Etihad takes 24% stake in India’s Jet Airways

The United Arab Emirates’ Etihad Airways has agreed to pay $379 million for a 24% stake in India’s Jet Airways, in an alliance that aims to benefit both national carriers. The move follows a recent decision by the Indian government to allow foreign holdings in the domestic airline industry to reach as much as 49%.

Etihad will pay Rs754.74 ($13.95) each for 27.3 million new shares in Jet, equivalent of Rs20.6 billion, and at a premium of more than 30% to Jet’s share price before the announcement late on April 24.

In addition, Etihad intends to invest a further $220 million in the venture, including $70 million to buy Jet’s three pairs of Heathrow slots through a sale and leaseback agreement made in February. The other $150 million will be invested in Jet’s frequent flyer programme, called “Jet Privilege”.

The arrangement is subject to usual regulatory and corporate approvals, including from India’s Foreign Investment Promotion Board, which should be gained within six months.

“The investment should be mutually beneficial to both carriers, and has the tacit support of the Indian government, so is unlikely to meet any significant obstacles,” said a person familiar with the transaction.

The idea is that the two airlines should expand their existing operations, introduce new routes between India and Abu Dhabi and combine their network of 140 destinations. India is one of the world’s fastest growing airline markets, expected by analysts to expand at 10% a year over the next five years from 42 million passengers currently; and Abu Dhabi is keen to establish itself as a hub for intercontinental air traffic.

“[The alliance] 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,” said James Hogan, Etihad president and chief executive in a statement.

Etihad already flies to nine Indian cities, including the main hubs of Mumbai and Delhi, and has a total of 59 flights a week.

Nevertheless, ownership and control is likely to remain with the Indian firm, with Naresh Goyal, non-executive chairman of Jet, holding 51% of the company.

“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,’ said Goyal in the statement.

Jet is India’s largest publicly traded airline company, whose 116 aircraft visit 125 locations worldwide. But, it needs to raise cash and reduce debt.

“Infusion of FDI in the domestic sector will result in the improvement of the economics of aviation, grow traffic at our airports and create job opportunities,” added Goyal.

In March, budget operator Air Asia created a venture with India’s Tata Group to form a domestic low-fare airline.

The Etihad-Jet deal could lead to more cooperation, such as joint-purchasing of fuel and catering supplies, in addition to a planned integration of their respective frequent flyer programmes.

Etihad is advised by HSBC and Jet is advised by DSP Merrill Lynch and Credit Suisse.