By Ruma Dubey

Kingfisher Airlines was frozen on the 5% upper circuit today on corporate grapevine that Abu-Dhabi based Etihad Airways, which was earlier rumoured to pick up stake in Jet Airways and then in Spicejet too, is now picking up a 48% stake in the beleaguered KFA.  

The stake sale is expected to fetch KFA around Rs.3000 crore and a formal announcement of the deal is expected to happen on 18th Dec, Vijay Mallya’s birthday. Etihad is expected to buy 30% stake before end of 2012 and another 18% before end of August 2013. None of this news is yet to be officially confirmed, either by KFA or Etihad.  But one cannot help but wonder why Etihad is buying into an airline which is saddled with a debt of around $2.5 billion.

Well, though this is great news for all the shareholders of KFA, majority of which today comprises of retail investors, one cannot help but wonder about this flip-flop by Etihad. Was there any truth to the earlier decision to take over Jet Airways, or was that merely a rumour? And if it had already negotiated with Jet, then why this volte-face and buying 48% in a company which is dead and saddled with debt? Logically, it should have bought into a company which is doing relatively better and has a good spread across the country. Jet fits that bill. But in case of KFA, today hardly any plane is taking off. So why buy into a company which is seemingly down and out?

Maybe the logic is that losing companies come cheap. But then is valuations are to be beleived,  KFA is not coming as cheap compared to Jet. A few days ago, when the deal between Jet and Etihad was announced, it was said that Etihad would be picking up 24% stake at Rs.1600 crore and if we apply the same valuation, a 48% stake in Jet would have cost Rs.3200 crore. And the deal with KFA is for 48% at Rs.3000 crore. So KFA’s 48% stake is coming at a valuation of just 6-7% lower than Jet. So in what way can we call this deal cheaper than Jet?

Jet Airways has a fleet size of 101, flies to 52 destinations and 21 international destinations. It already has a code share agreement with Etihad. And the stake buy in Jet would have given Etihad access to the largest airline company of India currently in terms of market share.

On the other hand, KFA when the times were good, it had a fleet size of 69 planes. But as per the information on the Directorate General of Civil Aviation (DGCA) site, it has around 10 aircrafts and its market share from being number two, has slipped down to 3.2%, the smallest in the sector. The DGCA has suspended its license. And above all this, it is making huge losses and is sitting on a debt of $2.5 billion.

Clearly, KFA, in comparison with Jet, is more than a losing proposition and to get a valuation today of just 6-7% lower than Jet simply makes no logical sense. And that is why we are forced to conclude - if this deal goes through with KFA, it might have happened with some help from the Govt of India.

We all know that the Govt has been more than kind and patient with KFA. And somehow one cannot help but feel that this deal with Etihad too is a direct result of this kindness. Business is about give and take. Our UPA Govt is very good when it comes to such give and takes. Here, the Govt might have agreed to the long drawn demand of Etihad to increase seat allocation to India. Under the bilateral agreement with countries, India allocates the number of seats which can be allowed into the country. And under the UAE-India air traffic rights bilateral agreement, Etihad can operate 13,330 seats a week on the India-Abu Dhabi route. In fact the UAE has been negotiating with the Indian Government to increase the present allocation of seats and that has till date, fallen mostly on deaf ears. Currently, almost 40% of international air traffic from India is to the Gulf and West Asian countries. Etihad, presently offers 56 flights per week connecting Abu Dhabi directly to eight key cities in India, namely Bengaluru, Chennai, Hyderabad, Kochi, Mumbai, New Delhi, Thiruvananthapuram and most recently, Ahmedabad.

As per the capacity entitlements, UAE is allowed 54.200 seats per week and in terms of utilizing this capacity, Dubai carriers are already at 98.5% capacity; almost fully exhausted. As against this, the capacity of Indian carriers is only around 48%. Thus there is a desperate need for the UAE carriers to cajole and coax the Govt to increase capacity. And somehow, this deal with KFA could be a precursor to increase in capacity. Give and take – give more capacity with the tacit agreement that capacity will be raised. For Etihad, then the deal makes absolute perfect sense!

Keep a watch on announcement soon (after 18th Dec) that Eithad will have more passenger seats to India. That will seal the deal!