Global carriers Lufthansa and KLM-Air France, bulge bracket private equity funds including the Blackstone Group, KKR & Co, and TPG Capital have joined the race along with US airlines Delta to invest around $200-250 million in India’s second largest airline Jet AirwaysBSE 1.17 % is looking to raise capital to fund operations, face growing competition amidst severe macro headwinds, said multiple sources in the know.
Jet Airways, in which Abu Dhabi’s Etihad Airways owns a 24 per cent stake, has adopted a network strategy independent of its investor and has roped in JP Morgan to raise funds, including through a possible stake sale. However talks with the potential investors are not yet advanced and no binding offers has come in, the sources mentioned above cautioned.
Indian rules allow 100% FDI in scheduled commercial airlines but foreign airlines, though, are barred from holding equity stake in Indian carriers above 49 per cent. With Etihad already on board, Jet only has limited headroom and can bring on board another strategic partner by selling up to 24% stake in the airline.
With a current market cap of Rs 6,880.59 crore, a 24 per cent stake sale could help raise Rs 1651.2 crore ($256 million). “Jet Airways does not comment on speculation. As a listed entity, all material decisions are taken by the Company’s Board and duly conveyed at the appropriate time,” Jet Airways spokesperson told ET.
Spokespersons of Blackstone, KKR and TPG and Lufthansa all declined to comment. The Lufthansa spokesperson added, “We would like to add that with a presence of over half a century, India is a strategic market for Lufthansa Group and we are committed to increase our offerings by introducing our latest and most innovative products and services and by providing unrivalled connectivity.” Mails sent to AirFrance-KLM did not generate a response till the time of going to press.
GLOBAL CONNECT
Analysts say, a transaction, if successful, will provide necessary firepower for Jet in its expansion plans as the deal is coming at a time, when Jet’s larger rival Indigo is negotiating with the India government to acquire shares of the country’s biggest carrier, state-run Air India, which the Modi-government plans to privatise. Jet’s net debt in FY17 stood at Rs 5937 crore ($920 million).
The Jet’s second largest shareholder U.A.E’s Etihad may also infuse fresh capital into the company, preferring to stay invested. However, late last year Etihad Aviation Group sacked its CEO James Hogan, who led an expansionist strategy. With a new interim management structure in place, aviation industry watchers say the future role of Etihad in Jet is not clear. There has also been persistent industry chatter than it is not willing to capitalise Jet any further.
“With the founding leadership of Jet Airways back in the driving seat, it has been the intention of Naresh Goyal to take back total operational, financial and management control of Jet Airways. Although the management ‘takeover’ by Goyal did take place nearly 18 months back, the option to find a buyer for 24 percent, which is nearly to the stake Etihad holds of the airline, clearly suggests Jet Airways’ intent to buy back Etihad’s stake,” feels Mark D Martin, Founder & CEO at Martin Consulting, an aviation consultancy firm. Goyal’s move, feels Martin, “clearly is strategic and potent since Etihad at the moment is closely reviewing its global airline investment in the wake of the recent Air Berlin judgement. So we believe Etihad opting for an exit option, might just be perfect timing considering Etihad’s global investment operational control meltdown.”
Etihad, however, has clarified last week — following media reports that Jet Airways is in exploratory talks to sell a minority stake to Delta Air Lines — that it remains committed to its strategic partnership with its Indian partner that operates 257 services each week, each way between Abu Dhabi and 15 cities across India.
STRENGTHENING EXISTING TIES?
For international carriers like Lufthansa and Air France-KLM, both of whom already have commercial ties with Jet, an equity partnership will give them better access to the Indian market, which is not just the largest growing market in the world but also a market, where Middle Eastern carriers have higher market share than the European carriers.
Jet Airways, through its domestic as well as international network, can also feed into the networks of these international carriers. Any such pact will be a big plus for Jet Airways too as it will give Jet Airways’ access to the wide international network of these carriers. Currently, Jet Airways is the second largest international carrier out of India with a market share of about 15%. The national carrier Air India leads the pack with a market share of 17% in terms of outbound traffic out of India.
Jet Airways has recently announced strengthening its codeshare with Delta and Air France-KLM, which will enable Jet Airways access to as many as 43 European destinations via the airline’s European hub Amsterdam and 27 via Paris besides 34 in North America.
Jet Airways also has codeshare arrangements with Lufthansa, which has a large number of codeshare flights with Air India, as the national carrier is the only Star Alliance member in the country. Lufthansa had, in the past, tried to rope in Jet Airways as the second Star Alliance member from the country but that could not take off after Etihad bought stake in Jet Airways.
ET had first reported about Jet’s ties with KLM Royal Dutch on September 27, 2016, months before the airlines announced the deals.
Even though PE funds traditionally stay away from a volatile industry like aviation, investors like TPG have mined the sector extensively across the world, being part of the consortium that bought Continental Airways in US. In India, TPG said investment banking sources, had explored investments in both Jet and Kingfisher in the past while JP Morgan’s PE arm had backed Ajay Singh when he took over the troubled SpiceJetBSE -0.88 %. Both KKR and Blackstone have backed air taxi operators in Asia.
JET’S AIR POCKET
However, analysts forecast challenging days ahead for players like Jet. “The pricing scenario in the domestic market remains challenging. Jet has also been hurt by weak economic conditions in the Gulf region, a key international sector for Jet,” said Joseph George, analyst with IIFL on June 7th.
“In the domestic segment, high growth in industry capacity addition means that carriers have been unable to fully pass on the increase in oil price. As a result, domestic yield fell 1.3% YoY in 4Q, putting pressure on margins… International yields declined 5.4% YoY.”
Jet’s 4Q and FY17 earnings have been propped up non-core streams such as income from aircraft leasing, amortisation of one-off gain from sale of Jet Privilege, profit from real estate deal with Godrej Buildcon, and sale and leaseback of owned aircraft. The last two streams, argue analysts are clearly non-recurring. Income from aircraft leasing would drop substantially in FY18 since all aircraft (except one) have come back from the lessees. Gain from sale of Jet Privilege would be fully exhausted in FY18.
Source: Economic Times