Friday 21 December 2012

Will Etihad lower airfares? (PO)

M D Nalapat

Friday, December 21, 2012 - If a prize were to be awarded for the worst-performing minister in India, former Civil Aviation Minister Praful Patel would stand a good chance of qualifying. Under his stewardship, the state-owned Air India has become terminally sick, being kept alive only by bigger and bigger infusions of taxpayer cash. It’s debt has reached $10 billion, while morale is low. Delhi airport was handed over to a private company that did not take long to raise — and raise, and raise - charges for airlines and passengers, so that it has become one of the most expensive in the world.

Bangalore airport resembles a crowded shed, while in the rest of India, only Hyderabad airport provides a pleasant experience. When Praful Patel took charge of the Civil Aviation portfolio in 2004, air fares were coming down, thanks mainly to low-cost airlines such as Air Deccan. Soon afterwards, they began to skyrocket, so that these days, it is much more expensive to fly within India than it is to fly within much richer countries. Of course, despite his poor record in safeguarding the interests of the air passenger, Praful Patel has been rewarded with another prize portfolio, that of Industry, where too he is presiding over declines in performance.

However, now that civil aviation is finally rid of the multi-billionaire minister, there is a chance that airline ticket prices may once again begin to fall, rather than constantly rise. This is if Etihad Airlines buys into Kingfisher, the airline which is now in life support in the ICU. The withdrawal of the Kingfisher fleet from domestic operations has been a major factor behind the high prices being charged by the surviving airlines, and its re-entry into the market may be expected to promote competition within the sector. This is, of course, if Etihad chooses Kingfisher Airlines rather than Jet Airways as its partner of choice in India. Etihad is in talks with Jet Airways and Kingfisher to acquire a stake in one of the two, so as to enter the fast-growing air transportation market in India. Although media accounts speak of Jet as the front-runner, aviation sources in Abu Dhabi, London and Bangalore say that on the contrary, Kingfisher may be the better bet for Etihad.

The main reason for this is that the flamboyant promoter of Kingfisher, Vijay Mallya, may be willing to hand over control of his dying airline to the Abu Dhabi carrier, whereas Jet Airways will give only a much smaller stake, about 24%. In India, it is easy to use Foreign Financial Institutions (FIIs) to boost control in domestic companies over and above the limits sanctioned by law, and Etihad can use the FII channel to - in effect - boost its stake in Kingfisher to much more than the 49% it is legally entitled to buy. There is a world of difference between holding a minority stake – and being in the passenger seat - as opposed to having control, and thereby being firmly in the driver’s seat. Another advantage for Etihad, should it decide on taking control of Kingfisher, would be that the Indian carrier has by now lost the bulk of its fleet. Leased aircraft have been re-possessed for non-payment of dues, whaile other aircraft have been pledged to lenders. Given its aggressive modernisation drive, the Abu Dhabi airline is likely to have a substantial fleet of surplus aircraft which can be leased to Kingfisher, thereby earning immediate revenue. The entry of the Etihad aircraft into the Indian skies ought to lower fares, which is the factor which is most important to the traveller, after years of having higher and higher fares and deteriorating service by carriers eager to cut costs by short-changing passengers. Should Etihad buy into Jet Airways, the lease market for its surplus aircraft would be much less. Add to that the fact that 49% of Kingfisher Airlines is probably worth $1,if that. The airline has been run to the ground and by now has a growing negative net worth. Jet Airways, on the other hand, would - justifiably - demand a much higher price for the 24% stake that promoter Naresh Goyal may be willing to cede to Etihad. Over the years, Goyal has developed Jet Airways into an efficient airline. About two years ago, this columnist took its Delhi-London flight, and found the standard of passenger comfort far better than that of European carriers .

Ironically, the effect of the near collapse of Kingfisher Airlines may make it an attractive option. For example, while Jet Airways has about 20,000 employees, Kingfisher by now has much less, because of the fact that much of the staff have resigned in disgust at not having been paid for months at a time. This has made the airline leaner. Should Vijay Mallya succeed in getting Etihad to buy a controlling stake in his airline, he would be freed of responsibility for the nearly $2 billion that the company owes to financial institutions and to others. Also, what stake remains with him can be expected to rise sharply in value, given the fact that Etihad is a well-run airline, despite its fascination with Europe, including a sizeable Euro-expat managerial group eager to ensure that as much benefit as possible flow to their financially stricken continent from the airline. However, high reliance on European brainpower is a trait which Etihad shares with several GCC entities, including Al Jazeera. Coming to the luxury brands of Europe, these have two huge pools of customers eager to pay absurdly high prices simply because of a label, and these are in the GCC and in China, where too European labels enjoy a huge premium to this day. Those banks which trusted Vijay Mallya and handed over huge loans to Kingfisher are going to be the only losers in such a deal. The chances are that more than half the loan will need to be written off, if a viable White Knight is to come forward. Only the management of Etihad can decide as to whether Jet Airways or Kingfisher is the better buy. However, for the air traveller in India, the re-entry of Kingfisher into the market ought to result in a lowering of fares. In these inflationary times, any relief is welcome!

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