Etihad Airways' expected investment in Jet Airways has the potential to fundamentally change India's air transport industry. Struggling Indian carriers are hoping other foreign investors will follow.

Several international airlines are showing an interest in Indian carriers, especially low-cost airlines such as Spicejet, GoAir and IndiGo. Unconfirmed reports indicate that Japan's All Nippon Airways (ANA) is in talks with at least two Indian carriers. Air Asia has also been rumored to be contemplating setting up camp here, but it is unclear whether this would be through a start-up with local investors or by buying into an existing carrier. Some industry analysts are predicting that SpiceJet could be the next Indian airline to take on a foreign shareholder.

If Etihad does procure a share of Jet Airways, it would be a boon for India's troubled airline sector, according to the Associated Chambers of Commerce and Industry (Assocham). The sale would put the Indian airline in a position to regain the market share it lost over the last several months, and help it conquer its mountain of debt.

Assocham points out that a capital injection from Etihad will go beyond improving the financial stability of Jet Airways. “The good thing is that in the last few months several initiatives have been taken to increase the comfort level of the global investors,” Assocham states. It adds that after the Etihad-Jet deal, renewed efforts should be made to revive the grounded Kingfisher Airlines, although it is difficult to see how that airline could attract foreign investment. The carrier is showing no signs of reviving its business almost four months after it grounded its fleet following labor unrest.

Several industry experts caution that investing in India is still a high-risk proposition. A fractious regulatory framework, legislation changes, infrastructure constraints, high taxation and the straitened finances of most of the country's airlines have dissuaded some potential investors, but the temptation of access to this promising market may still be very tempting for others with deep pockets.

State-run Air India, which fears stiff competition from Etihad on domestic routes as well, has warned the government that any deal between Etihad and Jet could prove disastrous to the flag carrier's growth. Air India has been surviving on government aid for years and its local competitors have cried foul about market distortion related to these subsidies.

Late last year, the Indian government significantly altered airline investment laws and now foreign entities are allowed to own up to 49% of an Indian carrier. Etihad would be the first airline to take advantage of the new regulation in spite of the well-identified risks. According to the guidelines for foreign investors in Indian airlines, the new entity will initially have to seek approval from the Foreign Investment Promotion Board. It will also need to ensure that the CEO is Indian, as are a majority of board members, and that the joint venture company is registered in India.

According to a senior Jet Airways executive, when the deal is completed, the airline might shift its international base from Brussels to Abu Dhabi, Etihad's base. The Indian airline would also be able to widen its network through code-sharing and gain access to fuel at a much reduced cost. Its cargo business could also benefit.

Etihad CEO James Hogan said last week that he plans to present the proposed buy to his board of directors following the conclusion of due diligence. Given earlier investment cases, it appears unlikely that the body would reject such a proposal.

“We are keen to enter the Indian market,” Hogan says. He confirmed that he met with government officials earlier this month to discuss foreign direct investment and talk about “what is going to happen in the domestic market” in terms of the ability to pass along fuel surcharges, among other issues. “A strong domestic market is key if we are going to have a long-haul relationship with an Indian carrier.”

Hogan believes Jet Airways' economic troubles are linked to domestic competition and “domestic rules of doing business,” but that the airline has a “great management team” that shares the Abu Dhabi-based carrier's dedication to providing good service.

Etihad has been weighing investment opportunities in India for months. Along with its 24% stake in Jet Airways, valued at around $300 million, it also was considering the grounded Kingfisher Airlines.

For Jet Airways founder Naresh Goyal, a self-made businessman, the Etihad investment is a turning point. While foreign investors (Kuwait Airways, Gulf Air) owned part of Jet briefly in the 1990s, they had to sell following a policy change that was implemented to protect Air India from foreign takeovers. Goyal never relinquished full control of his airline, even after the carrier's initial public offering in 2005. Now he does not have a choice: Jet Airways, while not nearly in as desperate a state as Kingfisher and not nearly as strangled by political interference as Air India, needs capital, not the least to grow its international business.

Etihad, besides gaining access to India's domestic market, has the potential to channel some of it long-haul traffic through its growing Abu Dhabi hub. However, such connections cannot replace direct long-haul services from India to Europe when the routes are big enough. Etihad has been trying to channel Air Berlin's Asian traffic through Abu Dhabi, but customer response to double connections has been lukewarm in many markets.

The likely Etihad move is being closely monitored by the three global alliances. Jet Airways has been exploring alliance options for years and was last believed to be considering the Star Alliance. However, once the carrier is tied to Etihad—an unaligned airline—an alliance hook-up seems unlikely.

None of the global alliances has an Indian member so far, but given the expected growth in the coming years, all three are keen to team up with a local carrier. Star Alliance at one point had invited Air India to join. But when the government-owned airline missed several deadlines, Star shelved the plans. At the time, the flag carrier was preoccupied with implementing the merger with Indian Airlines and did not dedicate the kind of management attention to the alliance-joining process that would have been needed.

Similarly, Oneworld had agreed to take on Kingfisher Airlines, but that process was suspended well before the airline's grounding last fall. “Every time we believe we are close to something in India, something happens,” says Oneworld CEO Bruce Ashby.

Given Kingfisher's grounding and the difficulties Air India continues to face in its restructuring, Jet Airways has been the only viable candidate lately. And low-cost carrier business models are unlikely to lead to any meaningful alliance possibilities.

For Etihad, a Jet Airways investment would fit a pattern. The carrier has previously bought minority stakes in Virgin Australia, Air Seychelles, Air Berlin and Aer Lingus. Hogan says the group has become “the world's first equity alliance.” He claims the ties deliver “strong and growing revenue streams” that complement Etihad's own organic growth and provide cost synergies and value in joint procurement.