India: Etihad’s Investment in Jet Airways Beneficial for Both Airlines but Challenges Significant

Etihad, the national carrier of the United Arab Emirates (UAE) and India’s Jet Airways are negotiating an agreement under which the former company could buy a 24 percent stake in the Mumbai-based airline for $300 million.

This deal will provide a number of benefits for Jet Airways: The monetary influx will help the Indian airline reduce its $2.3 billion debt load. It will also give Jet access to Etihad’s excellent service infrastructure, acquire lower priced aviation fuel from the UAE and access a global network.

On the other hand, Etihad needs to sign this agreement to help its bottom line. While its growth has been impressive – in 2012, profit increased by 200 percent and passenger traffic by 23 percent – it has been driven by codeshares, equity partnerships and aggressive cost-cutting, according to Etihad’s president. The company already has equity partnerships with Air Berlin, Aer Lingus, Air Seychelles and Virgin Australia, and, therefore, needs to continue this trend.

Etihad’s timing is also auspicious since New Delhi recently allowed foreign investment of up to 49 percent in Indian airlines. Consequently, competition in the Indian aerospace market is about to heat up as other foreign investors begin to enter this fast growing sector.

The Etihad-Jet deal is not without some major risks. Firstly, there are the uncertain costs: India’s Airports Economic Regulator Authority (AERA) raised aeronautical charges for the New Delhi airport by 340 percent in 2012 and 154 percent for the Mumbai airport on February 1, significantly increasing the airlines operational costs.

Secondly, India has a history of abrupt regulatory changes such as those that, in the 1990s, forced Jet’s previous foreign investors, Kuwait Airways and Gulf Air, to divest their stake in the airline.

Finally, there’s the airline itself. Jet’s 2012 profit was due to higher fares and lower costs, and not increased passenger loads – domestic and international traffic declined by 13 percent and 5 percent respectively.

India’s aerospace market holds enormous potential but investors should not discount the very real risks from operating costs and inefficiencies, and government policies.

Regardless, this agreement will likely be signed soon and be the first of a number of other such deals which have the potential to increase government revenue and help domestic airlines.

However, as exemplified by AERA’s recent fee decisions, the pace and size of these investments won’t be helped by New Delhi’s schizophrenic policies that will likely continue until immediately past the upcoming election.