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Corporate Dec 12, 2012

Etihad's growth recipe lies with Jet, so why the interest in KFA?

By Sindhu Bhattacharya

New Delhi: Etihad Airways is romancing two Indian brides at the same time but who is it really after?

It has been in advanced talks with India's second largest airline by passengers carried, Jet Airways and has already added to the code share between the two as late as yesterday. But reports suggest that Etihad has now also begun negotiations with Kingfisher Airlines for a possible equity partnership.

A relative newcomer to the aviation business, the nine year old Abu Dhabi-based carrier has been on an acquisition drive this past year, taking minority equity stakes in Virgin Australia and Aer Lingus and raising its shareholding in Air Berlin and Air Seychelles, according to news reports.

Its CEO James Hogan was quoted as saying earlier that any future acquisitions would follow the same theme, with Etihad not interested in majority ownership but focused on growth.

Which ever bride Etihad picks finally, there seems to be an expensive wedding in store in the near future. Debarka Banik/Flickr

In the Indian aviation pecking order right now, there is no doubt that if a partnership with Jet works out, Etihad will find readily available aviation infrastructure, fleet, route connectivity and access to smaller Indian cities. In short, Etihad's recipe for growth is an alliance with Jet Airways. So why has it opened another flank with Kingfisher?

Much of Etihad's aggression in the Indian market is perhaps modelled on its Gulf cousin Emirates, which many have mockingly called the official carrier of India.

Emirates is the largest foreign airline operating to and from India, enjoying sixth freedom rights which means it carries large number of Indian passengers to Doha and provides them onward connections.

The battle between Gulf carriers for the Indian market makes sense because India is one of the few aviation markets in the world which is underserved and has a vast growth potential in terms of air traffic.

As of now, 11 percent of Emirates' total global network capacity is deployed in India and the airline routinely manages to fill over 80 percent of its 54,200 seats a week from India.

n this context, it becomes critical for Etihad to gain a firm toehold in India through an acquisition which not only gives it domestic scale but also established infrastructure and marketing muscle - two things Jet could well provide and both unavailable with Kingfisher right now.

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

So what does Etihad aim to gain by aligning with Kingfisher, which has been grounded since October one, is steadily losing planes to lessors, struggling with employee salary dues for much of 2012 and has over Rs 7000 crore debt on its books?

In fact, any deal with Kingfisher would virtually mean starting an airline in India from scratch.

Is Etihad looking to use an airline like Kingfisher as a low-cost Indian domestic carrier which feeds its own global network?

A story in the Economic Times this morning cited reports on Tuesday in certain section of the media saying Etihad would pay Rs 3,000 crore for a 48 percent stake in Kingfisher. That values the airline at Rs 5,600 crore, almost four-and-a-half times more then its existing market cap of Rs 1,261 crore.

The same ET story quoted sources to say Etihad finds the huge premium demand from Jet intimidating. It values Jet Airways at $1.4 billion (a 65% premium at the current market cap of Rs 4,639 crore) and for a 24% stake, Etihad will have to pay nearly about $300 million.

"Of course, the advantage is that with Jet, Etihad will have a functional airline which has debt secured by assets. With Kingfisher, this is clearly not the case. However, the kind of premium that Jet is demanding might limit the upside for Etihad in case the deal works out in Jet's favour," a Kingfisher official reasoned.

Unconfirmed reports suggest Jet promoter Naresh Goyal wants more than half of the money Etihad will spend to acquire his airline upfront.

And besides valuation, Jet and Etihad have some more knots to untie: Jet's ambitious expansion in Europe which would clash with Etihad's ambitions for the same markets and also rumours over differences between the two airlines over management control.

Indian laws allow any foreign carrier to buy only up to 49% equity in an Indian company while placing restrictions such as CEO etc being Indian and the company being registered in India.

So is Goyal being difficult at a time when the deal could well swing his way with a little flexibility? He also has the task of restructuring his own ownership in Jet, which is presently through Tail Winds - a company registered in the Isle of Man - making any deal with Etihad a little more complicated.

But at the same time, has Kingfisher promoter Vijay Mallya promised a little more than just a grounded airline, including his F1 franchise to get Etihad to partner with him?

With Kingfisher, Etihad gets unquestioned management control but also a large dose of debt and an airline which has not flown for close to two months on domestic routes and for many months internationally.

Kapil Kaul of Centre for Asia Pacific Aviation (CAPA) is certain that the expansion of code share between Jet and Etihad is a sure indication that the two will deepen their alliance into an equity partnership in the future.

He also says that in case Etihad buys 49 percent in Jet, it will delist the airline.

Which ever bride Etihad picks finally, there seems to be an expensive wedding in store in the near future.

by Sindhu Bhattacharya

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