Etihad deal to change market dynamics: ex director, Jet

The aviation sector will undergo drastic change after Etihad invests in the country, said Saroj K Datta, ex director at Jet Airways. Yesterday, the airline confirmed that it is in talks with Etihad for a possible stake sale and is in final stages of negotiations.

Datta told CNBC-TV18 that additional funds from Etihad will help Jet Air reduce high cost loans. "Jet Air has proved its credibility for investment from Etihad," he added. He however said that right now it would be difficult to assess synergies between both carriers and also stressed that it is crucial for them to prevent passenger cannabilisation. At the macro level, the industry will see more financial efficiency with the entry of foreign players, is what he expects. Meanwhile, a section of media reports suggest that after the deal, Jet Air could shift its international base from Brussels to Abu Dhabi. The shift of international base could also give Jet access to aviation turbine fuel at much cheaper rates, according to the broad contours of the deal. As part of the deal, both airlines will operate flights on code share and Jet Air is also likely to put on hold its plan to join the Star Alliance. Post the transaction, Jet Air will be the first airline to get foreign direct investment after the government relaxed norms to allow foreign airlines buy up to 49 per cent stake in Indian carriers. Below is the edited transcript of his interview on CNBC-TV18 Q: Is the terrain going to be significantly different if exactly what is being reported happens that is Etihad does pick up a substantial stake, maybe a 10 percent stake in Jet Airways, and SpiceJet also gets a little more money. Are we going to see the terrain change significantly? A: Yes, I think it will change significantly because most of the airlines have severe problems with regard to cash availability. Only Air India is getting the government funding. Apart from that the private airlines including Jet Airways require funds to get over a lot of the additional expenses they are incurring in terms whichever loans they have been required to take at high interest rate in order to have meet their current expenses. Unless the operations become extremely profitable which is very tough issue to talk about, the additional funds that come into the company from a carrier like Etihad will obviously held Jet Airways to get rid of some of its high cost loans and financing arrangements and proceed much more smoothly than it has been able to do so far. One other thing is Etihad is a much newer carrier than even Jet Airways. Jet Airways in the last 20 years has proved that it has done a lot of things and it is in the front of every other carrier. It is one of the best carriers in terms of technology, in terms of systems and procedures. So, we need to wait and see, what Etihad’s participation in Jet Airways will amount to. Q: With reference to operational efficiency, if in case in a hypothetical situation, Etihad does pick up stake in Jet- what sort of operational efficiency would that bring on the table? Would there be a conversion from a high cost airline to a low cost airline? How exactly would there be more efficiency on the earnings before interest, taxes, depreciation, and amortization (EBITDA) front if in case this deal does come through and there could be some amount of synergies between the two? A: That is an extremely difficult question to answer because even if Etihad brings in equity and gets a 24 percent share as the media has reported, even then the primary holding is of the Indian investor that is Mr Goyal and 20 percent which is with public who invested. The important question is who will run the company? Will it be Jet and the current management, which should be running the company? What sort of changes will take place in the management of the company and in terms of policies? So there are all these questions. Ultimately let us remember that Jet Airways is largely a domestic carrier but has expanded on international routes quite a bit in the last five years. Etihad is also operating to a large number of points in India. They also have a large international network and they have got into alliances with various carriers in other parts of the world. Therefore, what sort of synergy will come in and what sort of policy decision will be taken about the scope of Jet Airways operations? There will always be a question of Jet Airways being both an international and domestic carrier. Therefore, when one talks of a low cost airline it will have to get restricted to the domestic segment. It will become a competitive situation. Ultimately Etihad and Jet Airways will have to decide that they do not want to compete with each other. They provide synergies; they provide common fronts, selling marketing and technical areas. So, therefore, it needs to be spelt out. I think none of us can guess what could happen, neither would I attempt to. _PAGEBREAK_ Q: I agree that that part has not yet been specified but we know that there is already a code sharing agreement between Etihad and Jet Airways. Are you getting a sense that besides the equity money that comes, this kind of a non-compete arrangement between the two players outside India could improve Jet Airways’s international performance as well in some fashion, therefore, even business strengthens somewhat? A: Each of the two airlines, I suspect will have a great influence on the other. It is not that only Etihad will have a strong influence on Jet Airways. Eithad will bring in 24 percent equity but so will Mr. Goyal continue to have a large equity share of the company. I think both will influence each other. The policies will have to be thought out more completely. Jet and Etihad must have already talked amongst themselves and identified synergies, identified what sort of policies they are going to follow before they have taken this step to get into a public announcement that this is under consideration because that’s what one of the newspaper says this morning. Another thing we have got to remember is that government has not announced any of the changes in rules and regulations that will need to take place, if a foreign equity comes in from another airline. The current policies, which are applicable, it is called, guidelines for foreign equity participation in Indian domestic carriers, which was issued sometime in 1997 if remember correctly, two-three months after the government withdrew permission for foreign carriers to hold the equity in domestic airlines, that lays down various conditions, which the domestic Indian carrier cannot do even like have an alliance, have an agreement, have foreign airline personnel working in this company and so on. Now those regulations how they are going to be changed, and till the government announces it, I don’t think any of us can take a call on it because quite a few of them will not be relevant in the new situation. The whole issue to me is a little bit, how is the airline going to be treated? Why is Jet Airways still treated as a domestic carrier, if Air India is not? In fact Jet operates a substantial proportion of its operations on international routes and even IndiGo, SpiceJet etc. have started operations admittedly only on the regional routes and Jet is operating on a long-haul international routes with wide-body aircraft. How do you classify them to be a domestic carrier and an international carrier? Why should different criteria apply to Air India, to a government-owned carrier and to a privately owned Indian carrier? Q: I can see that there are a lot of legal quibbles that will have to be ironed out – definitional issues. My point was more in terms of how the industry will take course from hereon. Assuming there is a reasonable amount of success in Jet-Etihad relationship do you see this as a showcase deal? In which case you could see some more alliances, say for an Indigo – do you therefore, see that the industry itself moves to a more robust plane? A: Yes, industry will. I would suspect if it doesn’t, the purpose of foreign direct investment (FDI) would have been lost at least for the industry, if not for individual carriers. The point is that, it brings in much greater efficiency in financial terms much more than in technical or operational areas.  I believe the Indian domestic carriers are too hampered, are being constricted by non availability of funds and therefore having to borrow at high interest rates. Till they are able to convert into a profitable operation, inclusive of the non-operating expenses, they will not be able to create funds for their own operations. To be able to run a profitable operation with non-operating expenses also included, the foreign investment will give advantage in terms of being able to write-off or repay the loans at high interest cost which they have on their books and therefore, be able to become profitable. Q: On the balance sheet issue, how exactly do you think that this is going to solve the problem? For example Etihad comes in, picks up 24 percent stake, that is around Rs 2,000 crore but Jet is already sitting on a debt of around Rs 12,000-14,000 crore, it will still have assumed Rs 10,000 crore debt on its balance sheet post the deal any which way. How exactly does the balance sheet issue on a long-term basis get solved unless the operations or the economics of the aviation industry change significantly? A: I do not believe in speculating as to what the financial relationship between Jet and Etihad is going to be. For example, the whole media and the specialists have all talked about Kingfisher Airlines. Why is no foreign investment being talked about in Kingfisher because the investors are not willing to take a share of the debts that Kingfisher have on their books. What agreement Jet and Etihad have reached or proposed to conclude, in terms of their entry and therefore the debt how it is going to be repaid is a question on which I do not believe speculating in. Primarily, the fact is that it enables or creates the possibility of Jet becoming profitable not only on an operational cost basis but also inclusive of non-operating expenses and therefore have surpluses to pay back some of their debts that they have. In addition, the additional capital that comes in from Etihad, is used to pay back some high cost loans.  Obviously, the amount you are talking about will come down to a substantially lower level and enable Jet to operate much more profitably than they have been able to. Let us also remember that Jet has been profitable for almost every year of operation except two-three years now once in 2001-2002 period and then during the slowdown in the economies worldwide. So once they are able to get rid of their non-operational expenses, particularly repayment of loans and high interest costs, I think the operational profitability will enable them along with the additional capital that comes in, to remodel their operations in any form they would like to.