Corporate Feb 14, 2013
New Delhi: The impending equity partnership between Jet Airways and Etihad could sound the death knell for Air India.
Not only will the new Jet-Etihad combine be a bigger entity capable of giving fierce competition to Air India (AI) on international routes, AI's own problems like the largest debt pile, lack of a fleet growth strategy and absence of a domestic low-cost arm would hurt the national carrier on the domestic front too.
To top it all, the changing world aviation order where the Gulf airlines (Emiartes, Etihad and Qatar) are enhancing their presence through global alliances is already posing a grave threat to AI's survival.
If amid all this, the government agrees to review bilateral traffic rights with the Gulf nations (especially with the UAE), AI's future could well become uncertain.
AI has already panicked, with Chairman and MD Rohit Nandan seeking protection against the might of the Jet-Etihad deal from the Ministry of Civil Aviation early this year. But panic alone wouldn't help AI and the ministry appears, as of now, disinclined to mentor an airline in which the government holds the entire equity. It is a sorry state for any airline to be in, more so since AI has already been promised Rs 30,000 crore bailout package subject to it meeting equity parameters.
So either the government should help the carrier to fight competitors who are far better armed with fleet, connections and a massive funds infusion, or it should allow AI to find a strategic partner and slowly exit the business of aviation.
As of now, Etihad Airways is expected to pick up 24 percent stake in Jet, becoming the first global airline to acquire any equity stake in an Indian carrier after the norms for foreign direct investment (FDI) were liberalised.
According to an exhaustive report by aviation consultancy Centre for Asia Pacific Aviation (CAPA), the Jet-Etihad deal would be a killer for AI on international operations as well as domestic routes.
"The absence of a long-term fleet strategy, with no pending narrow body orders and no longhaul aircraft commitments beyond 2015 limits the future business case (for Air India)," CAPA said today.
The combined Jet-Etihad might will have a fleet of 180 aircraft when AI's operational aircraft are only 100 in a fleet of 127 aircraft. In fleet size alone, Jet-Etihad will tower over AI.
CAPA says that there is no long-term fleet strategy for AI. It has no pending narrow body orders and no long-haul aircraft commitments beyond 2015, limiting the future business case.
Compare this with Jet (outside of the partnership with Etihad), which is expected to place an order in the coming months for up to 100 narrow bodies - a mix of B737 MAXs for the full service operation and A320neos for JetKonnect.
Also, 46 B737-800s from an earlier order are still to be delivered. Jet (standalone) currently has a wide body fleet of 23 aircraft (13 A330s and 10 B777-300ERs) of which five B777s have been subleased to Thai Airways, leaving an operational fleet of 18 aircraft.
CAPA estimates its wide body fleet size will increase by at least 10 aircraft in the next 12 months.
On the debt front too, AI is on a very weak wicket. As of now, its debt stands at about $9 billion, which is twice the debt of all Indian carriers put together and more than four times the debt on Jet Airways' (standalone) books. Higher debt means higher servicing costs and a much weaker balance sheet.
Air India's current operations anyway leave a lot to be desired. Take for example its loss making flights. Of the 189 routes, only 12 meet total costs which means not even one flight in 10 is able to meet operational costs.
A further 82 cover their cash costs but not their total costs and 95 routes, or just over half, do not even meet their cash costs.
International routes are bleeding particularly badly and account for 80-90 percent of losses.
In this scenario, not only will the Jet-Etihad deal spell a disaster for AI in terms of aircraft loads and financials, the government's intention to open up Indian market for more bilateral air traffic rights to the Gulf nations could drive the last nail in AI's coffin.
The three major Gulf carriers - Emirates, Etihad and Qatar Airways - already have 311 wide body aircraft in service and a massive 418 on order.
Recently, Emirates has partnered Qantas, Etihad has a network of equity investments and codeshare arrangements which will be at Jet's disposal soon.
And global airline alliance Oneworld has invited Qatar Airways to join in. In this scenario, if the government allows Gulf carriers more points of call, more seats per week or more flights (or all three things), AI would be left with virtually no business case at all.
"One of the critical impacts of the Jet-Etihad deal is likely to be a liberalisation of the India-UAE bilateral. This will benefit not only these two carriers, but also
Emirates, flyDubai and Air Arabia. Meanwhile Qatar Airways, Turkish Airlines and Singapore Airlines are all waiting in the wings seeking an expansion of bilaterals as they have exhausted their current entitlements," says CAPA.
So the picture which is emerging is this: AI is surely going to face massive competition on international routes after the Etihad deal and also because of more rights to foreign carriers.
On the domestic market, where it is relatively better placed, it is facing capacity constraint. Also, unlike Jet and other LCCs, AI has not been able to develop a clear cut low cost domestic offering when at least 70 percent of the domestic market is low cost.
CAPA has suggested massive funds infusion into AI, many times more than the current bailout package which will pump in over Rs 30,000 crore into the debt laden, loss making national carrier.
CAPA's recipe suggests $12-14 billion investment in expanding fleet alone (it suggests 240-280 new aircraft over the next decade).
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