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India's Jet Airways on the brink as Etihad board debates cash injection

Company in dire straits after defaulting on debt payment, warns chairman

Troubled Indian carrier Jet Airways is seeking urgent assistance from Etihad Airways as losses mount. (Getty Images)

MUMBAI -- India's Jet Airways is seeking an emergency cash infusion from Etihad Airways after defaulting on repayment of external debt on Monday, leaving the future of the country's second-largest private airline in the balance.

Jet Airways informed India's stock exchanges that the loan payment, which was due on March 11, "has been delayed owing to temporary liquidity constraints," but did not detail who the lender is or the size of the default.

The default comes just days after Jet Airways Chairman Naresh Goyal wrote an urgent letter to Etihad CEO Tony Douglas asking for an infusion of 7.5 billion rupees ($107 million) by the end of this week. Failure to do so, Goyal warned, will be "severely deleterious [for] the future of the airline, leading to its grounding."

Jet Airways has been struggling under mountains of debt, mounting losses and other headwinds as fierce competition in India's aviation industry continues to push fare prices lower and squeeze margins. The company has currently grounded 50 out of its 119 aircraft.  

The letter to Etihad, dated March 8, included a draft of a 40 billion rupee rescue plan for the troubled carrier. The plan, which includes the emergency cash injection, has been approved by Jet Airways, Etihad and lenders. Final approval by Etihad's board is expected this week, though analysts say there may be some sticking points for the Abu Dhabi-based airline, particularly in relation to the Goyal family's future role in Jet Airways.

The draft of the rescue plan was seen by the Nikkei Asian Review.

According to the proposed plan, "lenders shall infuse 7.50 billion rupees into the company. Etihad will procure funding for the company, either itself, or from an offshore or onshore lender, for an amount equivalent to lender's financing, i.e., 7.50 billion rupees, as soon as reasonably possible."  

In addition, Jet Airways is proposing to pledge 15% of the total share capital of its loyalty program, Jet Privilege, to lender HSBC as security for a $150 million loan. Jet Airways holds a 50.1% stake in Jet Privilege.

Under the rescue plan, Etihad Airways will inject between 16 billion and 19 billion rupees worth of equity into Jet Airways, which  would increase its share marginally to 24.9% from the current 24%, while lenders including State Bank of India will infuse 10 billion rupees for a 29.5% stake. A new investor will bring in another 16 billion to 19 billion rupees. That investor is yet to be identified, though it is widely believed that it will be the National Investment and Infrastructure Fund, a government-owned wealth fund.

These moves would bring the Goyal family's stake to 17%.

Furthermore, Goyal, would step down as chairman of the board and be designated chairman emeritus, and his family's maximum stake would be capped at 22%. Etihad has made his removal as chairman a requirement for bailing out the Indian company, though Goyal has been fighting this.

Ashish Nainan, an aviation analyst with the ratings agency CARE, believes that Etihad might have a problem with the founding family retaining a 17% stake, especially as its own stake would be less than that of the banks. "That's not really a comfort zone," Naina said. "It would leave scope for Goyal [to engage in] backdoor negotiations and to come back at a later point."

The board structure being discussed -- with two nominees from Etihad and two from Jet Airways -- is likely another sticking point, he said. "Etihad would want more control than leaving anything to the existing shareholders. … They want to run the airline."

Another point that might not sit well with Etihad is a proposal for Goyal's son Nivaan Goyal to be given an executive position at Jet Airways. The younger Goyal, who joined the company a decade ago, is currently the head of business at the company and was being groomed to become executive director.

Nainan added, however, that should the deal fall through, the government of Prime Minister Narendra Modi will likely ask banks to step in to help, as it does not want to let the airline fail ahead of important elections this year.

Jet Airway's request comes amid struggles at Etihad itself, which has been posting losses for the past two years and has reportedly laid off 2.5% of its 2,065 pilots. Its strategy of taking minority stakes in struggling airlines has also been put to the test. Two European airlines Etihad had invested in -- Alitalia and Air Berlin -- have filed for bankruptcy protection.

Still, approval of the rescue plan would give much-needed support for Jet Airways, its lessors, employees and lenders. The Indian carrier's debt stood at around 84.1 billion rupees as of last September, 30 billion rupees of which comes due at the end of March.

Shareholders the debt-laden airline have already voted in favor of a takeover by a group of lenders and of a capital increase that would steady the company's finances as it seeks a return to earnings growth. Under a debt-for-equity deal approved by the airline's board on Feb. 14, banks led by State Bank of India will take a 51% stake in the carrier. The debt-for-equity swap, which will entail an issue of 114 million new shares, is expected to fill a funding gap of around $1.2 billion, but the deal depends on Etihad board's approval.

Jet Airways has been battling high fuel prices, a weakening rupee and intense competition that pushed down fares. Employees and aircraft leasing companies have gone unpaid for several months. The airline on Feb. 14 reported its fourth consecutive quarterly loss -- 5.88 billion rupees for the October-December period. Like its peers, Jet Airways has also suffered from rising global oil prices and a depreciating rupee. In August, the carrier embarked on a plan to cut costs by 20 billion rupees over the next two years. Fresh equity infusion was part of the plan.

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