After Etihad Deal, India’s Airlines May Attract More Foreign Interest

Courtesy of Jet Airways From left: Hameed Ali, acting C.E.O. of Jet Airways, James Hogan, president and C.E.O. of Etihad Airways, Naresh Goyal, chairman of Jet Airways with James Rigney, chief financial officer of Etihad Airways, on Wednesday after the deal between the two airlines was announced.

MUMBAI â€" Could the economic reforms introduced by the Indian government in September save India’s beleaguered aviation industry?

Last week, Abu Dhabi’s Etihad Airways said it would buy a 24 percent stake in the Indian carrier Jet Airways, the first investment since the Indian government relaxed ownership rules to allow foreign operators to buy 49 percent of local airlines.

Etihad is not alone: on March 6, Malaysia’s AirAsia won approval from India’s Foreign Investment Promotion Board to take a 49 percent stake in a new budget airline venture with Tata Sons and Telestra Tradeplace. The next Indian airlines likely to attract foreign investment are SpiceJet and Indigo, which have about 20 percent and 27 percent of the market, respectively, analysts said.

If the Jet-Etihad deal “goes through without any hurdles, it will give confidence to people who wish to invest in this sector,” said A. K. Prabhakar, senior vice president of equity research at AnandRathi Financial Services in Mumbai. SpiceJet and Indigo are the next possible beneficiaries, he said, in part because they will need a foreign partner to compete with the newly buoyant Jet and the new AirAsia.

Amit Dave/Reuters A Jet Airways passenger aircraft taking off from the Sardar Vallabhbhai Patel International Airport in Ahmedabad, Gujarat on Feb 1, 2013.

India’s aviation sector was considered one of the most promising in the world just a few years ago, attracting investment from Goldman Sachs, BNP Paribas and W.L. Ross as India’s new middle class took to the skies. The number of passengers in India is still growing quickly and is expected to increase by more than 40 million in the next five years.

But profitability has proven elusive for most in the industry, thanks to dwindling funding, rising fuel prices and punitive taxes that add to airline costs. Indian airlines lost $2 billion in the fiscal year that ended in March 2012, said the Centre for Asia Pacific Aviation.

Kingfisher Airlines, strapped with mounting debt and unpaid bills, stopped flying late last year. Air India, the state-run carrier, lost more than $1 billion last year. The deal with Etihad brings Jet Airways, which has an estimated debt of $2.2 billion, much needed capital as well.

The transaction “strengthens the balance sheet of Jet Airways” and “underpins future revenue streams” for the company, the chairman Naresh Goyal said when the deal was announced.

“Infusion of foreign direct investment in the domestic sector will result in the improvement of the economics of aviation, grow traffic at our airports and create job opportunities,” he said.

The closing of the Jet-Etihad deal, expected in the next month, is likely to be closely watched before other foreign airlines come marching in to India, analysts predicted. The Indian government’s ongoing battle with the British telecom Vodafone Group over an alleged $2 billion owed in back taxes has created considerable anxiety for foreign investors looking to do deals here. Despite slew of reforms announced last year to attract foreign investors, there remains a “lingering sense of apprehension” about tax liabilities, said Ajay Bodke, the head of investment strategy and advisory at Prabhudas Lilladher, a Mumbai brokerage. On a recent road show to Toronto, New York and Boston, Finance Minister P. Chidambaram met with foreign investors to try to allay these concerns.

Etihad Airways/European Pressphoto Agency James Hogan, CEO of Etihad Airways with the airways’ flight crew in Sydney, Australia on March 27, 2007.

Neither Etihad nor Jet disclosed information about how, exactly, the deal was structured to protect it against future tax claims or any other unexpected liabilities introduced by the Indian government. Merger experts said they believed the deal was a preferential share allotment, meaning a company issues new shares to only a select group of investors in exchange for payments into the company.

Because the company is issuing fresh equity rather than selling existing shares to Etihad, there are no capital gains tax implications, experts say.

“If it is done through a preferential share allotment, then there is no taxation exposure on the deal for Naresh Goyal, Jet Airways or Etihad,” said Amarjeet Singh, a partner in tax at KPMG in India, which was not involved in the deal.

However, industry experts say simply welcoming foreign investment into Indian airlines will not be enough to fix the sector.

“India is one of the largest aviation markets in the world and needs to compete on the global stage,” said Sudeep Ghai, who specializes in airline start-up, strategy and commercial performance improvement at Athena Aviation, an airline-consulting firm based in London. “To do this effectively the Indian government needs to eliminate red tape, strike down taxes on airlines, get rid of punitive airport charges that add to airline costs and invest in efficient airports that can handle increasing passenger volumes.”