Etihad Airways has offered to sell its entire stake in Jet Airways because the debt resolution process is taking too long. After Jet Airways managed to secure interim funding while its resolution was still being negotiated, Etihad asked the State Bank of India (SBI) to purchase both, its 50.1% stake in JetPrivilege and 24% stake in the airline.
JetPrivilege is a loyalty rewards programme that now operates independent of Jet.
JetPrivilege was restructured under the terms of the resolution agreement between Etihad and Jet, that own 50.1% and 49.9% stake in it, respectively.
After Jet grounded about two-thirds of its fleet, Minister for Civil Aviation Suresh Prabhu asked officials to take stock of the grounding, bookings, cancellations, and ticket refunds.
Jet Airways pilots union has also announced a strike from April 1 unless the airline manages to piece together a debt resolution plan by March 31.
We have decided that either the management lets us know about the progress of the resolution plan and the future of the company by March 31 or we will refrain from flying duties, said National Aviators Guild Vice President Asim Valiani.
Prabhu said that no pilot or crew member who has reported stress should be put on the roster.
Etihad offers to sell
Etihad CEO Tony Douglas met with SBI Chairman Rajnish Kumar on Tuesday, March 18, to discuss Jets resolution plan that has been delayed because of a lack of consensus.
At the meeting, Etihad said that it is prepared to sell its 24% stake in the airline and 50.1% stake in JetPrivilege to SBI at Rs 150 per share, making the total sell off worth Rs 400 crore. The shares of the company, at closing time on Wednesday, March 20, was Rs 217.65 on BSE, signaling that Etihad was hoping to exit the deal by selling its stake at a discounted rate.
Business Line also reported that Etihad feels a resolution deal is too far away, so it may sell its 50.1% stake in Jet Privilege to SBI at a discounted rate.
As a minority shareholder, Etihad is working closely with Indian lenders, the company, and Jet stakeholders to facilitate a solution for Jet Airways, said an Etihad representative.
Etihad asked for an exemption to the traditional regulation of making an open offer for its shares and set the price at Rs 150 per share. This move seems like Etihad’s threat to sell has no real teeth.
However, the Economic Times reports that the Securities and Exchange Board of India (SEBI) is unlikely to approve, leaving Etihad to accept the highest offer from any open bidder or not sell its shares at all.
Although Jet will be run by a board of directors in the future, there are two points in this deal that are causing friction.
First, negotiators are concerned about Jet CEO Naresh Goyals power to nominate up to two board members because he will likely nominate his own son.
Secondly, Goyal has an issue with a clause that caps his equity at 22% indefinitely, because it removes any possibility of him controlling the airline in the future.
Thirdly, Jet needs an immediate infusion of Rs 750 crore that the plan states Etihad must provide. However, Etihad has refused to contribute this additional money. Instead, it has offered to reduce its stake in Jet.
Any resolution plan for a corporate is a very complex process and things do not happen in one or two days. There are various stakeholders and you have to align and take care of all of them lenders, promoters, JV partners, said an SBI official.
These disagreements will need to be resolved soon, otherwise Jet risks major financial losses beginning with its pilots’ going on strike in the coming weeks.
Etihad’s financial woes
Additionally, a no-Etihad deal might not really be a loss for Jet in the long-term because, Etihads financial performance in recent times mirrors Jets trajectory to insolvency.
Etihad has not made profits for two years and is predicted to continue to not do so for another year. In fact, the company reported a $1.87 billion loss in 2016. The airline might also lay off up to 50% of its pilots later this year. It has also cut back on its fleet and destinations.
This financial turbulence provoked Douglas to announce that Etihad was restructuring its books, beginning with selling off its stake in Darwin Airline, a European carrier.
Two of its previous aviation investments in EuropeAir Berlin and Alitalia have filed for bankruptcy, as well.
Facing competition from cheaper European airlines like Lufthansa, Air Berlin has been suffering losses worth 2.7 billion for the past six years, which has led Etihad to look for buyers for its 29% equity in the airline.
Etihad’s 49% stake in Alitalia has not reaped any gains either over the years, as the airline is now struggling to continue operations.
Emirates and Qatar Airways also pose as relatively stiff competition for Etihad, despite having their own individual financial hurdles.
“Few airline companies have been as poorly managed as Etihad… It is a wonder the carrier is still flying at all”, said Skift Business Editor Brian Sumers.
However, the financial health of an airline is a complicated concept because it is not dictated solely by business decisions.
Rising fuel prices and fluctuating currency exchange rates are two major factors in aviation profitability. Fuel is non-negotiable and many transactions are carried out in the American dollar because of expenses related to international flights, such as airport rent.
Are things looking up?
If Jet loses Etihad as an investor, the debt recovery process may get delayed even further if Jet wants to find another partner. If it doesnt, SBI and other lenders will control the airline.
The price Etihad has quoted is also just enough to keep Jet afloat and pay off its debt.
Time is of the essence to save the airline and with this [sale offer] Etihad has attempted to not completely write off the airline, said a mediator to the Economic Times.
Moreover, things might be looking up for Jet because officials say that a resolution plan for Jet is on the horizon. The deal should be finalised within the week, said an SBI official.
Rhea Arora is a Staff Writer at Qrius