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In Focus: Jet Set, Where Will It Go...

Jet-Sahara merger will add scale to operation, but investors keep their fingers crossed

As Jet Airways (Idirect Code: Jetair) and the Sahara Group agreed to settle a 10-month dispute over a failed merger deal, investors remained divided over the implications on Jet Airways. Jet Airways recently acquired Air Sahara in a deal valued at Rs 2,300 crore. While the company had paid Rs 400 crore as an upfront payment, it will pay Rs 550 crore in four annual installments starting early 2008.

Post acquisition, Jet Airways has decided to rename Air Sahara as Jetlite and position it between a low-cost airline and a regular carrier.

The deal, in all likelihood, will have a negative impact on Jet Airways in the near-to-medium term as Air Sahara’s integration will cost hugely to the company. Jet Airways may have to spend around Rs 350 crore on the assimilation process keeping all Air Sahara flights operational. For this, Jet Airways has initiated talks with private equity players like Blackstone, TPG Capital and Temasek for raising Rs 400-450 crore to meet the additional operational expenses. The private equity investors may take up to 8-9 per cent stake in the carrier.

The deal looks expensive given that Air Sahara has been the worst hit by the increasing competition. Air Sahara has lost almost half its market share since January 2006, the time of original share purchase agreement. Jet Airways, at present, is operating 340 flights a day with 62 aircraft as compared to Air Sahara’s 134 flights on 27 carriers. The falling market share of Air Sahara, its few flying slots and parking bays may not have much appeal for an investor in Jet Airways share. Moreover, the price being paid seems too high for a carrier that owns none of its planes and has few other assets.

However, for a long-term investor, the deal may bring handsome gains. The integrated company is expected to command around 32 per cent share of the domestic aviation market. Jet’s leadership position is unlikely to be challenged in the near future.

The deal will bring prime landing and take-off slots at London’s Heathrow, Delhi and Mumbai airports, making Jet the only Indian airline with clearance to fly overseas. After the merger, around 300 pilots will come into the Jet Airways fold, taking its total pilot strength to over 950. This will be a blessing for Jet Airways — which is all set to start operations in new routes — at a time when there is an acute shortage of trained experienced pilots in India.

If the Gulf sector is opened for private airlines in January 2008, Jet will be the sole beneficiary as government has stipulated five years domestic operations as the criterion for allowing private players in that sector. The airline has lined up plans to spend around Rs 8,000-10,000 crore to expand its fleet. However, the company is unlikely to post net profits soon. The Jet scrip has so far failed to maintain the height (Rs 1,155) at which it got listed on March 14, 2005. After attaining an all-time high of 1,373 on April 26, 2005, the scrip seems to have lost steam and has been hovering below the Rs 1,000 level for the past one year. Though the acquisition of Air Sahara will definitely add scale to Jet's operations, the process of integration of the two carriers may test investors' nerves in the short term.