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|19 March, 2019

Etihad is strapped in too tightly at Jet Airways

Etihad is holding out on a bank-led rescue plan that would convert Jet debt into a controlling stake to address a funding gap of $1.2bln

Zürich, Switzerland - March 26, 2016: Boeing 787 of Etihad Airways departing Zurich Airport on a sunny morning. Etihad Airways is the national airline of Abu Dhabi, United Arab Emirates. Image used for illustrative purpose.

Zürich, Switzerland - March 26, 2016: Boeing 787 of Etihad Airways departing Zurich Airport on a sunny morning. Etihad Airways is the national airline of Abu Dhabi, United Arab Emirates. Image used for illustrative purpose.

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MUMBAI  - Etihad is strapped in too tightly at Jet Airways. The ailing Indian carrier has stopped flights to Abu Dhabi, the hub of its Middle Eastern shareholder. Even with almost half its fleet grounded for failing to pay aircraft lessors, it looks like an attempt to strong-arm support for a restructuring. It’s a stark reminder that the Gulf emirate has more to lose than just its equity.

Investors know the risk of buying any stock is a fall to zero. For Etihad, however, that goes beyond the 24 percent stake in Jet it bought in 2013 for about $600 million, a strategic purchase which included control of the frequent-flyer programme. The airline had been ferrying passengers from India to Abu Dhabi, and then into Etihad’s own network to further destinations. As of Monday, that’s no longer the case. Jet suspended operations to the United Arab Emirates capital, having earlier missed a repayment on borrowings guaranteed by its partner airline.

The fallout confirms Etihad’s limited influence. It may have been expecting India to relax foreign investment rules that limit overseas peers to 49 percent ownership. It hasn’t happened, though, and Etihad has no clear path to an amiable resolution for an airline worth just $390 million after losing some two-thirds of its market value over the past year.

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Etihad is holding out on a bank-led rescue plan that would convert Jet debt into a controlling stake to address a funding gap of 85 billion rupees ($1.2 billion). The proposal also requires founder Naresh Goyal and Etihad to inject more cash into the business, according to a person familiar with the situation. The Gulf airline, facing its own financial difficulties, likely wants rid of Goyal, a troublesome partner, and has little incentive to put in more money unless regulators exempt it from a mandatory open offer should its stake surpass 25 percent.

It’s a precarious situation with employees and customers losing confidence in Jet. The lenders, led by State Bank of India, have failed to rein in difficult stakeholders and now face bigger discounts on their debt as they prop up the airline under pressure from a government that doesn’t want a bankruptcy before the election in May. Any prospect of a return for Etihad is rapidly in descent.

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CONTEXT NEWS

- India's Jet Airways has grounded its operations at Abu Dhabi Airport for an indefinite period, citing operational reasons, Press Trust of India reported on March 18 citing a message to customers from the airport services of Gulf carrier Etihad Airways, which is also Jet's 24 percent shareholder.

- Jet Chairman Naresh Goyal told the airline's pilots on the same day that he needed "a further short time" to finalise a rescue deal for the cash-strapped Indian carrier as the process is complex.

- In a letter reviewed by Reuters, Goyal said he was "committed to have the process completed as soon as possible and restore much needed stability" to the airline's operations, and that he would make it a top priority to settle delayed salary payments for pilots and some other staff once a deal is finalised.

- He also said talks for the rescue deal with Etihad, and lenders, led by State Bank of India, were ongoing.

- Etihad, in a separate statement, said on March 18 it was working with Indian lenders and Jet on a solution for the airline.

- Jet said on Feb. 14 that it had approved a “bank led provisional resolution plan” in which lenders will convert their debt to become the largest shareholder.

- The company said at the time that the plan seeks to address a funding gap of about 85 billion rupees ($1.2 billion) and includes an equity infusion, debt restructuring, and the sale and lease back of aircraft.

- For previous columns by the author, Reuters customers can click on GALANI/

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Jeffrey Goldfarb and Katrina Hamlin) ((una.galani@thomsonreuters.com; Reuters Messaging: una.galani.thomsonreuters.com@reuters.net))

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