By Yash Patel
Sept 22, 2013
Breakdown of the $900mn investment
$380mn – 24% Stake in Jet Airways (India) Ltd.
$150mn – Investment up to the tune of 49% stake in Jet Privilege Pvt. Ltd.
(A wholly owned subsidiary of Jet Airways (India) Ltd.)
$70mn – Sale and Lease Back of London Heathrow (LHR) Slots
$300mn – Further commitment amount at 3% interest rate.
On Senior Management Positions
It is very clear when a new investor comes in, they want to exercise some control. In this case, Etihad wants to hold key positions in order to get the best returns out of there $900mn investment.
As the final deal is yet to be completed, we have seen key management resignations as well as major changes in the management. This is considered to be efforts for realignment and restructuring of the airline before the FDI goes through.
The first one to put in his papers in June 2013 was Mr Nikos Kardassis, CEO who has been with the company since its inception with two terms from 1993-1999 and 2008-2013. He was always known as the most trusted lieutenant and right hand man to Mr Naresh Goyal, Promoter, Founder and Chairman of Jet Airways. Shortly after his resignation, we saw that Mr Gary Kenneth Toomey an Australian national was nominated as the new CEO of the airline. He is a long trusted aide of James Hogan, CEO of Etihad Airways.
The second one to put in his papers in August 2013 was Mr KG Vishwanath, VP-Commercial Strategy and Investor Relations who has been with the company since 1998. He joined the airline as a Management Trainee in 1998 and was promoted to VP in less than 10 years. He was associated with Chairman’s core team during the IPO exercise in 2005, again was a key member during the Air Sahara buyout and was also a key member in the negotiation processes between Jet-Etihad deal.
In other administrative changes, Mrs Anita Goyal, EVP-Network Planning and Revenue Management has been re-designated as Chief Advisor to CEO. She has been with the airline since its inception as a key member of the senior management. Previously, she was apart of the Jet Air GSA since 1975 looking after Sales and Marketing functions, until the formation of the airline.
Also, Mr Abdulrahman Albusaidy, GEO has been re-designated as Chief Strategy and Planning Officer. He has been associated with the airline in its initial years as a Director on the Board of Jet Airways between 1994-1997. He rejoined the airline as a key member of the senior management in 2007 and was in charge of all the functions of the Gulf and Middle East regions.
In weeks and months to come, we expect many more key resignations and reshuffles within the airline as a new investor needs to be secure of its investments and get a better return.
Mr James Hogan, CEO, Etihad Airways and Mr James Rigney, CFO, Etihad Airways are expected to join the board once the deal is completed.’
On Network Planning
As shared earlier, we expect to connect 25 Indian destinations directly to Abu Dhabi. The rollout will be in 3 phases as shown below:
Phase 1 – Ahmedabad, Mumbai, Delhi, Bangalore, Hyderabad, Chennai, Thiruvananthapuram and Cochin
Phase 2 – Amritsar, Jaipur, Lucknow, Kolkata, Goa and Mangalore
Phase 3 – Other Tier II and III Cities
A major question to everyone is about The European Hub at Brussels, Belgium. It would be too early to comment on this currently. One must understand the strengthening efforts between the two countries (India-Belgium), initial investments plus further investments made over the years for development of the hub, a huge passenger base between India-Belgium-US/Canada sectors, partnerships between Thayls High Speed Railways, Brussels Airlines, etc...
However on the other hand, it is very clear that Jet Airways forcefully wants to pull out of Brussels, perhaps a decision that is being exercised by its partner Etihad Airways. Mr James Hogan, CEO, Etihad Airways was quoted stating that Jet Airways will shift its hub to Amsterdam a few months back. However, a few months ago the airline requested for slots for the winter schedule at Amsterdam’s Schipol Airport. The slots and flight numbers were allotted however returned back as they missed the winter schedule deadlines.
The plan to shift The Brussels Hub to Amsterdam was as follows:
Mumbai – Brussels – Newark Mumbai – Abu Dhabi – Newark and
Mumbai - Amsterdam
Delhi – Brussels – Toronto Delhi – Amsterdam - Toronto
The Bilateral Agreements between Middle East Countries and Canada do not permit more than 7 weekly flights a week.
UAE - Emirates Airlines operates 4x to Toronto (3x Passenger Flight, 1x Cargo),
Etihad Airways operates 3x to Toronto
Qatar - Qatar Airways operates 4x to Toronto, 3x to Montreal
Therefore, Delhi - Toronto had to be served via Amsterdam and Mumbai – Amsterdam would be a feeder flight into the hub.
Recently a Commercial Cooperation Agreement (CCA) was signed between India/UAE/Canada, which may permit Jet Airways to fly to Canada via Abu Dhabi with no restrictions.
The plan of using Abu Dhabi as an international hub is as follows:
Mumbai – Brussels – Newark Mumbai – Abu Dhabi – Newark
Delhi – Brussels – Toronto Delhi – Abu Dhabi – New York
Bangalore – Abu Dhabi – Chicago
Delhi – Abu Dhabi – Toronto*
**Abu Dhabi – San Francisco
**Abu Dhabi – Washington DC
**Abu Dhabi – Los Angeles
**Abu Dhabi – Washington DC
**Abu Dhabi – Los Angeles
*Subject to approval of the CCA – Commercial Cooperation Agreement
** Indian City yet to be decided
Additionally we will see services as follows:
Currently a huge fleet replacement programme is in place.
There have always been 10 B777-300ERs in service for the past couple of years.
-5 are in service (BOM/DEL-LHR / BOM/DEL-HKG)
-3 are on lease with Turkish Airlines
-2 are at an MRO in Thailand for the new seat configuration, repairs, etc. which will join Jet Airways Fleet by October.
The new seat configuration has been done on 8 of the 10 B777s, completion is expected by October. The Old Configuration was 8F/30J/274Y (TOTAL 312) and The New Configuration is 8F/30J/308Y (TOTAL 346)
A further order of B777-300ER is expected for the airlines massive growing plans from hubs in Mumbai/Delhi and now Abu Dhabi.
A330s are being slowly removed out of service and either being leased out or returned back to lessors.
There were 16 A330s in service during the past one year as follows:
-2 returned to back to lessors
-3 leased out to Etihad Airways
-5 to be leased to Kuwait Airways (formalities pending)
-2 are in service (mostly on BOM-SIN / BOM/DEL-HKG)
4 A330-300s (BOM-BRU-EWR / DEL-BRU-YYZ)
Therefore, there are currently only 6 A330s are being utilised.
A330s cannot fly between Abu Dhabi – US routes due to range. Therefore only B777s can be used for such operations. Therefore over a period of 12-18 months we shall see no A330 being used as the B787-9s are expected to come in soon.
A fleet retirement programme has been kicked of a few months back and has helped the airline reduce its fleet age and increase its fleet utilisation time. There are new B737-800s being manufactured every 3-5 weeks since that past couple of months. As we speak a brand new plane (VT-JFM) is on its way from Seattle, currently parked in Shannon, Ireland. There are about 2 more in the production line slated to be (VT-JFN, VT-JFP).
Currently the fleet retirement programme is as follows:
-Removal of all B737-700s and B737-800s (Non-Winglet)
There are about 3 B737-700s/800s parked in an MRO in Jakarta, Indonesia. These planes will be going to SAS.
-Removal of all B737-700s and B737-800s (Winglet) in a phased manner with old planes being removed first in order to keep the fleet age young.
-Only B737-800s will be used for the above mentioned replacements and net growth.
-Once the B737-700s and B737-800s (Non Winglet) aircrafts are removed, we will see the replacements of the B737-900 / B737-900ER perhaps.
There are about 40 odd B737-800s on order with Boeing. Once these are exhausted by 2016/2017, we will see the 737-8 MAX coming in and replacing the NGs and additionally being used for net growth. The media has quoted an order of 50 B737-8 MAX, however the airline has not confirmed the same. A huge order is expected in the tune of 100-200 with Etihad backing the same.
We have seen the old ATR 72-500s being removed and replaced with newer ATR 72-600s. This is currently on going with the latest aircraft VT-JCZ being inducted a few weeks back.
Overall Fleet Planning
We see a huge and robust demand for A380 operations in India. As the GOI does not permit foreign carriers to fly them into India, Jet Airways can contemplate a couple of A380s on lease from Etihad and use them for its own operations. Huge traffic is between the India-Abu Dhabi-US sectors or even on India-UK sectors.
Common seating, in-flight entertainment systems, configurations etc will be rolled out on B787-9s which will allow for easy leasing activity between all of “Etihad’s Equity Alliance Partners”.
A huge order is expected for Jet Airways during the Dubai Air show in November 2013. This will be backed by its new investor Etihad Airways as well.
On Financial Aspects
The airline has a debt of about $2.1bn out of which $1.8bn is long term debt which is basically aircraft loans. The investment from Etihad will be used to retire majority of this debt as well as for expansion purposes.
The operating revenue and margins has dipped over the last few quarters due to low demand for air travel in the domestic region. This is mainly caused by a depreciating rupee currency, higher costs of ATF, increase in airport charges and taxes.
The non-operating revenue has however increased. The ancillary revenue has been up over the quarters and we expect it to contribute to about 10% of revenues by the next 12-18 months.
On General Aspects
Due to heavy taxation on imports of engines, spare parts, etc., it is very likely that Jet Airways would be conducting is MRO activities abroad especially on its wide body fleet. There it is a common practise for the joint purchase of engines, spare parts, etc. would be carried out in order to save costs of both Etihad Equity Alliance Partners and Jet Airways as a whole. Thus a commonality of an MRO is expected to get a huge discount on servicing of the fleet.
The ATR/B737 is already serviced to a certain extent at the Jet Airways Hanger in Mumbai, India. The A330s and B777s are serviced in South Asia.
Simulator training is also expected to be routed through Abu Dhabi and the cost of sharing the same is to be borne by the airline partners as well.
WORLD WIDE LOUNGES / FREQUENT FLIER PROGRAMME
There will be world wide sharing of lounges/FFP on the entire network of the Etihad Equity Alliance Partners.
CUSTOMER SERVICE / INFLIGHT SERVICES TRAINING
There are a set of trainers form Etihad who have been training staff at Jet Airways in order to provide a better standard of service delivery to its customers.
With Etihad Airways helping to recover the long lost charm of Jet Airways, it is very clear that the motive is to move and move fast. Be it in Profitability, Market Share, Destinations, Revenues, etc…
A clear cut is expected as the deal is waiting for final approvals to come in place, the transition has already started with key management changes coming in recent months, integration of the FFP, trainings, further code shares and alliances with other carriers, etc…
Over the next few quarters we will see improved standards, better in-flight services, further key innovations, new planes and more importantly a boost in revenue and customers which hopefully will lead to a recovery of profitability.
(Mumbai - based Yash Patel is an airline analyst and executive with a focus on airline finance, strategy and restructuring)