Etihad confirms $379m Jet Airways stake purchase
By: Ruchi Shroff
After much delay and deliberation, Etihad Airways' deal for a stake purchase in India's Jet Airways has been approved under the foreign direct investment guidelines.
Etihad has agreed to subscribe for 27,263,372 new shares in Jet at a price of INR754.74 per share. The value of this equity investment is $379 million and will result in Etihad holding 24% of the enlarged share capital of Jet.
The wider overall commitment also includes the injection of US$220 million to create and strengthen a wide-ranging partnership between the two carriers. As part of this, Etihad paid $70 million to purchase Jet’s three pairs of Heathrow slots through the sale and lease back agreement announced on February 27. Jet continues to operate flights to London utilising these slots.
An amount of $150 million will be invested by Etihad by way of a majority equity investment in Jet’s 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, which will be subject to full regulatory and shareholder approval, the airlines will gradually expand existing operations and introduce new routes between India and Abu Dhabi. They will combine their network of 140 destinations, with Jet Airways establishing a Gulf gateway in Abu Dhabi and expanding its reach through Etihad Airways’ growing global network.
“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," Etihad president and CEO, James Hogan, said. “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.”
A key component of the wide-ranging partnership is expanded codesharing on flights with passengers benefiting from reciprocal ‘earn-and-burn’ rights on the airlines’ frequent flyer programs. The proposed codeshare expansion will significantly enable Etihad to tap into India’s rapidly growing travel market.
Current estimates predict the size of the Indian market to grow to 42 million travellers over the next five years at a rate of 10% per year, while the Indian middle class, which provides the majority of air travel demand, is forecast to grow by 200 million, over the next eight years.
The airlines will 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.
A joint project management office will be set up to ensure delivery of all synergy benefits to both parties. Substantial ownership and effective control will remain with Indian nationals, with Mr Goyal as the non-executive Chairman holding 51% of the company.