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BW Businessworld

Naresh Goyal’s New Flight

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Just a few days before the Indian government was supposed to sit down for negotiations with the United Arab Emirates (UAE) for increased bilateral seat entitlements, Naresh Goyal made his audacious move. It was typical of the man’s operating style. “He won’t wait for the opposition to build up,” says an aviation ministry ­official referring to the way the Jet Airways chairman manoeuvered his proposal past the aviation ministry, which then paved the way for the Etihad Airways-Jet deal that was announced on 24 April.

On 17 April, Goyal had submitted an ambitious proposal to the aviation ministry seeking almost three-fold increases in seat entitlements from India to Abu Dhabi along with rights to fly out of 24-odd airports in India. The move came just days ahead of the government’s 22-24 April negotiations with the UAE for bilateral seat entitlements, leaving no time for other players to react.

Goyal essentially wanted to establish Abu Dhabi as a hub for Jet’s international operations under an investment deal that he was negotiating with Etihad for several months. Passengers from across the country would be flown to Abu Dhabi and onward to other destinations in the west.

On 17 April, even as Jet officials were briefing select media outlets individually, Goyal flew into the capital to meet Union civil aviation minister Ajit Singh (he met him on 18 and 19 April) to explain his plan and to work his charm and skills of persuasion — which has never failed in the past — on authorities to make them see things his way. The speed of his moves caught rival airlines as well as the Delhi International Airport (DIAL), which opposed the moves, by surprise.

On 22 April, even as the drama played out in the capital (sources say Singh met both finance minister P. Chidambaram and external affairs minister Salman Khurshid during the day and the Prime Minister late in the evening to clear the Jet proposal), a team of Indian officials led by joint secretary in the ministry of civil aviation, Prabhat Kumar, landed in Abu Dhabi to hold talks about increasing seat entitlements — by almost 40,000 seats from the current 13,300 seats per week — since the deal with Etihad would be contingent upon that.

Finally, both the deal and the increased seat entitlements materialised on 24 April. Etihad announced it was taking a 24 per cent stake in Jet for $379 million (Rs 2,085 crore at Rs 55 a dollar), valuing the Indian airline at $1.2 billion (some analysts feel that a similar deal some years ago may have fetched Jet a higher valuation).

Etihad will also facilitate another $370-million (about Rs 2,035 crore) loan at very low rates of interest (3-4 per cent). Under the deal, Etihad will subscribe to 27.3 million new shares of Jet at Rs 754.7 ($13.90) apiece. That’s a premium of 32 per cent over Jet’s closing share price of Rs 573.85 on 23 April on the Bombay Stock Exchange. Jet’s scrip, which had been on the upswing since 22 April in anticipation of the deal, closed at Rs 636.20 on 25 April on the BSE.

Meanwhile, the Indian government increased the seat entitlements to the Gulf to almost 50,000 seats per week.The increased bilateral seats and the new hub plan of Jet has bought some breathing space for Goyal whose airline has been consistently losing money even as its debt piled up. Jet’s total debt stood at $2.6 billion by the end of December 2012. According to senior government sources, if Jet had not got the Etihad investment, chances of it going the Kingfisher way were high. The government was keen to prevent one more airline going down the tube, and that also played a role in Jet getting the proposal through, they said. In fact, industry sources said that Etihad had almost pulled out of the negotiations three weeks ago due to the inordinate delays and lack of cooperation from the Indian government.
 
The Game Plan
Under the new plan, Jet officials say they are looking to give more depth to the airline’s international business, which already accounts for 55 per cent of its total ­revenues. It makes sense because the stiff competition and high costs of operating in the domestic market have been dragging down Jet’s bottomline. Under the new plan, the carrier wants to develop a dual-hub strategy, as its current hub in Brussels is too far ‘west’ to service countries in the Gulf and West Asia. Jet currently flies Delhi-Brussels-Toronto and Mumbai-Newark using Brussels as a hub — last year, it withdrew a third route, Chennai-JFK (industry sources feel that if Abu Dhabi works out as a hub, Jet might not be averse to abandoning Brussels as a hub).

At present, international traffic in and out of India is around 40 million a year. Of these, traffic to countries to the west of India (Gulf, Europe and so on) is 28 ­million, while it is 12 million to countries to the east. The ­maximum traffic is to the Gulf countries (15 million), followed by Europe (6.5 million) and North America (4 million); the rest is to Africa and South America. The traffic to the west of India is expected to grow at 10 per cent and reach 40 million in the next three years. “And, even if we get the entire entitlement that we have sought, we will be able to fly only 4 million passengers of this 40 million by 2016,” says a senior Jet official, adding that its share of this traffic would still be lower than what Emirates, the current champion in this market, has today.

Jet is also looking to capture some of the 60 million passengers who fly across India (from west to east) every year (for instance, from the Gulf/West Asia to Asia/Australia), who, it believes, can fly through India if given an option. “The fifth freedom rights — which India has negotiated with the Gulf countries and which could be very lucrative — is, as of now, totally unutilised,” says the Jet official. The proposed hub-and-spoke operation using Abu Dhabi as a hub is precisely towards this end, he says.

The hub-and-spoke operation would work like this: passengers from 24 cities in India would fly directly to Abu Dhabi. Passengers from, say, Tiruchirappalli, Kochi and Coimbatore would fly to Abu Dhabi at roughly the same time and then onward to, say, Kuwait, Jeddah and Oman. “Ninety per cent of the onward traffic would fly on Jet aircraft; only 10 per cent would go to Etihad,” explains the Jet official. Earlier, the airline had considered making Munich the second hub, but given the traffic trends out of India, the Middle East proved ideal.
 
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Jet’s move apparently also stems from its desire to be identified as much as an international carrier as a ­domestic one. At present, nearly 84-85 per cent of the air traffic in and out of India is carried by foreign airlines such as Emirates, Qatar Airways, Lufthansa and British Airways. And the rest goes to Indian carriers such as Air India (9 per cent) and Jet (6 per cent). “We see no reason why Indian carriers should not be allowed to carry more,” says a top aviation ministry official.

The deal also works well for the UAE carrier, which has an equity stake in Air Berlin (29 per cent), Virgin Australia (10 per cent) and Air Seychelles (40 per cent). It has code-share deals with 34 other airlines globally, and all these help it cover 325 destinations worldwide. The deal with Jet gives it the kind of access to India that would take any airline years to build.
 
A Bumpy Ride
The deal materialised after much turbulence. At some point, Eithad got worried about the safety of investments in India, especially after a court in Hyderabad sent summons to the chairman of Emaar (an influential UAE citizen). Sources say the Indian government had to allay those fears before the sheikhdom could be convinced. Then, to make matters worse, the Prime Minister unexpectedly cancelled a visit to Abu Dhabi before he went to South Africa. In fact, Khurshid had to fly down following the cancellation to placate the powers that be in the UAE.

Things came to a head in early April, when Etihad almost walked out of the deal, say sources, annoyed by persistent delays. By this time, the government had decided that the deal needed to be done. So, the machinery in New Delhi swung into action to convince Etihad not to pull out. Letters were shot off by Khurshid and commerce minister Anand Sharma to placate the UAE authorities. “I am not sure this is the ideal deal. But there is an economic rationale behind it that cannot be disputed. Moreover, the last thing the government wants to see is another airline go under,” a senior official involved in the deal says.

The final deal was cleared despite several dissenting voices. Although they barely had a day to put their heads together and react cohesively, almost all the airlines and airport operators that met at the Director General of Civil Aviation’s office on April 18 — a day after Jet formally submitted its plan — voiced their protests to the massive increase in seat entitlements that Jet was demanding.

The airport operators argued against Jet making Abu Dhabi a hub, while most airlines said they were opposed to the move on the ground that “supply is more than demand on the route” and that domestic airlines plying on this sector would bleed even more. Amongst the domestic carriers, only Jet and Air India Express fly to Abu Dhabi from Mumbai and Delhi at present.

However, according to sources, the government maintained that it had to look at Jet’s proposal in a broader light and that while the arguments against Jet’s plan to fly out of 24 cities were “lame”, those of airport operators were even “lamer”. “No one has stopped Air India or any private airline from coming up with a similar plan with a Gulf hub — not just Abu Dhabi. But who has come up with one,” asks a senior government official. The fact is that no other airline has taken the initiative thus far.

Also, it is argued that no one has stopped airports from trying to develop themselves into a hub. But with the kind of charges the two main airports (Delhi and Mumbai) levy, carriers have, in fact, withdrawn operations from them — let alone consider them as hubs.

Civil aviation minister Singh who met BW also dismissed these arguments saying the country’s interests had to come before those of any specific player and it was from that point of view that the government had given its green signal to Jet’s plan (see interview on Page 50).

Surprisingly, there was no representation from Emirates, which stands to lose the most from Goyal’s plan. Emirates flies the second largest number of passengers in and out of India (after Jet) — it flew 4.5 million passengers in and out of India in 2011-12; 13.04 per cent of its total global market share. Although the two airlines would compete with each other, officials say that since Dubai and Abu Dhabi are two states of the UAE, the benefits that accrue to the UAE as a whole would only go up.

The lone supporting voice from the industry came from Airports Authority of India chairman V.P. Agrawal, who claimed to be in favour of Jet’s plan as he sees greater usage of airports under the authority.

Goyal timed his move to perfection. The government did not want to see Jet going under, and it could also not ignore the strong economic rationale behind Jet’s proposal. During the tenure of former civil aviation minister Praful Patel, seats had been given (through increased bilateral entitlements) to both Emirates (54,000 seats a week with flights out of 10 airports) and Qatar Airways. The new Jet-Etihad combine will be serious competition to both. With an Indian carrier set to partake substantially in the profits and the business generated from the deal, it was inconceivable that permission would have been denied to Jet. By all accounts, Goyal seems to have pulled off quite a coup — at least for the time being.

(This story was published in BW | Businessworld Issue Dated 20-05-2013)