Analysis: Etihad equity stake in Jet Airways likely to benefit both carriers

Over the past few weeks, it has become increasingly likely that Abu Dhabi based Eithad Airways will be purchasing a 24% stake in India’s largest full service carrier, Jet Airways, perhaps as soon as the end of this week. The deal for a stake in Naresh Goyal’s airline, is reportedly worth somewhere between Rs. 1600 to 2200 Crore, which would value Jet Airways as a whole at somewhere between Rs. 6,666 Crore and Rs. 9,166 Crore ($1.22-1.69 billion). This deal makes Jet Airways the first carrier to benefit significantly from the Indian Government’s decision earlier this year to allow Foreign Direct Investment (FDI) by foreign airlines into the Indian airline sector. On the flip side, it puts increased pressure onto the rest of India’s airlines, especially low cost carrier (LCC) SpiceJet and now defunct full service carrier Kingfisher Airlines, as they now lose one potential investor. The former lacks capital for profitable expansion of its fleet of Bombardier Q400 turboprops whereas the latter is desperately seeking an infusion of capital before it is grounded permanently.

Immediately, it is important to note that Jet Airways will benefit greatly from this capital infusion, allowing it to make critical investments in simplifying and improving its fleet, product, and brand. As they continue to adjust and restructure their international operations, including the swap of several smaller A330-200s for their larger cousin the A330-300s, the reconfiguration of some of its Boeing 777-300ERs to a more dense configuration, and the termination of several poor-performing international routes. When combined with the swap of 5 ATR 72-500s for new ATR 72-600s, Jet Airways does have a large requirement for capital in the near term, especially as the returns from sale-leaseback continue to diminish (Jet has already sold off many of its assets). And it is Bangalore Aviation’s opinion that the moves that Jet Airways has made will be beneficial in the long term; so the Etihad deal is a vehicle for important long run changes.

But the far more interesting question is what effect will the deal have on Jet Airways’ operations so as to make the deal beneficial for Etihad? The immediate benefit is the expansion of bilateral capacity – allowing Etihad to feed more Indian travelers into their “superhub” in Abu Dhabi. Under the current system of bilateral capacity, Etihad’s rivals Emirates and Qatar Airways are granted more capacity and frequencies into India thanks to the O&D targeting system. Meanwhile, Etihad has all but maxed out its bilateral capacity to and from India, which puts it at a competitive disadvantage relative to Emirates and Qatar Airways in one of the world’s fastest growing demand centers. On the flip side, the Indian airlines have not yet maxed out their available seats and flights to Abu Dhabi, so Jet Airways could jump in and apply for several frequencies between Indian cities and Abu Dhabi using some of its spare narrowbody capacity (aircraft utilization at Jet has been falling for more than a year). This sort of setup is not without precedent – Etihad has already invested in and tied up with several carriers around the world, most notably AirBerlin, Virgin Australia, and Garuda Indonesia.

Each of these carriers either launched new services or increased services to Abu Dhabi following the deal(s) – AirBerlin and Virgin Australia created new flights to Abu Dhabi, and Garuda shifted their Jakarta-Dubai-Amsterdam triangular routing to fly via Abu Dhabi instead. But critically, in each of these cases, the carriers in question did not suddenly halt all other international operations. Garuda continued to expand in its niche in East Asia, AirBerlin actually expanded its long haul operations with new service to New York, and Virgin Australia continued to challenge the Qantas hegemony in the South Pacific.

Similarly, Jet Airways will not just all of a sudden become a regional feeder for Etihad a-la ExpressJet or SkyWest in the US. Moving the westbound international scissors hub from Brussels to Abu Dhabi makes little sense, given that Jet Airways’ longest range aircraft, the Boeing 777-300ER, cannot do runs from Abu Dhabi to the West Coast of the US (at least at its current weight though the flights are theoretically possible), a commonly speculated expansion point. As with each of the other Etihad partners, Jet should be allowed to focus on its strengths, which include the milk runs to the US, the Heathrow flights, and regional flights to the Gulf and East Asia, as well as potential flights to Star Alliance partner hubs. In fact, the value of an Etihad partnership will likely facilitate an expansion in regional international routes for Jet. These are just some of the implications of an Etihad equity stake in Jet. As the deal gets finalized and more details emerge over the coming months, important, and positive changes will be coming to the new Jet Airways.