Risk In Alti­tude Do­main

Tak­ing cue from Eti­had Air­ways, Jet Air­ways could be a dan­ger­ous buy for Tata Sons

The Day After - - CONTENTS - By Asit MAnohAr

Jet Air­ways has al­ready played a part in the de­cline of Eti­had Air­ways PJSC. Could Tata Sons Ltd. be the next busi­ness em­pire to en­ter its dan­ger­ous web?

Prime Min­is­ter Naren­dra Modi has sought Tata’s help to res­cue the strug­gling air­line, peo­ple fa­mil­iar with the mat­ter told Anurag Ko­toky and Bhuma Shri­vas­tava of Bloomberg News last fort­night. The con­glom­er­ate’s board would want state banks and coun­try’s air­ports to take a hair­cut on some of Jet’s com­mit­ments to them be­fore go­ing ahead, one of the peo­ple said.

Tata Sons is in talks with the gov­ern­ment about a po­ten­tial hair­cut to state-run banks on Jet’s loans while Air­ports Author­ity of In­dia may forego some of its dues, one of the peo­ple said, ask­ing not to be iden­ti­fied as the dis­cus­sions are pri­vate.

Any in­vest­ment by Tata Sons will cat­a­pult the group to the top league of In­dian avi­a­tion, dom­i­nated by budget car­rier IndiGoNSE -2.16 %, while pro­vid­ing a life­line to Jet Air­ways, which is fall­ing be­hind on pay­ments to lessors and em­ploy­ees. A deal that pre­vents the air­line from go­ing bust will save Modi’s ad­min­is­tra­tion, which last month had to over­throw the board of an in­fra­struc­ture fi­nancier that was miss­ing pay­ments, the em­bar­rass­ment of star­ing at busi­ness melt­down ahead of a gen­eral elec­tion due early next year.

A deal with Jet Air­ways, in which Abu Dhabi’s Eti­had Air­ways PJSC owns a 24 per­cent stake, will give Tata Group ac­cess to some lu­cra­tive as­sets in the avi­a­tion busi­ness - land­ing and park­ing slots in air­ports from Bangkok to Am­s­ter­dam, a large fleet of air­craft, and an es­tab­lished do­mes­tic net­work.

The po­ten­tial struc­ture of the deal has not been fi­nal­ized, the peo­ple said. One of the op­tions is to merge Jet Air­ways with Vis­tara, an air­line ven­ture Tata runs with Sin­ga­pore Air­lines, said a dayafter source on the con­di­tion of anonymity.

That cau­tion over this bout of na­tional ser­vice is hardly sur­pris­ing. Jet has built up a sub­stan­tial po­si­tion in coun­try’s do­mes­tic avi­a­tion mar­ket: It’s the biggest full-ser­vice car­rier and the largest out­right af­ter the ter­ri­fy­ingly dom­i­nant budget car­rier In­ter­globe Avi­a­tion Ltd., bet­ter known as IndiGo. Still, the smaller po­si­tions that Tata has staked out in joint ven­tures with Sin­ga­pore Air­lines Ltd. and AirAsia Bhd. are a much more sen­si­ble way of tak­ing on the chal­lenges of mak­ing money from get­ting In­dia air­borne.

Eti­had thought its bot­tom­less pock­ets would be enough to off­set those prob­lems and give it a toe-hold in one of the world’s fastest-grow­ing mar­kets. The bet turned out to be as bad as its other pur­chases of stakes in strug­gling air­lines, and may yet re­sult in a stricken Eti­had in turn be­ing swal­lowed up by its ri­val­rous com­pa­triot

Emi­rates.

The main prob­lem for the coun­try’s avi­a­tion sec­tor is that it’s sand­wiched be­tween a prof­itable and ebul­lient budget car­rier with a mar­ket share north of 40 per­cent - IndiGo - and a peren­ni­ally loss­mak­ing but still sub­stan­tial state-owned air­line, Air In­dia Ltd.

Squeezed from both sides, the in­dus­try suf­fers such strong down­ward pres­sure on ticket prices that even a rate of pas­sen­ger growth that’s out­strip­ping the ca­pac­ity of coun­try’s do­mes­tic air­craft hasn’t been enough to drive up av­er­age fares.

It’s a very bad idea for a full-ser­vice car­rier ever to en­gage in a price war with a budget air­line, given that it must hand out free food and drinks and gen­er­ally treat its pas­sen­gers like hu­man be­ings. But that’s more or less what Jet has been do­ing against IndiGo and Spice­Jet for the best part of five years.

No won­der its rev­enue is hardly ever enough to cover costs.

The ap­proach of Tata’s ex­ist­ing avi­a­tion ven­tures - its fancy Vis­tara op­er­a­tion with Sin­ga­pore Air­lines and the cheap and cheer­ful AirAsia In­dia - has been to carve out rel­a­tively niche po­si­tions with ties to in­ter­na­tional car­ri­ers. Put to­gether, these two have less than 10 per­cent of the mar­ket, com­pared with more than 15 per­cent for Jet and its tiny Jet Lite budget car­rier.

Still, that cau­tious ap­proach is prob­a­bly bet­ter than go­ing head-to-head with IndiGo, Spice­Jet and Air In­dia, the dan­ger­ous space in which Jet is play­ing.

One op­tion would be for Tata to swap its po­si­tion in the strug­gling AirAsia In­dia for a stake in Jet, which is prob­a­bly a bet­ter fit for Vis­tara. Just such a deal is be­ing worked on, the Eco­nomic Times re­ported Fri­day, cit­ing peo­ple fa­mil­iar with the mat­ter.

That’s not go­ing to be enough, though. Coun­try’s avi­a­tion mar­ket has been strug­gling for years, and Jet is in a sin­gu­larly dif­fi­cult po­si­tion to make money. All but a hand­ful of routes are short-haul, and the low-in­come mar­ginal cus­tomer isn’t very in­clined to pay ex­tra for 90 min­utes of pam­per­ing, so budget car­ri­ers have a builtin ad­van­tage.

The pas­sen­gers who are pre­pared to pay for full-ser­vice qual­ity typ­i­cally find that Jet is a bit bet­ter than the can­cel­la­tion prone, com­plaint-heavy Air In­dia, but not quite enough to com­mand a con­sis­tent pre­mium.

Right now, coun­try’s avi­a­tion mar­ket re­sem­bles that of the US from the 1980s to the 2000s. There are too many car­ri­ers fight­ing for space, and a dis­count car­rier a la South­west Air­lines Co. is qui­etly de­mol­ish­ing the busi­ness mod­els of the ma­jor play­ers.

The cri­sis in North Amer­ica was ul­ti­mately re­solved by the ma­jor air­lines con­sol­i­dat­ing into a cosy car­tel that’s been able to pump out ex­tra­or­di­nary prof­its once it stopped com­pet­ing so hard for cus­tomers. But squash­ing Jet and Vis­tara to­gether isn’t go­ing to be nearly enough to achieve that out­come while Spice­Jet, Indigo, Air In­dia, AirAsia In­dia and GoAir are still duk­ing it out for supremacy.

Tat a Chair­man Na tara jan Chan­dra seka ran should tread care­fully. The cur­rent mar­ket is great for value-con­scious pas­sen­gers. For cir­cum­spect in­vestors, though, it’s still a blood­bath.

Jet Air­ways founder Chair­man Naresh Goyal with Eti­had Air­ways CEO James Ho­gan and Eti­had Air­ways CFO James Rigney

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