Jet Airways: Expensive fare

It's not the best of deals but it's done and this time there's no looking back. The Rs 6,794 crore Jet Airways will buy out the beleaguered Air Sahara for an enterprise value of Rs 1,450 crore, a good 35 per cent lower than what it had committed to pay when it first inked a deal in January 2006.

Even at this price, the deal has not come cheap, but Chairman Naresh Goyal must be relieved that a long legal battle has been avoided. And also that the payment terms are fairly easy: Rs 400 crore has be forked out now, but the remaining Rs 550 crore can be paid out later in four tranches.

All Jet can do is to move on and make the best of what it has : a fleet of 24 aircraft"�seven Bombardier jets and 17 Boeing 737s"�, peak hour slots on prime routes, 17 parking bays and a market share of 8 per cent. Jet has already spent around Rs 180 crore while running the Sahara operations over the past year. It may need to spend another Rs 100 crore or so to refurbish some of the aircraft.

Nonetheless, Jet could put the Sahara fleet to good use. It may not want to start a Low Cost Carrier (LCC); the management has consistently said that it's difficult to run a no-frills carrier in India because costs are the same for all carriers.

Analysts agree. Says Gautam Roy, who tracks the aviation space at Edelweiss Securities, "It's not a good option since Jet will need to build a completely new business model. And that could stretch its resources at a time when it needs to focus on the overseas business, which is going to drive growth in the years to come."

Jet's best bet, Roy believes could be to use some aircraft for domestic routes and the rest on international routes. "That way, the capacity in the domestic market would be reduced and Jet would lose less money. At the same time, it can increase the number of overseas routes," he explains.

True, the aircraft can be used for some of the short-haul south-east Asian routes. Besides, they will come in handy when Jet starts flying to the Gulf, a lucrative market, in 2008. Says Nikhil Vora, vice-president, SSKI Securities, "Sahara has permission to operate in the Gulf market and that's a big benefit because unless the rules are relaxed Jet and Sahara will be the only two private carriers flying to the Gulf."

As for the home market, Jet can use some of the peak- hour flying slots to its advantage and try and improve both market share and yields. Sahara's heavy discounting of fares has caused much heartburn, and more seriously, cash burn for competitors. So, it would suit the industry just fine, if Jet pulled out flights from some of the more crowded routes and reallocated them.

Says Siddhant Sharma, CEO, Spicejet, "If Jet reduces flights on crowded routes like Bombay-Delhi or Bangalore-Delhi, the fares on these routes should stabilise." Sharma doesn't believe fares will drop too much, but says the huge discounting that airlines are resorting to, could stop.

The biggest gainer could be Jet. The airline has avoided increasing capacity, even though it had planned for an expansion of between 10-15 per cent in seat capacity at the beginning of 2006. Others like Kingfisher, Deccan Aviation, Indigo and Spicejet, however, have added capacity. Between January"�December 2006, approximately 70 aircraft were added to a base of around 175 aircraft. While, over 52 million people flew the Indian skies during that period, it was not enough to keep fares at reasonable levels.

Jet has not just lost market share over the past year, its yields too suffered: even in the December quarter of 2006, which is the best for the industry, Jet was compelled to sell as much as 70 percent of its fares at a discount. Now that it once again has a market share 34 per cent (with Sahara), it must capitalise on it.