Etihad Airways has bought a 24% stake in Jet Airways for $379 million. The UAE carrier has agreed to subscribe for 27,263,372 new shares in Jet Airways at a price of INR754.74 per share.
Etihad Airways' wider overall commitment to Jet Airways includes the injection of US$220 million to create and strengthen a wide-ranging partnership between the two carriers.
As part of this Etihad Airways paid $70 million to purchase Jet Airways’ three pairs of Heathrow slots through the sale and lease back agreement announced on February 27, 2013. Jet Airways continues to operate flights to London utilising these slots.
An amount of $150 million will be invested by Etihad Airways by way of a majority equity investment in Jet Airways’ frequent flyer program Jet Privilege, subject to appropriate regulatory and corporate approvals and final commercial agreements which are expected to be completed within the next six months.
Under the strategic partnership, the airlines will gradually expand existing operations and introduce new routes between India and Abu Dhabi.
“We are pleased to have reached this significant stage in India with Jet Airways and are certain the partnership will bring significant benefits and opportunities for global growth to both airlines,” says Etihad Airways President and Chief Executive Officer, James Hogan. “It is expected to bring immediate revenue growth and cost synergy opportunities, with our initial estimates of a contribution of several hundred million dollars for both airlines over the next five years.”
He added: “The Indian market is fundamental to our business model of organic growth partnerships and equity investments. This deal will allow us to compete more effectively in one of the largest and fastest-growing markets in the world.”
Chairman of Jet Airways, Naresh Goyal, praised the Indian government for allowing foreign direct investment into civil aviation into the country, which he said will improve the economics of aviation by increasing traffic at Indian airports and create job opportunities.
“This transaction further strengthens the balance sheet of Jet Airways and, more importantly, underpins future revenue streams, which will accelerate our return to sustainable profitability and liquidity,” says Goyal. “I have no doubt that this partnership with Etihad Airways is a win-win situation for all our stakeholders, especially our guests, who will now have access to a much expanded global network.”
One of the main components of the partnership is expanded codesharing on flights. The airlines both note key benefits to be gained from synergies and cost savings in areas including fleet acquisition, maintenance, product development and training, while the airlines will also explore joint purchasing opportunities for fuel, spare parts, equipment and catering supplies, as well as external services such as insurance and technology support.
Other areas of co-operation will include joint training of pilots, cabin crew and engineers, as well as maintenance of common aircraft types and the consolidation of guest loyalty programs.
Substantial ownership and effective control will remain with Indian nationals, with Goyal as the non-executive Chairman holding 51% of the company.
Etihad is being advised by HSBC, DLA Piper, Amarchand & Mangaldas & Suresh A. Shroff & Co and PricewaterhouseCoopers on this transaction.
Jet Airways is being advised by Harish Salve, Gagrats, ELP, Ernst & Young, DSP Merrill Lynch Limited and Credit Suisse.
In a recent speech, Hogan claimed that legacy airline alliances had outlived their usefulness, and that Etihad’s unique business model, which is a combination of organic growth, codeshares and minority equity investments, was proving very effective in building passenger numbers, revenue and profit for all its partners.
“The traditional airline alliances have evolved into slow-to-respond, bureaucratic organisations which struggle to deliver added value to their member airlines, many of which are no longer compatible with each other,” he said. “If we look at the consolidation currently occurring throughout the airline industry, we are also seeing more fragmentation within the alliances. This is going to continue as members seek ways to operate profitably in a very competitive environment with high fuel costs and generally slower global economic growth. This month we will report our strongest ever first quarter results. Our codeshare and equity partners have made a major contribution to that financial success.
Etihad Airways owns 29% of airberlin, 40% of Air Seychelles, 9% of Virgin Australia and just under 3% of Aer Lingus. It has 42 code share relationships around the world.
Hogan added: “It is easier, faster and far more cost effective to grow through one-on-one partnerships with established, respected carriers than it is to rely totally on our own resources, and to start from scratch in every market we serve. We have hand-picked like-minded partners with whom we can work collaboratively to build revenue across a broader network and reduce operating costs. We focus on our partners’ profitability as much as our own, because we are not dealing with competing interests. When the five CEOs sit down to make decisions, we have a shared commitment to make things happen.”