NEW DELHI/DUBAI Abu Dhabi's Etihad Airways paid $70 million to buy Jet Airways'(JET.NS) slots at London's Heathrow airport and said it remains in talks to buy a stake in the Indian carrier.
The move signals positive developments in the discussions and investors cheered the move after a delayed announcement of the potential deal significantly hurt Jet's shares in recent weeks.
Earlier on Wednesday, shares in Jet surged as much as 19.7 percent after TV channel ET Now cited unidentified sources as saying Etihad Airways was close to a deal to purchase a 24 percent stake in the company.
Abu Dhabi's Etihad has already paid a "token" amount of $70 million and will likely pay $400 million in the first tranche of the deal, the channel reported.
Etihad said the deal to buy slots was a part of a "sale and lease-back" agreement, and Jet would continue to operate flights to London using those slots.
Graphic: Jet's shares link.reuters.com/vaq36t
Jet shares were up 17.3 percent as of 0927 GMT. Shares of smaller rival SpiceJet Ltd (SPJT.BO) also surged 8.5 percent to 37.55 rupees.
A Jet-Etihad deal would be the first since India relaxed ownership rules in September and allowed foreign carriers to buy up to 49 percent in local carriers, which are battling stiff competition and high operating costs.
Malaysia's AirAsia Bhd (AIRA.KL), Asia's largest budget carrier, also plans to launch a regional airline in India in a venture with the Tata group, marking a return to aviation for India's biggest business house.
Etihad, launched in 2003, is on a buying spree to compete with regional rivals Emirates and Qatar Airways. Etihad carrier has taken stakes in Virgin Australia (VAH.AX) and Aer Lingus and raised its shareholding in Air Berlin (AB1.DE) and Air Seychelles.
Top executives from Etihad and Jet met Indian ministers earlier this month, but the deal faced a set-back later when the Gulf carrier's chairman told Reuters the deal needed to be revised.
Jet shares have fallen more than 27 percent since then through Tuesday.
Etihad will have to find a way around Jet's complicated shareholding structure before a deal can be finalised.
Tail Winds Ltd, the Isle of Man-based investment vehicle of Jet founder Naresh Goyal, currently holds 79.99 percent of Jet Airways.
According to Indian rules, foreign companies can hold a maximum 49 percent stake in local carriers, but so-called non-resident Indians like Goyal are exempted.
Goyal is likely to convert shares owned by a holding company into his personal stake to comply with foreign investment regulations, an Indian government source has said.
As a foreign company, Tail Winds cannot engage in share trades with another foreign company, but Goyal can sell his personal stake.
(Editing by Jeremy Laurence and Matt Driskill)