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Corporate Jan 31, 2013

Etihad unlikely to reap immediate benefits from minority stake in Jet

By Sindhu Bhattacharya

New Delhi: Etihad Airways may not get any direct immediate benefits in terms of increased traffic from Indian cities even after it picks up a minority equity stake in India 's Jet Airways.

According to senior officials of the ministry of civil aviation, the Abu Dhabi-based airline has indicated it will initially pick up 24 percent in the Indian carrier.

Reuters

As of now, Etihad operates flights to and from Ahmedabad, Delhi , Bengaluru, Chennai, Hyderabad and Mumbai in India .Reuters

"This means effective management control and substantial ownership remain with the Indian entity which is Jet Airways. So for us, nothing really changes. The Jet-Etihad combine will continue to operate as an India-registered airline while Etihad itself will continue to be allowed 11 ports of call in India with as many seats per week as the Air Services Agreement (ASA) allows between India and the UAE," said one official.

Why would Etihad want to pump in money into an Indian airline if it is not going to reap benefits in terms of increased traffic from Indian cities flowing into Abu Dhabi and beyond?

This official said as long as the foreign carrier continues to be a minority shareholder, it is unlikely to get any added benefits, outside of those it already enjoys as per the ASA.

So while the ministry will not alter permissions for Jet to take domestic traffic overseas, it will also examine in detail any request from Etihad, even after the deal, for increasing code share flights before agreeing to such an arrangement.

"Any carrier is required to take permission for code share and the Jet-Etihad combine will need permission too. Code shares will not be an automatic gain in this partnership," this official said.

This means Jet and Etihad will have to find ways outside of the well established practice of code shares to streamline overseas traffic towards Abu Dhabi . A high level team from Etihad, along with senior management people from Jet including promoter Naresh Goyal, is scheduled to meet Civil Aviation Minister Ajit SIngh tomorrow morning. This delegation is also expected to meet Commerce Minister Anand Sharma thereafter.

Last month, Jet had expanded the existing code share agreement where it has begun placing its code on Etihad's flight operating out of Abu Dhabi to Paris Charles de-Gaulle airport. This code sharing allows Jet Airways to offer its guests connectivity from India to Paris via Abu Dhabi . It is also in addition to the existing code sharing between Jet Airways and Etihad Airways on the Abu Dhabi- Mumbai/ Delhi routes operated by Jet Airways, and the Abu Dhabi Mumbai / Delhi / Cochin / Thiruvananthapuram / Kozhikode / Chennai / Hyderabad routes operated by Etihad.

The ministry's intransigence over allowing the two airlines more freedom on code sharing may actually not hinder their operations substantially if they manage to align flights from the Indian hinterland with those connecting to Abu Dhabi on the Etihad network, without a code share arrangement in place.

But this would be a tedious process and not as efficient as a code share, where guests are assured connectivity to the final destination.

As of now, the rules allow foreign airlines to pick up only up to 49 percent equity in Indian carriers. They also place restrictions such as CEO etc being Indian and the company being registered in India .

But what if Etihad actually increases its stake to 49 percent? On paper, the management control would be in Indian hands, but effectively Etihad may run the combined airline in this scenario.

There has been much speculation about Etihad delisting Jet Airways in case its stake in the Indian airline rises to 49 percent.

In this situation, how will the ministry control code shares and traffic rights to Etihad and the Jet-Etihad combine? This remains to be seen.

As of now, Etihad operates flights to and from Ahmedabad, Delhi , Bengaluru, Chennai, Hyderabad and Mumbai in India .

It is already known that any deal between Etihad and Jet would be a complex one, with the first step being a restructuring of Jet promoter Naresh Goyal's shareholding in the company.

At present, Goyal holds 80 percent in Jet Airways through Tail Winds, a company established in the Isle of Man. The first step would be this equity getting converted to Goyal's personal holding and getting an approval from the Indian government.

So even though the deal may be announced in a matter of days, it has several hurdles to cross.

by Sindhu Bhattacharya

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