Jet-Etihad deal: Changes only for show?

The Foreign Investment Promotion Board has given the go-ahead to the much-discussed Rs 2,038 crore Jet-Etihad deal, a month after the initial share purchase agreement between the two airlines was sent back to them with the directive to modify it to fit the Indian regulatory parameters.

The revised share purchase agreement was approved on Monday (July 29).  Regulatory agencies such as FIPB can now argue that the Indian company (that is Jet Airways) will retain control, so that the existing policy on foreign direct investment in aviation is followed, or at least appears to have been followed. The deal with FIPB's recommendations (changes pertaining to legal and shareholding issues) is now sent back to Jet Airways and after they accept the changes and modify the agreement the deal will require an approval of the Cabinet Committee on Economic Affairs.

But the fact of the matter is that the deal would never have been called off. Three central ministries - Civil Aviation, Commerce and Home - were doing their best to facilitate the deal. There was a strong compulsion to see it through given existing market conditions, foreign institutional investors withdrawing in droves and the overall dismal economic performance of the government.

The very fact that despite strong opposition from all other domestic airlines at the inter-ministerial meet held in April in New Delhi, 36,000 additional seats were given to Jet Airways. The bilateral deal India signed with the Abu Dhabi government to increase the number of seats proves that there was a whole machinery working behind the scenes to make the deal go through.

"The three ministries conveyed that in the larger interest of the nation and impending investments promised by the Abu Dhabi government, the deal (with Etihad) had to go through and therefore the grant of bilaterals was essential to it," says a top ministry official, indicating that it was more than just an aviation deal that involved a foreign airline as a partner strategic investor.

Experts point out that in any case, 'control ' over Jet Airways, about which so much was being made at this stage, could well shift later as the two airlines reach some private agreement once the dust settles down.

Legal experts said the deal may not have been watered down too much, but that changes must have been made to accommodate the government requirement of defining control. "Once the issue of control is settled, there will be no further hindrance to the deal. And both Jet and Etihad will find some form of private agreement by which Etihad can get to protect its investment in the Indian carrier. Once the heat dies down the two parties can agree to some voting rights in a particular way and that would be perfectly legitimate," says Ramesh Vaidyanathan, MD, Advya Legal, a Mumbai-based law firm that has also advised Jet on some aspects of the deal.

The larger issue here is whether Jet would have survived at all if this investment from Abu Dhabi had not come through. Jet officials believe the answer is in the negative. With the debt burden of over Rs 13,000 crore, falling domestic market share and falling load factor, Jet needed cash and fast to keep going. This deal was its only chance to get the money, with the bait of expansion in the Indian market dangled before Etihad. After all, Etihad has to counter the rise of other Middle East airlines like Emirates and Qatar in India.

This deal will give Jet what the Vijay Mallya-promoted Kingfisher Airlines was unable to get, despite the change in aviation policy last year permitting foreign airlines to invest in Indian ones: a fresh lease of life. Kingfisher is now grounded.

"If Jet does not get the investment it will go the Kingfisher way," says a top civil aviation ministry official. "Can you imagine the impact on the Indian aviation industry and the airports if an airline of the size of Jet fails?"

Naresh Goyal played an ace here. He pulled off the deal with Etihad and then brought up the regulatory compliance issue. So Etihad, for now, will have to swallow a bitter pill and accept the changed terms till it works out ways and means to wrench back the worth of its investment in Jet.

The deal will provide increased connectivity to several Tier II and Tier III cities, and give air travelers from these cities the chance to board international flights from their home towns, instead of having to travel to Mumbai and Delhi. Its approval is clearly reason to cheer.

With more markets opening up for Jet in the Middle East and US and Africa because of this deal and Abu Dhabi being used as a gateway, the deal no doubt will allow Jet to regain its lost position as leader in the Indian market.