Opinion| Jet Airways needed just one rupee to avert this tailspin
The indebted airline was dragged down by its low-cost rival’s aggressive pricing. Now options are limited and politically fraught.business Updated: Jan 04, 2019 15:19 IST
All Jet Airways India Ltd. ever needed was 1 rupee, or just 1.4 US cents, for providing hot meals and cold towels.
Since even that modest goal has proven elusive, India’s longest-surviving private airline now needs bankers with spine to keep flying.
It’s been clear for some time that Jet, falling behind even on pilots’ wages, was going to skip a debt payment soon. Now that a default on bank loans has finally happened, let’s spend a minute on the brutal economics of the missing rupee.
As a full-service carrier, India’s second-largest airline spends that much more per available seat kilometerthan its bigger rival, IndiGo. That’s excluding fuel costs, which are volatile andexorbitantly taxedbut comparable for all players.
The problem is thatas2015 was ending, Jet was earning only half a rupee more in revenue per seat kilometerthan IndiGo. That was just before InterGlobe Aviation Ltd., the owner of IndiGo, set out to expand its scale of operations 2.5 times faster than what Jet could muster.(1)The market leaderalso drove prices lower by forgoing revenue of 0.9rupees per kilometer over the first nine months of 2016.
Jet was too indebted to match its rival’s aggression. When it tried, by sacrificing revenue of 0.3 rupees per kilometer, it ended upcharging customers less than it cost to fly them. Then, starting September 2017,oil prices shot up for a year. Thewhole industry was shaken, but Jet had alreadykeeled over.
The fuel-price surge has nowreceded, and the airline is exploring cost-cuttingoptions.But saving $100 million a year on maintenance contracts won’t make the debt problem disappear: Repayments of as much as 63 billion rupees ($900 million) are due byMarch 2021. Of its fleet of 124 at the end of September,Jet owns only 16 planes that can be sold.
Lengthening the working-capital cycle has its limits. Lessors have to be paid lest they take the aircraft away; employees havefamilies to feed.A plan to monetize the airline’s privilege program hasn’t gone anywhere. Who’ll buy into Jet Privilege Pvt. when there aredoubts about the carrier’s future? Speculation that the Tata Group could be a white knight has also waned. Nor is it clear if Etihad Airways PJSC — which must now regret picking up its 24 percent stake five years ago — would want to backJet founder Naresh Goyal, the 51 percent owner, once again. The aviation market in the Middle East isn’t exactly brimming with optimism.
There are probably only a handful of good options now. Either Etihad doubles down by makinga fresh investment; or the board finds a new owner who infuses equity by diluting Goyal and Etihad. To succeed, both these approaches would need the real threat of banks referring Jet to the bankruptcy tribunal. Goyal would lose control of the airline involuntarily, yet the carrier would continueto operate with fresh super-priority funding (which will rank higher than existing debt).
State Bank of India, the airline’s lead lender, is waiting for a forensic audit of Jet’s accounts. Time is not on itsside: General elections must be held by May. The government of Prime Minister Narendra Modi won’t like the bad publicity from a collapsing airline so close to the polls. However, if state-run lenders take a haircut as part of a restructuring, opposition parties would pounce on Modi for causing losses to taxpayers to help private businesses. It would take a gutsy banker to do anything at all.
Still, not acting urgently can do bigger harm. The 2012 unravelingof Kingfisher Airlines Ltd. provides a cautionary tale. Left holdingthe worthless brand of the grounded Indian carrier, among other collateral, Indianlenders should know by now that a defaulted airline loses value exponentially ifcash-flow woes make it defunct.
Kingfisher’s $1.3billion default preceded India’s bankruptcy regime. Now that a moderninsolvency process does exist, its strength deserves to be weighed. Whether thethreat of losing his life’s work and legacy is enough to force Goyal to accept an out-of-court restructuring would be one suchtest of the law. There’s plenty of value in Jet, provided it can tweak its business model, or earn that elusive onerupee.
(1) Analysts expect IndiGo’s revenue passenger kilometers, or the number of occupied seats multiplied by kilometers flown, to grow by about 33 billion annually between March 2016 and March 2019; compared with an expected increase of 13 billion kilometers at Jet Airways.
First Published: Jan 04, 2019 15:19 IST