Three reasons why Jet Airways India would benefit from 24% stake sale to Etihad Airway

MUMBAI: The proposed deal of acquisition of 24% stake in Jet Airways by Abu Dhabi-based Etihad Airways would help the Mumbai-based company in three distinct ways. First, it should provide immediate funds to either reduce its debt or expand its presence domestically.

At present, Jet has a debt of Rs12000 crore of which Rs7500 crore is a long-term lease loan, while the remaining Rs4500 crore include working capital loans and other non-lease debt. Considering 24% acquisition, the value turns out to be Rs1900 crore. These funds can be used in its domestic expansion especially tier-II and tier-III cities, where future passenger growth is expected.

This when seen in the light of the fact that the government is planning to upgrade 35 non-metro airports works well for Jet Airways India. Jet is already present in over 50 cities. Hence, an expansion in unexplored and emerging tier-II and tier-III cities should help Jet Airways IndiaBSE -3.22 % gain its lost market share to Indigo Airlines. Jet has market share of 25.2%, while Indigo has market share of 27.3% in November last year.

Also Jet would benefit from lower fuel costs. Many experts believe that if the deal works out, Jet can fill its planes in the UAE at cheaper rates. Back home, Jet, like many airlines companies has to pay high sales tax, which is in the range of 25-30%. In the September 2012 quarter itself, the company's fuel expenses as a percentage of its net sales is 45%. By filling its planes in the UAE, the company can save fuel costs by at least 10-12%.

Lastly, the synergy of operations with Etihad Airways strengthens and expands Jet's international operations. At present, 59% of total revenues of the company come from international operations. Internationally, Etihad Airways, which is present in 67 locations, has a strong presence in North America and Europe, while Jet Airways, on the other hand, flies to 21 destinations internationally having strong presence in ASEAN countries.

The proposed deal if worked should provide Jet the experience of opening new routes in a cost-effective way. Beside, considering most Indians travel to the Middle East, North America and Europe for job, business, travel and education, the synergy works well for Jet Airways India. For Etihad, getting entry into emerging market like India is a strong advantage.

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