Co-pilots

Etihad bets on India in pricey Jet Airways deal

Etihad Airways is betting big on India. The ambitious UAE carrier is throwing indebted Jet Airways, the largest publicly traded airline on the subcontinent, a $600-million lifeline. The deal buys Etihad a 24 per cent stake, control of Jet's loyalty programme, and landing slots at Heathrow. That makes it the first company to take advantage of newly relaxed foreign ownership rules in India, as it seeks to tap one of the fastest growing aviation markets in the world.

Jet is one of India's top airlines but the price paid still looks a bit generous. Etihad is paying $380 million or a 32 per cent premium for its minority interest. That's on top of a 63 per cent rise in the share price since mid-September when reports of a deal between the pair first surfaced. That type of premium is usually justified by a change of control. In this case, Jet founder Naresh Goyal will remain non-executive chairman, and retain a 51 per cent stake.

Goyal has obviously driven a hard bargain even though his company badly needed the funds. The airline has to repay $400 million each year. At the end of December, Jet had $134 million of cash on total debt of $2.2 billion and had already been forced to enter sale and lease back agreements ahead of the tie-up. With Etihad, it will have a deep-pocketed partner.

The premium reflects the importance of India to Etihad. Over the last two years, the airline has snapped up minority stakes in Air Berlin, Virgin Australia, Aer Lingus and Air Seychelles but this is its biggest and most important bet. Only three hours away by air, India's population is over 150 times bigger than that of the UAE and can provide traffic for Eithad's routes to the US, Europe, Africa and the West Asia.

The success of Etihad's bet will depend on the capacity of the two strong characters at the head of each airline to stay on friendly terms, in order to navigate difficult political waters. Goyal long opposed the entrance of foreign airlines into India. And Etihad Chief Executive James Hogan might want a bigger say in how the Indian carrier is run after handing over cash worth two thirds of Jet's market value. Working together, the pair could be a powerful partnership. If they ever fall out, it would be a disaster.