Will Etihad Acquire Stake In Jet Airways or Kingfisher Airlines? Detailed Analysis By Travopia
In the year 2011, Asia Pacific airlines contributed 46% of the total airline industry profits. Asia Pacific is reported the most profitable of all region with earnings at $2.1 billion and its the only region where demand increase (6.4%) is expected to outpace capacity growth (5.9%). When we drill down further into Asia Pacific, India especially is a big player with significant scope for growth in air industry. In India, there are around 1,50,000 airline seats available daily. India’s Minister of Civil Aviation has noticed that in 2011 the national passenger traffic topped 140 million.
Now, the clear message here is that India is a good market for investors (from air industry perspective). The timing couldn’t have been any better when the Indian government liberalised rules in September’12 to permit overseas / foreign airlines to acquire up to 49% stake in Indian airlines.
Four days after the FDI announcement from Indian government in September, a new strategic alliance seemed to be on the cards between the Abu Dhabi based Etihad Airways and Indian carrier Jet Airways. In 2011, Etihad Chief Executive James Hogan had sought the Centre’s approval to include more India-Abu Dhabi routes in its scheme of things.
According to Economic Times, Etihad and Jet Airways were trying to iron out differences over valuation, with Jet wanting a deal based on a valuation of around $800 million while Etihad was willing to offer much less.
Later, Business Today reported that in addition to the stake-talk, the two airlines are expected to have a marketing agreement along with sharing of some flying slots under the air traffic rights. Jet and Etihad would be sharing each other’s infrastructure facilities like engineering and training. As a matter of fact, Jet Airways and Etihad signed a code-sharing agreement in 2008.
This is the current state of Etihad’s possible investment in Indian airline carriers.
Now, there are multiple question that needs answers -
- Will Etithad invest in Jet Airways or Kingfisher or both?
- If Etihad invests in Kingfisher airlines, why would they do so knowing the current state of Kingfisher?
- If Etihad invests in the Naresh Goyal led Jet Airways, why would they pay more when something might be available for less cost (KF, Spice Jet)?
- If Etihad invests in any of the private airlines in India, will it have an impact on the state run carrier Air India?
Travopia’s Take:
In 2011, Jet reported a loss of Rs 1,236 crore despite many financial engineering deals involving sale-and-leaseback of aircraft. Jet Airways has 100 planes now and Jet has been moving unsteady for several years because of the increasing competition in Indian air industry. We recently reported in our earlier article about Jet Airways losing the market share to IndiGo Airlines in Jun-July 2012 (23.8% vs 27.2%).
In 2007, Jet Airways acquired Air Sahara, which was later rebranded as JetLite and now known as Jet Konnect. Jet revamped its operation and started focusing on the full-service market. Now, Jet is applying to the Indian government for permission to join Star Alliance.
On the other hand, Kingfisher Airlines is in a bad state and has the least marketshare (3.5%) in India. The directorate general of civil aviation (DGCA) suspended the airline’s licence in October on grounds that it could not provide safe and reliable flights to consumers, after labour unrest and financial troubles.
Kingfisher Airlines has not paid bankers since January. On Thursday night, the airline paid its employees salaries for May. So, everyone is aware on the cash-strapped situation at Kingfisher. While the airline’s promoter Mallya is trying to solve the issue by end of this year, the reinstating process (pilot and plane checks) is going to be really lengthy.
If the Jet-Etihad deal goes through, then that would lead to Jet expanding its network to Etihad’s African, Middle Eastern, European and American network. Etihad, in return, will expand its network to Jet’s domestic Indian and Asian network.
Going by the track record of Etihad and the present situation in Indian air industry atmosphere, we predict Etihad might settle with Jet Airways.
Author: Karthick Prabu
Very nice article… I have been tracking this news
Thanks to Karthick Prabu!
I would like to throw light on this topic in a slightly different fashion:
I agree with your statement that ‘Jet is at a decent state and KF is at not-so-good state’. However, astute acquirers love to take on not-so-good assets and companies. Unsurprisingly, this is because, they can be bought for peanuts. The acquirer will then use his own capacity to turn the acquired company’s performance around. The critical success factor here is that the acquirer should know how to run an acquisition process smoothly, and to manage the post-acquisition changes skilfully.
Case to quote: The Mahindras are known for their continued success in making JVs and acquisitions work. And you can see what they did with Satyam, after the shamed company’s valuations hit rock-bottom.
Vishwanath,
Agree to your point. In case of Satyam, the governance was a big question, the company as such was good in terms of revenues.
In case of Kingfisher, everything is a question mark. End of the day, it depends on how Etihad runs its business. Meaning – if they are risk takers, then KFA might be luring them. If not, Jet should be the clear option.