Jet Airways – Etihad: Turbulent Times Again

The much talked about deal between Jet Airways and the Abu Dhabi based Etihad is again facing trouble as the Foreign Investment Promotion Board (FIPB) has deferred the deal. The primary reason for this is the lack of clarity on the effective control of the airlines.

The shareholders agreement between Abu Dhabi-based Etihad Airways and Jet Airways was structured in a way that creates a substantial role for Etihad in decision-making. Though the agreements do not confer any obvious rights or veto powers to Etihad, its concurrence will have to be taken for most decisions, including routine ones, lending credence to the belief that the there will be a joint manager for the airline along with the current Chairman Naresh Goyal, who owns 51% stake in Jet Airways.

It is no wonder that the stock witnessed a negative movement on account of this deferment. However, recent reports suggest that Jet Airways will shortly submit a reworked proposal to the FIPB, which will include the changes made in its share purchase agreement with Etihad Airways reflecting that the effective control is in the Indian entity’s hands. The reports also suggest that the airline will submit an explanation detailing why it will have an office in Abu Dhabi for network planning and how it does not mean a shift in the airline’s place of business.

On concerns regarding the network and planning operations being handled out of Abu Dhabi, reports suggest that it will be incorrect to say that the ‘place of business’ is being shifted out of India. Jet Airways plans to use Abu Dhabi as a hub for its international traffic flying to North America as well as west of India.

However, we are still of the opinion that there is much more under wraps and hence the scrip prices are likely to be volatile. Until the new plan is revealed to the FIPB and the SEBI, investors should avoid the stock.