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A Jet-Etihad deal won’t comfort many investors

Jet's 1st deal with Etihad was signed in 2013, which took 15 months & 46 trips by Goyal and the Jet management.

, ET Bureau|
Updated: Jan 21, 2019, 09.20 AM IST
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MUMBAI: Life seems to have come full circle for Jet Airways and Etihad Airways. And not in a nice way.

The two are once again stuck in a complex web of altercations that coloured their initial talks before the Abu Dhabi-based airline bought 24% stake of its Indian peer. Only this time, it seems the discussions are more bitter, the efforts at cornering out the other party are more pronounced, and the brinkmanship is more prominent than ever before.

Jet, facing the worst financial crisis of its existence and having failed to garner definitive interest from any other investor, not for want of trying, has finally knocked on Etihad’s door for additional funding.

But Jet’s chairman Naresh Goyal wants to still own and manage the airline, according to people in the know.

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Etihad wants a Goyal-less Jet, going by its communications to Jet’s lenders.

Goyal last week wrote in a letter to lead lender State Bank of India’s chairman Rajnish Kumar that he was willing to invest Rs 700 crore in the airline, but his stake shouldn’t fall below 25% from the current levels of 51%.

It wasn’t clear why he had let his airline go so far into its current crisis before making this offer.

SBI, along with other local lenders, is trying to formulate a resolution plan for the airline. Jet defaulted on loan repayments in December.

Goyal’s letter followed one from Etihad chief Tony Douglas who wrote to SBI saying the Gulf airline wouldn’t pay a rupee more than Rs 150 per share — a 46% discount to Jet’s stock price at Friday’s close — to put in additional equity in Jet. He also claimed that Jet may soon be grounded by aircraft lessors who haven’t been paid and that it has the cash to survive only for a week.

Jet has denied the latter claim.

Etihad has put forward other stringent conditions to investing in Jet. Those include no pledging of its shares as collateral against loans to Jet and no open offer even if its shareholding goes beyond 25%. Indian rules trigger an offer for an additional 20% when the 25% shareholding mark is reached.

Douglas’ letter, a copy of which was also sent to outgoing aviation secretary RN Choubey, marks the bitterness between the two partners, which would set investors thinking what will happen to Jet if Goyal and Etihad were to remain partners in the airline, albeit under a completely different structure.

Analysts aren’t too positive about this partnership.

“Etihad is definitely not good for Jet if it has to survive and sustain its identity,” said Mark Martin, founder of Dubai-based aviation advisory Martin Consulting. “But having said that, what Goyal has done in the last six months is insanity. He seems to be on a total power trip and it’s no longer about Jet’s survival and wellbeing at all. If Etihad takes over, it is Goyal who has brought it upon himself,” he said.

Etihad’s own losses — over $3.5 billion in the last two years — are cited by analysts as a reason for its reluctance to invest more in Jet.

“My take is Etihad may not be tempted to push ahead given the restrictions on foreign direct investment (FDI) as well as uncertainty over Goyal’s position in the company,” said Shukor Yusof, founder of Malaysian research firm Endau Analytics. “At the same time it’s perhaps unwise for Etihad to go deeper into Jet given its own financial difficulties. Moreover the Indian sector is a very tough market.”

Foreign carriers are allowed to own up to 49% in an Indian airline.

Others have criticised Goyal.

“I understand Mr. Goyal has made an offer to invest approximately $100 million of his own money in the airline provided he retains control. Given Jet's outstanding debt (over Rs 8,000 crore), Rs 700 crore from Mr. Goyal is a drop in the bucket,” said Steve Forte, a former CEO of Jet and now an independent consultant.

“If Mr. Goyal's offer is accepted by the banks then nothing will change and the downward spiraling of Jet Airways will continue. The airline will burn through the new cash infusion just like it did with the initial infusion from Etihad and any other loans it received,” he added.

DRAMA BEFORE 2013 DEAL
Jet’s first deal with Etihad was signed in 2013, after considerable drama.

The deal famously took 15 months and 46 trips by Goyal and the Jet management to its future partner’s headquarters in Abu Dhabi. Jet’s ailing financial health then was less public than this time, but the airline was desperate for funds.

Etihad invested more than Rs 2,000 crore in Jet then at a considerable premium to its market value, arranged soft loans for the Indian airline, and paid its bills.

“At the very time of signing the first deal with Etihad, Goyal knew what he was getting into,” said Martin. “Etihad is known to exercise complete control over the airlines it invests in and bring them to be feeders for its operations. That’s what it tried to do with Jet. It tried to control its operations, its management and then its board.”

Goyal wouldn’t have that.

People in the know said Etihad CEO and its nominee on Jet’s board James Hogan cut down his visits to Jet and communication between the two airlines decreased.

In responses to media queries, Jet has always maintained its relations with Etihad are as firm as ever.

Meanwhile, Etihad’s other airline investments such as Air Berlin and Alitalia soured in Europe, and it decided to tighten its purse strings. A change in management followed, marked by the exit of Hogan and CFO James Rigney, both Jet board members.

Goyal saw his chance and quickly charted out a different path. He quickly stitched a far-reaching commercial agreement with Air France-KLM and Delta Air Lines, their trans-Atlantic partner.

While the tieup has given Jet several codeshare customers, it doesn’t seem to have worked in getting Goyal a potential investor when Jet required one. Jet tried to woo Air France-KLM as well as Delta for funds, but in vain.

What happens of the Jet-Etihad talks remains to be seen, but investors would be justifiably worried about the future of a partnership that begins on such an odd note.
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