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Cost, Cargo & Commerce: The 3C's of Jet-Etihad deal

Jet, on international routes is placed second behind Air India, based on capacity

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The anticipated Etihad-Airways is being billed as as "game changer'' as it will bring in benefits such as wider network, better distribution, improved revenue and saving synergies for two airlines.

Jet Airways is the largest carrier in terms of deployed capacity and the second largest in terms of market share in the domestic market. On the routes, it is placed second behind Air India, based on capacity.

As%re for Asia Pacific Aviation report is the third largest Gulf-based carrier (after Emirates and Qatar Airways) based on deployed capacity over its entire network.  It flew 10.29 million passengers last year and has a fleet of 64 wide body planes. And like its bigger regional peers, Etihad's ambitions too are grand.

"Our goal is to be a profitable, sustainable business growing in line with Abu Dhabi. By 2020, we plan to be a major global business, with potentially 25 million passengers per year, 27,000 employees and up to 100 destinations,'' Etihad's CEO James Hogan stated in an interview in an International Air Transport Association publication last October.

The proposed sale of 24 percent stake to Etihad for about Rs 1,600 crore will bring in the much needed capital infusion and will help Jet to cut down its debt burden. Moreover, it will help Jet to widen its network through code share alliances and could also give a boost to its business. (20% of Etihad revenue comes from cargo and it has six freighters). The deal will enable the Abu Dhabi-based airline widen its footprint in India and give an access to growing domestic market.

Apart from the benefits on the commercial side, the deal is likely to give the two airlines cost advantage. Jet sources confirmed that the deal will lead to synergies and cost savings for both the partners but refused to share further details. Jet is also likely to shift its international hub from Brussels to Abu Dhabi in due course.

One such instance of mutual benefit can be seen in Etihad and Air Berlin's decision to integrate their Boeing 787 fleet plan. Together, the two airlines have 56 of those planes on order and according to a Centre for Asia Pacific Aviation report (CAPA), "a combined Etihad
Airways-airberlin team, led by Etihad Airways, will oversee the integration programme, which will see the two airlines share infrastructure, pool maintenance, develop joint training programs, and streamline purchasing activities, as well as work jointly on product
development for the new aircraft type." (Jet Airways too has 10 787s on order).

Another example is of partner airlines integrating their sales and distribution efforts, creating joint offices, general sales agents and single marketing teams at certain offline stations. British Airways, which held 25 percent stake in Qantas between 1993-2004, set up common sales offices in South East Asia and Sri Lanka. And in a recent example International Airlines Group which controls British Airways-Iberia post their merger is aiming at synergies valuing 450 million pounds by 2015 through procurement savings and use of information technology.

London-based aviation analyst Saj Ahmad says that the deal will enable Jet to align with one of the fastest growing airlines that has a solid financial footing. " Etihad is poised on Monday to reveal a second year of profits too. Added to that Etihad's diverse stakes in other
airlines like airberlin and codeshares with over a dozen airlines means that Jet Airways can leverage this partnership and grow its business inorganically and much faster than if they were to go it alone.''

"For Etihad, they would get access to a lucrative domestic Indian market that has freed up capacity in the wake of Kingfishers collapse. It never made any sense for Etihad to ever invest a penny in a grounded airline and one which now has no operating licence. Jet Airways has no such restrictions and through them, Etihad will be able to carve out a strong niche in the Indian market,'' Ahmad added.

"Jet Airways will get a much needed boost while Etihad gains strategic entry into a long term growth market. The practical implications of the deal will unfold over the coming weeks but the outcome is likely to be changes in Jet senior management level, much deeper code sharing
and schedule co-ordination between two carriers and probably joint purchasing agreements," CAPA said in its analysis on the Jet-Etihad deal.

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