at a compounded annual growth rate of 11.8 per cent between 2004 and 2012. In 2011-12 alone it grew a whopping 16 per cent to a little over 40 million passengers.

Limiting factor

The only limiting factor to growth has been availability of seats and carriers, not just from the Gulf but also those such as Singapore Airlines and Cathay Pacific, are bound to demand an increase in bilateral capacities quoting the Abu Dhabi precedent.

The government’s problem will be that any increase will benefit the foreign carriers more than the domestic ones given that Air India is in no position to exploit the high capacities and the other private airlines may not have the aircraft capacity to cash in.

The ones to benefit the most from all this are passengers. The Jet-Etihad deal could well stimulate the next round of competition, especially in the Gulf and on-bound passengers market.

There is already fair competition through the presence of several airlines and hubs such as Frankfurt, London, Brussels, Istanbul, Dubai and Doha for on-bound passengers to North American destinations.

The addition of Abu Dhabi and the combination of Jet-Etihad will only intensify this competition leading to a fall in fares. But is this enough justification for a policy change that blatantly supports a corporate deal?

raghuvir.s@thehindu.co.in

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