JET AIRWAYS turned 25 this year. It is the only private airline to have survived of the first lot of airlines that started operations when the civil aviation sector opened up in the early 1990s. Unfortunately, in recent weeks the crisis in the commercial carrier has snowballed into a dire situation where it may face even closure if its owner, Naresh Goyal, does not find a buyer or funder.
Primarily hit by higher fuel expenses, currency fluctuations and below-cost airfares, the airline declared a Rs.1,036-crore loss in March, at the end of the first financial quarter of this year. It suffered further losses in the third quarter. As things stand, it may not survive until the fourth quarter. The impact will obviously be staggering, considering its passenger load, its large number of employees, the huge fleet it operates, the airport space it occupies and the domestic and international routes it flies. As a public listed company, its shutting down will have an adverse impact on the markets and, of course, investors.
Goyal, say financial experts, has few bailout options at present. The Centre had apparently asked Tata Sons Limited to explore the option of buying the beleaguered airline. The Tatas, it is believed, will do it if Goyal sells his ownership stake and steps down. For a short while, it looked like Reliance Industries Limited, the conglomerate with deep pockets, was interested, but airlines were perhaps not on its list of takeovers and it seems to no longer be in the picture. Etihad Airways, Jet’s partner airline, which owns 24 per cent of the company, could be another contender, and industry sources say Goyal has appealed to it to save his airline. He is willing to concede operational reins to the West Asian airline in exchange for a cash infusion.
“The crux of the problem is that Goyal is unwilling to give up his ownership position. Even though Jet is a valuable product to own, Indian industry does not trust him,” said an investment banker who monitors the civil aviation sector.
As this magazine goes to press, Goyal is hunting for a funder or buyer. There were reports on several financial websites on November 28 stating that he has said that he is now willing to relinquish his controlling stake if that is what it will take to save the airline. The company’s share price, which had been sliding, improved with the news. However, this information could not be verified.
“The best contender for the debt-ridden airline would be the Tatas. They own the domestic carrier Vistara, and acquiring Jet will help the Tatas gain scale. For instance, Vistara has not been able to expand as rapidly as it should because of the lack of slots at prominent airports such as Mumbai, Delhi and Bangalore. Should the Tatas acquire Jet, its domestic market share will grow to 24 per cent, making it second after Indigo, which has a 43.2 per cent market share,” said the banker. Jet also has an established international presence with a strong network across Europe and Asia. The Tatas own Air Asia, so they are obviously interested in the aviation market, he said.
“It is just Goyal that is the problem for them. He has a tainted reputation, and the Tatas would prefer to stay clear,” said a source in the Tata group. Yet, Jet has so much to offer—healthy routes, good passenger flow and a strong infrastructure—that the Tatas, informed sources say, have begun due diligence on the airline to see whether a buyout is viable. The Tatas with their partner Singapore Airlines wanted to take over Jet in a two-step transaction beginning with a reverse merger and ending with a buyout, but the board of Tata Sons had second thoughts when Goyal refused to step down, he said.
As Jet’s partner, Etihad has the right of first refusal in case of share sales. This makes it a strong contender for ownership. However, as it is a foreign company, Indian regulators will only allow it to own up to 49 per cent of the company. Jet’s strong routes to the Gulf, particularly Abu Dhabi, make it an attractive proposition for Etihad.
Hitting an air pocket
The first red flag relating to Jet Airways went up when the company declared massive losses in the first financial quarter of 2018. By all appearances, Jet Airways seemed to be a competent airline. It was operating out of international terminals; it was a full-service airline that gave passengers luxuries that budget airlines did not. To the average traveller, there was no hint of trouble.
The astounding loss of Rs.1,036 crore was a shock to the market. In the same quarter in the previous year, the airline declared a profit of Rs.602.4 crore. The losses in the second and third quarters, of Rs.1,261 crore and Rs.1,297 crore, were equally disastrous, according to the company’s financials.
Analysts say the total enterprise value of Jet Airways is about Rs.12,000 crore (market capital plus debt minus cash), with the total debt of the airline standing at Rs.8,000 crore and the market value at Rs.3,940 crore. “It is a healthy company, but a combination of external factors and some of its own inefficiencies have led it to this condition,” said the banker.
Explaining the cash crunch, he said: “Unfortunately, Jet Airways has suffered from the double whammy of rising fuel costs and a rising dollar. Fuel costs can range from 18 per cent to 30 per cent of the total expenditure of an airline and therefore form one of the most significant factors affecting profitability. In 2018, the price of crude has fluctuated from a 52-week low of $ 60 per barrel to a high of $ 85 per barrel. In addition, the crude trade is denominated in U.S. dollars, and that has also moved adversely for India. From an average exchange rate of $1 = Rs.65 in March, the price moved to $1 = Rs.74 in October 2018.The compound effect of both badly impacted the airline industry in India and Jet in particular.” Jet has been hit the hardest as it is a full-service airline and its costs are higher. Budget airlines have also been affected by the oil/rupee factors but not as badly as Jet has been. Indigo, for instance, reported its lowest profit in the quarter ended June 2018.
In an informal conversation, a junior pilot said that Jet had been struggling with operational issues for some time. It was once a tightly run ship, but in recent years operations had become unwieldy and inefficiencies had begun creeping in. For instance, the airline performed badly on on-time arrivals and departures. There were roster and scheduling problems. Another indication that something was wrong: Jet has seen six chief executive officers in four years. Already in the grip of internal problems, the airline could not cope when hit by external factors.
While announcing the terrible third quarter losses, Goyal said the company was working on a plan to reduce costs by Rs.2,000 crore over the next two years. As the financials deteriorated rapidly in November, the airline immediately began taking cost-cutting measures. Sadly, this started with layoffs and the shutting of its Hyderabad office. Travellers confirmed that frequent fliers were denied lounge access unless they were flying business or first class.
When Jet Airways took to the skies in 1993, it launched itself as a premium airline that could make flying an enjoyable experience. It was a refreshing change from the stodgy Indian Airlines, and its smartly turned-out, friendly crew set a high benchmark that even budget airlines would follow. A trailblazer of sorts, it introduced schemes such as sky shopping, the frequent flyer programme, and giving to charity. Its largest contribution has been connections to some of the most remote places in the country.
Jet saw good days when it bought out Air Sahara in 2007, which increased its market share to approximately 30 per cent for a while. In 2013, the strategic alliance with Etihad Airways brought in about Rs.2,000 crore and gave it a much-needed cash infusion that helped expansion. It looks like Etihad may once again be helping its partner.
With close to six crore domestic passengers (according to the Directorate General of Civil Aviation), flying has become par for the course in India. A plane ticket could often cost less then a railway ticket to the same destination. Analysts say the heavy traffic and load factors do not necessarily indicate a healthy sector. In India, the capacity of airline seats may have increased, but the seats go for a song, barely covering costs for budget airlines, never mind full-service flights such as those Jet operates. Jet is so much a part of the country’s aviation landscape that the idea it may no longer exist is mind-boggling. For the sake of travellers and shareholders, one hopes that a solution can be worked out.
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