Mid-air break-up

The Jet-Sahara airline deal may have been doomed as soon as Deccan Aviation listed on the stock exchanges some three weeks ago. With more aircraft and a bigger market share than Sahara, Deccan nevertheless commands a market capitalisation that is only a fraction of the Rs 2,300 crore value that was put on Sahara. It was inevitable then that Jet would seek fresh terms, and the demand for a 20 per cent cut in price should have been the least to be expected from a savvy management of the kind that has built up Jet over the years. Indeed, the stock market never liked the Sahara deal from the beginning""Jet's share price dropped as soon as it was announced, and recovered partially last week when it was called off. The moral of the story is that hunger for building market share or for preventing capacity from going to a rival, should not blind one to the underlying value of a business.

The blunder is said to have cost Jet Rs 180 crore in earnest money and losses till date on running Sahara, and could cost it a further Rs 500 crore lying in escrow and now the subject of dispute. If Jet has been willing to call off the deal regardless of this potential loss, its real valuation of Sahara was not 20 per cent less than Rs 2,300 crore, but a much lower figure. A reasonable interpretation would then be that Jet has been playing a tactical game to extricate itself from a deal that had been re-assessed, and the argument about lack of home ministry clearance for Naresh Goyal (Jet's chairman) to take over as Sahara chairman, could come in handy for the escrow battle. Sahara will of course cite the doctrine of promissory estoppel, which says that if one party to a contract has done everything required of it, and the other party is in breach, no liability attaches to the first party.

Even if Sahara hopes to win the escrow battle, it will have suffered loss of standing with customers because of the collapse of the deal. The airline's image in the market is now of an unviable service, and so its future as a stand-alone operation must be in doubt. In any case, the larger Sahara group is under pressure from the Reserve Bank of India to limit its business investments to the extent of its owned funds, so a sale is still on the cards. However, no new suitor is likely to pay anything approaching Rs 2,300 crore. In other words, victory in the escrow case has become critical.

Meanwhile, the episode has exposed chinks in aviation as well as competition policy, and rules were being made up as events moved along""raising questions about the government's impartiality. The Competition Commission remains a non-starter, and this is a problem when two entities merge to jointly command a 50 per cent market share""for no one has independently gone into the issue of what that might mean for customers. Equally, the issue of transferring landing and other rights became contentious, so much so that Jet had decided to retain a separate identity for Sahara. There has been too much arbitrariness on display in aviation""who qualifies to start an airline, on what terms (capital, fleet size, etc), and so on. An independent regulation of the aviation sector has therefore been a felt need for some time (despite the imperfect record of sector-regulators). The government needs to get moving, even as Jet and Sahara pick up the pieces and fight it out in court.