LATE EVENING ON MONDAY, October 13, 2008, Naresh Goyal sat in Vijay Mallya’s red Bentley, which ferried the chairman of Jet Airways from his office in Andheri to Mallya’s Kingfisher House, close to Runway 14/32 in Mumbai’s domestic airport.

The rendezvous between the overlords of India’s two largest airlines, not known to be great pals, was exactly what it seemed: desperate. But you could also say it hadn’t come a day too soon. With crude soaring to $145 (Rs 8,491) and the recession slicing through travel budgets, aviation was going through its bloodiest cull in years. Seven airlines had shut in the U.S. alone, and the contagion was fast spreading.

Back home, market leader Jet Airways reported a net loss of Rs 253.06 crore in the year ended March 2008, compared to a net profit of Rs 27.94 crore the previous year. Kingfisher was also reportedly haemorrhaging Rs 3 crore a day. Suicidal price wars with low-cost upstarts SpiceJet, IndiGo, and GoAir promised to turn things uglier.

At about 11 pm, Goyal and Mallya emerged from their meeting, armed with a formula to stem the rot. Amid wide smiles and tight hugs, Mallya revealed an elaborate non-equity-based operational alliance—including joint fuel management and cross-utilisation of crew—which would save “humongous costs and bring in efficiencies”. Jet Airways went a step further. It said the alliance was “in the national interest” and would bring in “international best practices to strengthen the Indian aviation industry”.

Except of course it didn’t. Few industry watchers really believed that the two strong-headed men with very different philosophies could keep up the happy amigos act. While Goyal had built his airline brick by brick, the flamboyant Mallya is remembered for growing his on steroids. The “humongous” cost savings never materialised, and by 2012, Kingfisher had folded up, leaving a gruesome trail.

The deal with Etihad could be Naresh Goyal's final lifeline.
The deal with Etihad could be Naresh Goyal's final lifeline.

Jet was big enough to keep standing, only just. In the pre-low-cost era, it owned more than 45% of the Indian market. Even in 2012—the year it finally surrendered its long-held No. 1 perch to IndiGo—it flew three out of 10 air passengers with group brands JetLite and JetKonnect. But after that, its share rapidly eroded to the low-20s.

With losses mounting and employee morale at an all-time low, Goyal knew a cash-rich partner was his only hope to avert a belly landing. Mid-2013, help came in the form of Etihad—the flag carrier of the United Arab Emirates (UAE)—which pumped in $379 million in Jet for a 24% stake, as part of a string of small holdings in airlines across the globe which accounted for a fifth of its $6.1 billion revenue last year. It paid another $70 million to purchase Jet’s slots at London Heathrow and $150 million for its frequent flier programme.

Jet Airways issued the mandatory soundbites on “cost synergy” and “significant passenger benefits”, but a more significant detail went unnoticed. Goyal, I am told, scored a mini triumph at the negotiating table: He asked for a valuation of $3 billion, while Etihad pegged it at a mere $350 million. After months of parleys, Goyal managed to get about $1.2 billion, double of what a private equity fund would have put in.

‘Jetihad’, as the partners have come to be known, can now renegotiate contracts—maintenance, ticketing, food, handling—and prune spends by 5% to 10% over the next couple of years. Add to that revenue enhancement from additional traffic to the tune of 10% to 15%, and a 20% gross improvement in margins is not unrealistic.

Well begun then, but here’s the fine print: Etihad as an ally has even less in common with Jet than Kingfisher did (though its name does translate to ‘union’ in Arabic).

For starters, while Goyal is preoccupied with survival, Etihad is a much bigger statement of intent for Abu Dhabi, the richest of the UAE’s seven emirates. Unlike Jet, Etihad doesn’t have a domestic market to worry about. Instead, it focusses on one goal: overtaking the much bigger Dubai-based carrier Emirates, and to a lesser extent, Qatar Airways, and making Abu Dhabi the No. 1 hub in West Asia.

Aviation consultant Mark Martin attributes this to the region’s well-known obsession with creating the biggest and the most luxurious. “Emirates may have taken 30 years to reach where it has, but Etihad wants to be there in five.” It wouldn’t mind skimpier profits so long as this larger goal is met. Jet, on the other hand, hasn’t thought about larger goals in a while.

The sheen of Etihad’s balance sheet—it made profits of $62 million in 2013, up 48% the previous year—has helped gloss over these differences for now. Technically, they shouldn’t matter much to Jet anyway, since it has only sold a minority stake. But within months of coming on board, Etihad is stretching the stake to its seams, following a pattern that is now famous—or notorious—among its investee airlines across the world.

Some smell foul play, others are gung-ho. But in the melee of media reports based on Jet’s perspective, few speak of the new order Etihad is pushing through, dramatically changing India’s oldest private airline. (Jet Airways declined to participate in this story since Goyal was not in the country, and the airline was yet to select a new CEO after Garry Toomey and CFO-cum-acting CEO Ravishankar Gopalakrishnan left in quick succession; it has since appointed former Air Seychelles boss Cramer Ball to the post. Those who did speak requested anonymity. Etihad did not respond to e-mails.)

FEW DISPUTE THAT this is a great deal—on paper. Amber Dubey, analyst at consultancy major KPMG, calls it a win-win. For Etihad, it assures a constant flow of passengers for the hub through Abu Dhabi, while Jet gets much-needed cash.

However, there are dissenters. Many executives who have had long careers under Goyal say they have been bowed out because of Etihad’s increasing belligerence.

“They saw me as Goyal’s boy during the deal process,” says a former senior Jet executive who was once billed as a potential CEO. “They wanted their own guys to sit in all the CXO roles... I thought they had an axe to grind against me.” During my research, I was told that most of the recent senior exits from Jet have had a similar trigger.

Management exits and realignments are not unusual after an equity exchange, but the scale of it here raises questions. Since November last year, Etihad has flown in 30 to 40 employees from Abu Dhabi to closely oversee Jet’s offices and hangars. More telling, it has deputed two directors, James Hogan and James Rigney, its chief executive and chief financial officer, respectively, on Jet’s board. Despite its controlling stake, Jet also has two representatives on the board of six: Goyal (chairman), and company veteran Gaurang Shetty. “The tenant is behaving like the landlord,” says the former CEO hopeful.

That may be a simplistic account of an intricate game of brinkmanship. Goyal knows that Etihad will have to stay invested in order to make the most of the deal, while Etihad understands Jet will need more of its cash. Goyal wouldn’t push Etihad back beyond a point till the cash comes through.

Etihad’s growing clout has fallen afoul of the regulators. While assessing the deal, the Competition Commission of India (CCI) had observed that Abu Dhabi would gain joint control of the assets and operations of Jet. The Securities and Exchange Board of India (Sebi) decided to examine if Etihad could be counted as a promoter, in which case it would have had to come out with an open offer to take the stake up to 46%.

“The company [Jet] has been very opaque. It creates doubts whether what you are seeing is the [entire] picture,” says J.N. Gupta, founder of proxy advisory firm Stakeholders Empowerment Services. Gupta, a former executive director at Sebi, maintains that “Etihad is sitting in joint control with Naresh Goyal, which has to trigger the takeover code, and an open offer has to be made to the shareholders”. Etihad denies the allegations.

Last month, Sebi ruled in Etihad’s favour, meaning it wouldn’t be mandated to up its stake, after “the regulatory authorities concerned were satisfied that ‘effective control’ was vested in Indian nationals”. That suits Goyal: If Etihad were to increase its stake to 44%, it would have further depleted his bargaining power.

Meanwhile, Jet was forced into a prolonged management vacuum at the top till Cramer Ball, ex-CEO of Air Seychelles, part owned by Etihad, came on board as chief executive days before we went to press. Ball, a former Etihad man, is credited with implementing Etihad’s plans at Air Seychelles and turning it around from three years of losses to two years of profit. But the critical post of CFO remains vacant.

More trouble is brewing in Jet’s domestic business, which an oldtimer calls “the thorn in Etihad’s hide”. Etihad doesn’t understand domestic, and it cares little because that has no relevance to its raison d’être—feeding traffic to and through Abu Dhabi. The mismatch in mindsets is taking its toll on day-to-day operations. Take the issue of flight cancellations. It’s standard practice in the domestic sector that if the loads don’t add up in two consecutive flights, the airline combines the flights by cancelling one. But such last-minute calls irk Etihad, which generally cancels flights at least 45 days in advance, since predicting demand and deploying capacity is far easier for international routes.

Etihad also wants to scrap certain unprofitable domestic routes, which some Jet executives fear would end up giving its competitors free rein. Further, detractors allege that Etihad doesn’t understand where the growth is in the Indian market: the segment serviced by low-cost, no-frills operations, where average capacity distribution is between 70% and 80%.

“They are not agile enough for India. They’d say ‘let’s discuss domestic in the next meeting’, which would invariably be 15 days later,” complains the oldtimer, adding that Jet’s original all-hands-on-board approach was more challenging. “Goyal would simply pick up the phone and call a middle manager if he had to, without involving his seniors. Etihad frowns upon such an unstructured approach,” says another former executive.

Sanjay Agarwal, the former CEO of Kingfisher Airlines who knows a thing or two about managing a troubled airline, warns that while Etihad has done many international alliances, “India is an altogether different landscape, which I myself, despite being Indian, learned the hard way”. Trying to get Jet employees to rally behind Etihad’s management will be disastrous, he says. Jet must retain control, and Etihad should restrict itself to “utilising vendor contracts wherever they are more favourable, sharing best practices, network planning, and revenue management”.

Is Etihad too grand to be content with that role? Vic Dungca, a director at Jet from 2004 to 2013 who is close to Goyal, thinks so. “When all one is accustomed to doing is to throw money at a problem, then before long one starts to think that money solves everything.”

Unabashed opulence is indeed central to Brand Etihad, courtesy Abu Dhabi’s fabulous wealth. (Before Jet, Etihad had shown interest in Kingfisher, which enjoyed similar positioning in its heyday.) Consider the airline’s latest launch—The Residence, a lavish private suite including a bedroom, living room, and bathroom, and a personal butler. The New York Times says it is unlikely any competitor will even try to match that. “Is it to meet market demand? Well, maybe,” Seth Kaplan, managing partner of Airline Weekly, told the newspaper. “But if they got their math wrong, it’s not as much of a big deal as it would be at United or American.”

That’s the kind of brazenness that has helped Etihad navigate Jet-like management control investigation in Europe, where it has taken interests in several troubled entities, including Air Berlin, Aer Lingus, Air Serbia, and Darwin Airline. As with its Indian partner, it has pushed the limits of its legal entitlements in many of these cases. For instance, at Air Berlin, it has attempted to put in money in the form of bonds convertible into stocks, which, if converted, would take its stake beyond the 49% allowed to non-EU investors. It has also renamed the Switzerland-based Darwin Etihad Regional—not the kind of thing that will make it the darling of European regulators.

There is a view that Etihad’s money muscle allows it to get away. “Etihad does not ‘need’ Jet in any way. If Jet collapsed, Etihad and others would have probably accessed the Indian market more easily because the Indian government would have had to relax rules to stimulate the industry,” says aviation analyst Saj Ahmad. Recently, Etihad CEO Hogan was quoted saying that the Jet deal will also be “great for Indian jobs”.

Hogan clearly has Abu Dhabi’s blessings to carry on with the strategy of cherry-picking distressed airlines. There is constant chatter of a stake in the troubled Italian carrier Alitalia, and a possible tie-up with Air France-KLM. In fact, Jet Airways recently signed an enhanced code share agreement with Air France, prompting speculation that Etihad may be using Jet to cozy up to SkyTeam—one of the three mega airline alliances of which Air France is a founder-member. Eithad is part of Star Alliance.

GOYAL IS NO STRANGER to the dynamics of foreign partnerships. “I have no personality, so I can fit in anywhere,” he told the Times of India back in 2007. Until the Indian government prohibited FDI in domestic airlines in 1997, Jet had two partners, Kuwait Airways and Gulf Air, sharing a 40% stake between them. Many in aviation say Goyal was part of the clique which asked for a ban on FDI to keep Tata from reentering the sector with Singapore Airlines all those years ago.

Ironically, 2007 was also the year things started nosediving for Goyal, with the ill-fated buyout of Air Sahara for Rs 1,450 crore—a move meant to keep Mallya from snapping at his heels. But Saroj Datta, former executive director at the airline and someone credited with much of the hard work in running it for many years, suggests that the ground for Jet’s fall was laid much before. “Everyone got a little slack in the early 2000s. We didn’t pay attention to controlling costs till the low-cost carriers came in, particularly IndiGo.” Jet was relatively successful in an inefficient market, but when efficient competitors took flight, it was found wanting.

Dungca, the former director, blames a growing tolerance for non-performance. “The management either blithely ignored its problems or didn’t realise they could become monstrous. But just as important—no one at Jet Airways has been known to lose their job for not performing.” Dungca says these factors, plus the economic slowdown, “created the perfect storm that devastated the company’s finances”.

A drastic change in the management style has also copped blame. In the Jet of yore, major decisions like acquisition of the Boeing 737-800 NGs were made after months of deliberations. But in the mid-2000s, after Jet became India’s biggest carrier by passengers carried, these decisions became more and more centralised. Datta says the team got to know about the purchase of Boeing 777s and A330s (for international operations) only after the order was made at the Paris airshow. “Compared to that, we were all part of the decision to buy the 737-800 NGs. The induction of the aircraft, pilots, engineers, and routes were all well-planned.”

There’s also a view that Jet just wasn’t prepared to expand internationally with the level of aggression it showed in the mid-2000s. Jet’s wide-bodies began coming in 15 months after they were ordered, while normally airlines work for two to three years preparing the market before launching services. An erstwhile operations honcho says, “You don’t do fleet planning before network planning. You do network planning and you see what fleet is required to run that network profitably.”

Perhaps, say others, it all comes down to Goyal being fazed by Mallya’s mercurial rise. Normally, Goyal is not someone to be easily rattled. At the age of 12, he endured the indignity of his family’s possessions being thrown out of their home because they were unable to repay a loan of Rs 10,000. To have built India’s largest airline from there testifies to a rare tenacity. But this was different.

“I think he was scared that Kingfisher would buy Sahara and Jet wouldn’t be able to compete with it,” says Datta. In hindsight, Kingfisher was already going through trouble integrating Air Deccan. It is not known whether Goyal paused to question if a beleaguered Mallya would really be able to fit in another airline, operating completely different aircraft and with a very different brand positioning.

The aftershocks continue unabated: Jet’s losses for the 2013-14 financial year stood at Rs 3,667 crore, more than ever before. The airline has made some noise about a three-year business plan which it says will help it become profitable. It has also talked about writing down overvalued non-cash assets, and a task force to implement
major restructuring.

ETIHAD’S IMMEDIATE CHALLENGE is to turbo-charge that restructuring. The top priority is to help clean up operations, and there are a few green shoots already. On condition of anonymity, a Jet executive says, “One year ago, Jet would end up cancelling flights in March because it is lean season. Now it is clear that schedules have to be planned a year in advance. Things are becoming more structured.”

That means strategies are being thought of at the group level. U.S.-based Seabury Group has been advising Etihad, and now Jet too with its long-term goals. Consultations are on to identify the key international markets Jet needs to be present in as an Indian carrier, and those that need to be serviced through West Asia. “Network and fleet decisions will be driven at the [Etihad] level,” says an ex-Jet executive.

What most also admire—some grudgingly—is Etihad’s grip on networking internationally, helping plot scenarios on how best to use the Jet fleet. One option that is finding favour is to have 20-odd Jet flights originating from various points in India going to Abu Dhabi as part of a night wave, with some of them flying further to Europe or Africa after collecting passengers from Abu Dhabi.

“There are several destinations which will bleed as non-stops, but will be very attractive as one-stops,” says a former Jet executive. “Take Mumbai-Milan. Route it one stop through Abu Dhabi, and you make a lot of money because it will not only feed off the India traffic from multiple destinations, but also the Etihad network.”

While hub-based carriers may lose money on major routes, they make up for it by offering route combinations at fares that can be 50% higher than other routes for similar distances. Imagine connecting Goa to Lisbon through Abu Dhabi. It is the possibility of building such unique connections that Etihad is counting on.

Aviation consultant Ahmad says Etihad has what it takes to help build a stronger Jet: It has grown faster than Jet, flies to nearly a third more destinations, and is profitable with the same fleet size—all in half the time. “Employee morale can take a hike. If the Jet staff want to hold on to the olden days, like Air India did, their days are numbered.” Etihad’s not a charity, Ahmad adds, and it has a right to demand change.

There are two ways of looking at that change: mourn the demise of Jet Airways as we know it, or move on with the new order. Goyal seems to have made his choice. Given where he has been, that could be the only choice.

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