Business Today

The Final Call

Jet Airways' lenders have worked out a survival plan. Will it work?
twitter-logoManu Kaushik | Print Edition: March 24, 2019
The Final Call
Naresh Goyal, Chairman, Jet Airways

As a young professional working at his uncle's travel agency in Delhi, Naresh Goyal, the Chairman of Jet Airways, had exact schedule of almost every flight in the country on his fingertips. This perseverance and hands-on approach, added to his deal-making skills, came in handy as he went on to build full-service carrier Jet Airways from the scratch, an endeavour that destroyed Air India's monopoly in Indian and international skies. However, Goyal's once-formidable empire, shaky for the last five years, has started crumbling, thanks to his strategic mistakes, heavy management churn and changes in the external environment such as rise in aviation turbine fuel, or ATF, prices and rupee depreciation.

Jet's market share tanked from 16.6 per cent in January 2018 to 13.6 per cent in January this year. Market shares of almost all major private carriers either rose or remained steady during the period. The airline has been posting net losses for the past four quarters. This is in sharp contrast to rivals IndiGo, SpiceJet Vistara and GoAir, which suffered losses for a few quarters, but managed to survive the last year's downcycle.

However, Jet seems to have fallen victim to severe cash crunch and debt pile-up. It has delayed salaries to employees, including the crew, for months. Several of its planes are grounded because it doesn't have cash to pay lessors. In January, it defaulted on a debt payment, which was followed by a downgrade by ratings agency ICRA.

As per a Reserve Bank of India circular last year, companies that default on loans have to submit a resolution plan within 180 days or file for bankruptcy. After defaulting on the loan, Jet's lead banker, State Bank of India, or SBI, quickly formulated a rescue plan, a bank-led provisional resolution plan (BLPRP), to salvage the airline and take it from the promoter. Some reports say Goyal has resigned from the board, but there's no official confirmation from Jet.

The nature of Goyal's folly is not exactly comparable to that of Vijay Mallya, who owned Kingfisher Airlines, but the fact that Jet is in a bigger mess than Kingfisher is a good enough reason for bankers, and other investors, to act. For instance, Jet's gross debt stood at Rs 8,411 crore (as on September 2018) as compared to Kingfisher's initial debt of Rs 7,524 crore (Kingfisher's debt swelled later due to interest accrual). Kingfisher had 5,696 employees in 2012 vis-a-vis Jet's 16,000-odd employees. Lastly, Jet's size of operations - 119 aircraft, around 600 daily departures - is bigger than Kingfisher's 69 aircraft and 370 daily flights.

What Went Wrong

Goyal ran Jet as his personal fiefdom for years, says an industry veteran. He called the shots on key issues even as churn continued at the CEO level. In over five years, Jet has had seven CEOs, including three acting CEOs.

The problems with Jet are three-fold: the management style of Goyal, internal issues and the general difficulty of running an aviation business anywhere in the world. The troubles with Jet began soon after it acquired low-cost carrier, or LCC, Air Sahara in 2007. Goyal's idea to give competition to aggressive LCCs IndiGo and Kingfisher turned out to be a disaster. Having its feet in both full service carrier and LCC markets, Jet couldn't integrate Air Sahara operations with itself, which resulted in confusion among customers and drained management resources.

With mounting losses at Jet (Rs 3,667 crore in 2013/14), Goyal was desperately looking for a bailout, and that's when the airline brought Etihad on board with 24 per cent equity. For Etihad, it was part of a larger plan to own airline assets in different parts of the world. Many industry insiders think Goyal miscalculated Etihad's intentions and let Etihad use Jet as a feeder airline for its international operations via Abu Dhabi. But since most of Etihad's global investments, including Alitalia and Airberlin, have turned sour, there's not much one can expect from it.

But things were not always like this. Jet, till 15 years after it was started in 1992, was an outstanding airline, but the competitive dynamics and the regulatory environment were different then. Even during the stratospheric rise of LCCs such as IndiGo, SpiceJet and GoAir from 2005, Jet gave a tough fight to LCCs. Till 2012, seven years after the launch of IndiGo, Jet was the market leader.

The scenario has changed now with more airlines vying for market share and influence of air carriers on policymaking reducing significantly. "There were conditions under which the current promoter could deliver but that's not the case now. The way he wants to run the airline now, it's not going to work," says Mark Martin, Founder, Martin Consulting.

Kapil Kaul, CEO (South Asia) at Centre for Asia Pacific Aviation (CAPA), says the current board cannot turn around Jet. Its August outlook said if Jet has to change, along with ownership, the composition of the board has to change too. "The board has not delivered. If the promoter has to resign from the board, the idea is to move from promoter-driven system to institutional system," he says.

Experts say SpiceJet's revival was easier because its operations were simpler compared to that of Jet Airways. SpiceJet operated two types of aircraft - Boeing 737 and Bombardier Q400 - with limited international operations, which made it easier for chairman Ajay Singh to turn it around. With some management rejig, and capital infusion of about Rs 1,500 crore, SpiceJet was revived in about a year. Jet's operations are more complex - it flies four types of aircraft.

With change in ownership, leadership is also expected to be changed, with Goyal likely to be replaced. The company's statement elaborating BLPRP said: "Appointment of lenders' nominees to the board of directors of the company would be under the provisions of the RBI circular."

Under the resolution plan, the banks will get to convert debt into equity (114 million shares) at a cost of Rs 1 per share. Goyal's stake is expected to fall from 51 per cent (as on December 2018) to about 20 per cent, while lenders, led by SBI, would become the largest shareholders. Lenders' shareholding is expected to rise after they take part in fresh equity infusion, which will likely be supported by National Investment and Infrastructure Fund, or NIIF, a fund created by the government for infrastructure financing. It's still not clear how much fresh money will be infused - between Rs 2,200 crore and Rs 3,400 crore is the speculation - but things are not going to move forward without it.

The resolution plan estimates a funding gap of Rs 8,500 crore that will be bridged through equity infusion, debt restructuring, sale of aircraft, sale and lease-back, and refinancing of aircraft. This is possibly the last attempt to revive the airline, and the resolution plan is just a beginning in a long and tiring journey to make a comeback.

"The composition of the board and the quality of the board would determine everything. I don't think management is a problem, maybe some additions are required. I don't see lenders holding Jet for long. They would exit in less than two years. There are many buyers in India and overseas," says Kaul.

Even if banks hold the largest number of shares, it is unlikely that they will become promoters. Their job will be to appoint a new board, and the moment the airline stabilises, which could take 12-24 months depending on external (fuel prices, rupee rate) and internal factors, find a new investor.

Some, however, remain sceptical given the poor track record of banks in managing troubled assets. "Examples of revivals led by banks are far and few between," says an aviation consultant.

House in Order

Some say it's a backdoor entry for the government as both SBI and NIIF, which are likely to participate in equity infusion, are government institutions. "Jet is not in the same kind of mess as Air India, and its problems can be fixed," says an aviation analyst. The two biggest assets for Jet include 16 owned planes, which are worth $400 million, and the Jet Privilege programme, whose value can be unlocked once the airline stabilises.

Jet has already taken steps to reduce costs, optimise fleet and increase revenues. It is aiming at cost savings of Rs 2,000 crore over the next two years, and claims to have realised Rs 500 crore savings already. "The airline has been exploring opportunities to enhance revenues by undertaking several steps to improve yields in the domestic market, fine-tune revenue management practices and use the advantages of connectivity over its hubs to improve volumes," a Jet spokesperson said in an email.

"There are layers of high costs which, through better negotiations and contracting, can be reduced significantly. It could be in the area of maintenance and leasing. Over the years, Jet has increased the productivity of narrow-body aircraft; they could do that with wide-body aircraft as well," says CAPA's Kaul.

Airline failures are common the world over and regulators around the globe have taken steps to put in checks to avoid these. In some countries, an airline needs six months of liquidity to renew the air operator permit. In India, except IndiGo, no airline has cash to run for six months without revenues. Rupee depreciation and fuel price hikes can have an immediate and considerable impact on health of airlines.

After Kingfisher Airlines and SpiceJet, Jet is the third biggest crisis to have rocked the aviation sector in the past six years. If Jet shuts down, everybody loses. It will have an impact on employees, bankers, shareholders, in fact the entire sector.


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