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Corporate Dec 4, 2012

Will Jet deal with Etihad allow cheaper fuel from Abu Dhabi?

By Sindhu Bhattacharya

New Delhi: If all goes well, Jet Airways' promoter Naresh Goyal will announce an equity deal with Etihad airways before the year ends.

According to sources, Goyal is planning to offload 24% stake in favour of Etihad at Rs 1600 crore. If the deal goes through at this price, it would mean Jet Airways has been valued at over Rs 6600 crore.

As per Sebi guidelines, Etihad will have to make an open offer to the public shareholders of Jet for another 26%. This means the cap in foreign airline investment would be reached through this transaction since India has only recently allowed up to 49% equity investment by foreign airlines in Indian carriers.

Sources confirmed this deal, saying it will be completed only when Jet Airways takes necessary permissions from the Home Ministry and the Foreign Investment Promotion Board.

As Firstpost has pointed out earlier, this deal would require Goyal to first transfer shareholding in Tail Winds, which is registered in Isle of Mann, to himself. It may also need him to issue fresh equity. To validate any deal with Etihad, Goyal will have to first remove this anomaly of a promoter of an Indian airline owning shares through a firm registered outside India. Goyal himself is an NRI.

Sources confirmed this deal, saying it will be completed only when Jet Airways takes necessary permissions from the Home Ministry and the Foreign Investment Promotion Board.Reuters

According to sources, the two airlines will reap many benefits if the deal goes through including code sharing on key routes and economy in jet fuel costs.

The latter is quite critical for any airline operating in India since India has one of the highest taxation rates on jet fuel anywhere in the world. If a deal with Etihad allows Jet Airways to pick up cheaper fuel from Abu Dhabi, it could mean a dramatic turnaround in its fortunes since jet fuel accounts for close to half of any airline's costs.

Then, till now Jet has been operating internationally with Brussels as its hub; it wanted to shift base to Munich but now, with this deal, it may actually make Abu Dhabi its hub.
For Etihad too, the deal could prove a win-win. It will get access to traffic originating from India's interiors without having to seek permission from the Indian Government for increasing either ports of call or seats per week from India.

Besides, Eithad will be in a better position to fight competition from other Gulf competitors such as Emirates and Qatar Airways for Indian passengers through this deal.

But any formalisation of the deal is still some months away. As per the guidelines for foreign carriers wanting to invest in Indian airlines, the new entity will initially have to seek approval from the FIPB. It will need to ensure that the CEO is Indian, board is majority Indian and the JV company is registered in India.

It will also need to seek laborious clearances for any foreign employees from the Home Ministry, from a security aspect.

by Sindhu Bhattacharya

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