Etihad to benefit more than Jet from deal, says CAPA's Kaul

The Jet-Ethiad deal is on expected lines but it is a bigger opportunity for Ethiad than Jet Airways, says Kapil Kaul, CEO, South Asia, Centre for Asia Pacific Aviation (CAPA).

“Jet has100 plus fleets, infrastructure, people, competence, technology and is operating in a market place which is going to be, as an economy growing at 7-8 percent, perhaps 9 percent for two to three decades. It is an outstanding opportunity for an airline that doesn’t have a home market and is good given the fact that Ethiad have huge expansion plans going forward,” he explains.
Meanwhile, Kaul feels there will be more implication of the deal internationally. “The bilateral which includes 41000 seats from Jet Airways and connection to 23 cities through Abu Dhabi will have larger implications on the international scene,” he says in an interview to CNBC-TV18. Jet Airways today finalised its deal with Etihad selling a minority for Rs 2060 crore. Jet will sell 27.3 million shares at Rs 754.74 each on a preferential basis to Etihad. Below is the verbatim transcript of Kapil Kaul’s interview on CNBC-TV18 Q: What are your initial thoughts on the deal?
A: It was always a done deal for us and was just a matter of regulatory and procedural issues that got sorted out. The key part of the deal was the bilateral’s that have been approved yesterday and have got 41000 seats, very big jump in terms of bilateral’s for just one single carrier and that is a key part of the valuation. Once that was done, the deal in terms of valuation, in terms of the other agreements between these two companies was already agreed on.
Once the bilateral’s were approved, a formality of announcements was done today. The deal is on expected lines, valuation on expected lines. It’s a big opportunity for Etihad. It is a bigger opportunity for Etihad than Jet Airways because Jet is an outstanding opportunity. It had some deeper issues for the last 5-6 years because of the nature of competition, but continues to be outstanding.
Jet has 100 plus fleets, infrastructure, people, competence, technology driven company and operating in a market place which is going to be, as an economy growing at 7-8 percent, perhaps 9 percent for two to three decades. So, it is an outstanding opportunity for an airline which doesn’t have a home market, it will always be dependent upon a feed. With this acquisition, India becomes their home market and that is unbelievable for an airline like Etihad given the fact that they have huge expansion plans going forward. So, I would think a big deal for Etihad.
They will also get a big boost to their maintenance facility. Jet has 100 plus planes. So, you would expect them to start maintaining them at the Abu Dhabi facility and see them supporting training and other needs as well. Overall, a big deal for Etihad, though it might seem that Jet has got money, but overall more positive for Etihad than Jet Airways. Q: For Jet Airways particularly, what kind of deleveraging on its balance sheet are you expecting now that Etihad has come on board?
A: If it is below 24 percent deal and it will be a combination of preferential’s as well as promoter selling stake, whatever money comes through preferential would need to come to the company. Don’t know what the promoter will do with the disinvestment, but around Rs 2000 crore will significantly help in deleveraging their business. It depends on what they do with the money but it would significantly help in deleveraging their debt.
_PAGEBREAK_ Q: What about the market share dynamics in the entire aviation market, now that a foreign player has come onboard?
A: More implications on the international part because the kind of bilateral that Jet Airways has asked, its about 41000 seats from Jet Airways and connection to 23 cities through Abu Dhabi, so it has larger implications on the international scene. I don’t see much in the initial stages on the domestic part, but they would need to protect their domestic turf.
You might see some more clarity on their low cost business, on their domestic business, but this is largely an international play because Etihad never does any investment if it doesn’t support their long haul fleet, their hub for trans-continental travel. The domestic fleet which will support their international fleet is critical. The focus would be more on international though you would see some play on the domestic as well. Q: What is your view with respect to the government helping them close this deal with the bilateral rights?
A: Bilateral are national assets. It needs to be given after thought, consultation, it must be aligned to national interests, India’s interest. It must be aligned to trade, tourism, any strategic issues like oil and gas, some benefits to the Indian aviation as well. Unfortunately, three months back there was an announcement that we are not going to give any bilateral.
Three months later we give one airline, that too an Indian carrier 41000 seats and that becomes the vital part of the entire deal that’s finally getting approved. We are treating our bilateral’s without respect. It is not about Jet-Etihad deal because Jet is entitled to offer bilateral’s, but government will have to look at it from a larger national perspective.
We don’t treat our bilateral with respect and I don’t think we have a policy of how to allocate bilateral’s in our national interest. We must open up. India is a USD 2 trillion economy, will grow at 7-8 percent and opening up of bilateral’s is critical for the economy but it must be done with thought, strategic purpose. Any proponent who says that we have to open up and it will give boost to trade and tourism is fine but what happened to our free trade agreements (FTAs).
If you look at India’s FTAs, even the parliamentary standing committee says that FTAs were done in a hurry. In fact, if you look at the European FTA the government is saying that there is not much benefit to India in most of the FTAs, these are hurriedly done. Bilateral’s are more hurriedly done because there is no thought, what will be the impact of bilateral’s on your competition, industry structure, consumer and economy as a whole. So, if you grant it without respect its unfortunate but for this deal this was critical and once that got approved, valuations got aligned to their needs. Q: How will the pricing evolve because now there is an additional capacity with Etihad coming onboard and AirAsia will be onboard soon and there is so much worry about a monopoly of a foreign player, perhaps aggressive pricing as well. How do you see all of that play out?
A: Pricing is more strategic. For a business pricing becomes a very strategic rule. It’s more a play on international side. Air Asia is yet to come, has not even applied for regulatory approvals. It might get regulatory approvals but will it be couple of years till they get the size and scale to make any impact.
On the domestic part, when they come they will bring an ultra low cost model to the level they could. They will stimulate the market as that is their basic business model. As long as the industry maintains a pricing discipline and continues to operate and rationalise their costs, I don’t think this deal will make any significant impact. I see a larger play on the international side and not much on the domestic in the near term. Q: Do you see the financials of these companies getting rerated especially for Jet post Etihad coming onboard?
A: Yes, it surely has an upside. It will completely rerate the sector.