Thursday, February 28, 2013

ETIHAD, FDI And India

The Indian government introduced Foreign Direct Investment (FDI) to support the airlines who were suffering from over capacity and low yields. The demise of Kingfisher helped alleviate the capacity problems but showed the depth of the banks' exposure to the sector especially for Air India and Kingfisher. FDI was meant to provide needed cash that cannot be obtained from stretched banks.

This prompted Etihad to look at Jet Airways with a view of purchasing a 24% stake for about 400 million USD (ETIHAD And India). Etihad negotiated and completed its due diligence, when the  deal slowed down over Etihad's fears of government policy changes that will force it to exit the investment (Gulf Air and Kuwait Airways, the original shareholders in Jet Airways were forced to divest their investment in Tailwinds, the holding company in October 1997). The Indian government has since given assurances to the UAE government and Etihad that the investment is safe and investing in India in general is safe and profitable.

However, on 27 February 2013 Etihad announced the purchase and lease back of three pairs of Jet Airways slots at London Heathrow for 70 million USD, an indication that the deal is still ongoing.

Speaking of Indian government policy, Air Asia has applied for a joint venture with Tata Sons Ltd and Bhatia's Telestra Tradeplace PVT Ltd to start Air Asia India. While the JV is not outside the FDI rules, it does add capacity to the market and will in the short term destabilize it. 

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