Foreign airline investment takes off with Etihad deal

By Nimish Vakil and Sneha Rao, Tyabji Dayabhai
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Within just seven months of the government of India permitting foreign direct investment (FDI) by foreign airlines in the Indian aviation sector, Etihad, Abu Dhabi’s flag carrier, has struck a deal to buy a 24% stake in India’s foremost airline, Jet Airways.

Jet was among the first to enter the aviation sector when India’s skies were opened up to private operators in the early 1990s. Now it has again taken the initiative to forge the first partnership between an Indian and a foreign airline – a partnership that will certainly benefit Etihad, Jet, airport infrastructure and passengers in general.

Mutual benefits

The capital infusion from Etihad will enable Jet to achieve sustainable profitability. Jet can use the sale proceeds to repay its huge debt and may even consider adding to its expansion plans, especially in the Middle East. It will be able to widen its network through “code share” alliances, whereby a seat purchased from one airline is on a flight operated by a cooperating airline under a different flight number or “code”. Jet will also be looking to decrease operating costs by sharing engineering and airport services. It may also consider changing its hub to Abu Dhabi to enable it to buy fuel at cheaper prices.

Nimish Vakil
Nimish Vakil

Etihad on the other hand will be able to tap into India’s fast growing travel market, which provides huge passenger traffic to Etihad’s Middle Eastern, European and North American destinations. This will further enhance the airline’s already strong and strategically well placed international presence, partly owing to its minority stakes in four other global airlines.

Together, Jet and Etihad will benefit from synergies and cost savings in areas including fleet and operations maintenance expansion, product development and training. Further advantages include opportunities for joint purchasing of fuel, spare parts, equipment and external services such as insurance and technology support.

Other gains

The alliance will bring additional traffic and revenues to tier II and III airports as well as to metro airports. This will boost growth in airport infrastructure and services as Etihad is expected to bring with it service practices on par with global standards.

Passengers will benefit from lower fares, better regional connectivity and a far greater choice of destinations. Investments in the Indian aviation sector could be on the rise as a result of the Jet-Etihad deal and others to follow.

Repercussions

How is this affecting Air India, India’s national flag carrier, which has an operating deficit of about US$2.6 million a day and reported a loss of about US$1.4 billion for the financial year ended in 2012? When the cream of Air India’s international revenue comes from its operations in the Gulf region, the Indian government on one hand is permitting a deal that will move passenger traffic from major Indian hubs to Abu Dhabi and on the other hand infusing funds into Air India to keep it afloat.

The long-term effect of such deals needs to be carefully evaluated by the Indian government. With a huge increase in the bilateral arrangements between India and Abu Dhabi and with Dubai and Qatar in the queue, is India helping Etihad, Emirates and Qatar Airways fortify international hubs at Abu Dhabi, Dubai and Doha at the expense of Mumbai and New Delhi and destroying its national carrier, Air India?

Conclusions

The Jet-Etihad deal could bode well for other private Indian airlines looking to partner with foreign carriers, such as Emirates, which is likely to face increased competition and therefore to seek a local partner in India. Other private Indian carriers also may see no choice but to strike similar alliances or risk losing seats on international routes.

Sneha Rao
Sneha Rao

Before embarking further on permitting FDI in the aviation sector, it would be prudent for the Indian government to focus on formulating and implementing a new national aviation policy, covering wide ranging issues including FDI, amendments to the Aircraft Act,1934, amendments to the Civil Aviation Requirements and regulations for implementation of the Cape Town Convention (which has now been ratified by India).

It is important for the government to ensure through its regulatory framework and policy formulation that Indian carriers do not lose control of flights and routes to and from the country as result of liberalization.

If the investment by Etihad in Jet is a trend-setter for the likes of Emirates and Qatar Airways looking to invest in Indian carriers, will it be a win-win situation for the partnering airlines as well as the Indian aviation sector as a whole or will the Indian aviation sector find itself in the hands of Etihad and others?

Nimish Vakil and Sneha Rao are both partners at Tyabji Dayabhai. Tyabji Dayabhai was established in 1872 and has over 25 years’ experience in handling all types of aviation transactions and litigation.

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