MUMBAI, India – The recent decision of UAE’s flag carrier, Etihad Airways, to buy 24% stake in Indian carrier Jet Airways Ltd, according to aviation experts, is likely to change the business dynamics of the aviation industry in India. This partnership will result in greater dominance of Middle East-based carriers in Indian skies especially on Westbound routes (see box on number of destinations and flights operated per week in India by leading carriers on pg 10) and could also result in Etihad-Jet combine grabbing the numero uno position in the Indian market, with a significant global impact.
The operational synergy between the two airlines will also enhance connectivity. Competition for Westbound traffic from India is also likely to heat up and a resultant fare war may break out with passengers enjoying lower fares, which could lead to increase in the number of passengers and overall may boost travel and tourism to and from India.
What has suprised many in the aviation industry is that while the deal was in the air for some time, the official announcement was made the same day when India and UAE signed a new air travel bilateral agreement raising the existing weekly seats of 13,300 each side to 50,000 over the next three years.
While the deal with the cash-rich Etihad will see Jet Airways slip out of the debt trap, the Middle East carrier will be eyeing the expansive domestic network of the Indian partner and leverage on it to feed its network of destinations through its hub Abu Dhabi. It is estimated that an additional half million to one million passengers will be flying through the new hub using the Jet and Etihad combined networks. Jet is also looking at setting up a hub in Abu Dhabi. Industry observers feel that the while the benefit out of this partnership for Jet Airways will be short-term, Etihad will be the long-term beneficiary.
“The strategic alliance will have a short-term benefit for Jet helping the airline to clear its debts by having secured access to world’s fastest growing markets. On the other hand, Etihad will use Jet’s domestic network to compete with other Gulf carriers. In the long-run Etihad will be benefited with this partnership and will strengthen its share in the Indian market,” stated a top official of a Middle East carrier.
“The merger is expected to help Jet Airways retire its debt and save on interest cost that goes straight to its bottomline. Besides that the deal will help Jet expand its route network in India and abroad through self-operated and code-share flights. Jet and Etihad will gain against their competitors by way of incremental passengers and some cannibalisation from other airlines. The strategic alliance could bring considerable synergy benefits to the partners including joint procurement of aircrafts; fuel; personnel; Maintenance, Repair and Overhaul (MRO) and other goods and services; cross-utilisation of aircraft; joint training of pilots and cabin crew; shared sales forces in common destinations. All this is likely to show its impact on bottomlines of both airlines in the next 12-24 months,” observed Amber Dubey, Partner and Head-Aviation at Global Consultancy, KPMG.
The two airlines that are likely to be adversely impacted because of this deal will be Emirates and Air India. According to Dubey, increasing competition for Westbound traffic from India will force other regional carriers from the Gulf to work out counter strategies. “With Jet-Etihad deal, Westbound traffic out of India to Europe and the USA is going to be impacted considerably. Etihad’s other competitors in the Gulf may have to counter that through collaboration with other Indian carriers. There could be similar thoughts in the minds of other leading carriers in South East Asia after the landmark Tata-AirAsia deal,” he informed. Dubey also foresees intense fare wars between competitors to lure traffic on these routes. He further added, “We are sure other Indian carriers will have drawn up their war strategy. The intense competition may lead to sporadic fare wars during the upcoming summer season. Unless the vexatious Aviation Turbine Fuel and MRO taxes and airport levies are rationalised, we may see some consolidation or alliances in the domestic market in the next 12-18 months.”
However, the increasing competition among carriers will work in favour of passengers, feel industry observers. “The deal will have an extremely positive impact on passengers. They can expect more competition, better regional connectivity, higher efficiency, more choices, better services and lower fares. People in Tier-II and III cities will see enhanced global connect and that may give a fillip to the trade and tourism in those locations,” said Dubey.
Etihad Airways has agreed to subscribe for 27,263,372 new shares in Jet Airways Ltd at a price of Rs 754.74 per share. The value of this equity investment is USD 379 million and will result in Etihad Airways holding 24% of the enlarged share capital of Jet Airways Ltd.