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Yesterday, India’s largest private carrier sold its three precious landing slots at London Heathrow airport to Abu Dhabi, UAE based Etihad Airways for $70 million. Etihad will lease the slots back to Jet Airways for the time being. London is essentially THE destination for Jet Airways, which currently serves Heathrow daily from New Delhi and twice daily from Mumbai, with its fleet of B777-300ER’s.
This sale and lease-back arrangement has been done to avail a low interest loan from the Gulf carrier to repay high interest rupee loans. We are not comparing Jet Airways to Kingfisher Airlines, but this reminds one of selling the family silver to meet current liabilities. While the spin doctors will portray this as increased cooperation, it is clear that if the Jetihad deal fructifies, Jet will eventually become a regional player, feeding the Etihad global network.
Ever since the Government announced liberalisation of the foreign direct investment policy in airlines in September, we have been hearing about Etihad negotiating Jet Airways to purchase a 24% stake in the airline. Over the last or so months there have been announcements in media at regular intervals which result in huge rises in Jet’s stock prices, and then when no deal was announced the stock prices subside. An example is from yesterday, when CNBC-TV18 reported progress in the Jetihad negotiations which sent the airline’s stock prices up 17%.
One cannot help but suspect if this regular roller-coaster ride in Jet’s share prices is not being engineered by the powers that are, to make short term profits on the backs of gullible investors.
However, the deal fits into the strategic approach taken by Jet Airways over the past fiscal year of funding debt reduction through cash raised via sale-leaseback of assets. Jet Airways has already returned to operational profitability as of the third quarter thanks to capacity contraction, fare increases, and cost cuts. Jet Airways has close to Rs. 4,000 Crore in high-interest debt which it can now pay down around Rs. 350 Crore thanks to the proceeds of this sale-leaseback. This will reduce finance and interest charges and improve their financial results moving forward in the 4th quarter.
Clear signs are emerging that Jet is desperate for the Etihad deal. From a position of falsely perceived strength, Jet Airways has been steadily brought down. Sheikh Hamed bin Zaved al-Nahayan, Chairman of Etihad Airways, played hard-ball with Naresh Goyal of Jet Airways and stated “the deal needs to be revised”. With the move by AirAsia to commence a joint venture with the Tatas and Bhatias to set up a LCC in India, the pressure was further ratcheted up on Goyal.
Earlier this week, Kritika Saxena of CNBC-TV18 reported that Jet Airways will accept Etihad’s new tough demands. This includes Right of First Refusal (ROFR), “more” management control in operations (in reality a replacement of Naresh Goyal’s existing management to one of Etihad), and expansion of its board by giving four seats to Etihad. Jet also indicated indicated its “willingness” to new price negotiations to “review” the valuations.
An egoistic Jet Airways thought it could dictate terms. Etihad seems to have shown that money talks and ego just walks. Be ready for Jetihad.
As usual comments are welcome.
In parting, we suggest you read this nice article by Sindhu Bhattacharya on whether Naresh Goyal’s time has come. Another recommended read is why is Etihad talking tough with Jet, and explains Jet’s limited options.
