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Anita Goyal’s Maltese breed dog has reasons to be worried. The pug recently managed to fly down from London but managed to clear the customs only after its owner paid a penalty of Rs 36,200 for violating aviation norms. But the way the Jet –Etihad deal is headed, the pug might have to get used to taking long walks.
The pug is not alone in its concern as the entire management as well as the govt of India has enough reasons to be worried. The secrecy behind the Jet-Etihad deal and the way it was announced within moments of seat enhancement agreement signed between the two countries had the stink of controversy. And you do not need a canine’s ability to smell a controversy in this deal.
The fact that various government ministries have raised questions over the deal is reason enough to believe that more has been given than received in the bi-lateral agreement. As against a mandate to increase weekly seat entitlements for airlines of both countries from 13,300 to 25,000, the civil ministry delegation returned after giving away 50,000 seats.
Reports say that Etihad agreed to the deal only after it was assured of more seats and more ports of call in India. That explains why Etihad agreed to pay a huge 32% premium for acquiring a 24% stake in Jet Airways. Etihad was willing to pay $370 million (Rs 2,050 crore on the day of the deal) for the stake after the seat sharing agreement was announced. Ironically, it is the same Etihad management which rejected an earlier offer of Rs 1,780 crore, saying the price was too high for a loss making company with a negative net worth.
There is little doubt that the seat sharing agreement announcement by the two countries was the deal clincher. However, while Etihad is a government owned national airline, Jet Airways is a private player. In signing the deal, the government has sacrificed the interest of other Indian aviation companies, especially its national carrier Air India. It is the sudden increase in the seat sharing which is the bone of contention among various ministries, including the finance ministry.
Sections of media have reported that the deal would be revised. Whether the terms are acceptable to Etihad and whether it will agree to pay the same premium, only time will tell. Subramanian Swamy has threatened to approach the courts through a Public Interest Litigation if the deal is not revoked, saying that the deal can lead to a collapse of domestic airlines and create a systemic risk for all financial institutions.
The quantum of damage this deal will cause to Indian companies in uncertain, but what is certain is that cancellation of the deal will cause irreparable damage to Jet Airways. The Naresh Goyal controlled company was scouting for partners not because it needed a seat sharing arrangement or better management skills but it desperately needed a partner to infuse funds as domestic banks were no longer willing to fund its losses.
For FY12,the company’s interest outgo was twice its operating profit. In order to raise more money from the banks, the promoters needed to pump in equity, which was provided by Etihad. If Etihad walks out of the deal, Jet Airways can go the Kingfisher way because it will not be able to service its debt by way of its own operations. The company has been able to survive over the years only by selling its aircrafts and leasing it back from the buyer. The excess fund generated by the sale kept the airline flying.
But there are only so many aircrafts to sell and anyways it is not a viable business model. Further, its Indian operation is likely to face headwinds in the form of increased competition from AirAsia. And if the deal falls through, there will be no interest from any other airline to pick a stake in Jet Airways. Etihad is the only hope for the company, even if it means letting the country down. Is it surprising then that the Maltese dog is worried.
