LET JET GO: A SAGA FROM BOOM TO BUST

INTRODUCTION

Naresh Goyal founded Jet Airways in 1993 with a fleet of four leased Boeing 737 aircraft. At a time when private airlines had just started coming up in India, Jet Airways, a full-service airline, grew fast to become India’s largest international carrier.

However, with budget airlines such as SpiceJet and Indigo entering the fray, the aviation industry became highly competitive. Being budgeted airlines, SpiceJet and Indigo started to offer low airfare, forcing Jet to lower its fares too. But it continued to offer full services which lead to increasing operational costs and forcing it to keep borrowing from banks to stay afloat in the market. Macro-economic changes such as a rising fuel costs and weakening rupee also hurted it further.

It has consistently been one of the India’s top three airlines in past decade. Jet Airways was founded by ticketing agent turned entrepreneur Naresh Goyal, after India ended a state monopoly on aviation in the early 1990s. It’s now 24 per cent owned by Abu Dhabi’s Etihad Airways PJSC and controls 13.9 per cent of India’s market, one of the fastest-growing in the world.

As a slide of budget carriers started flooding the market in the mid-2000s, offering no-frills, yet on-time flights, Jet Airways began dropping fares even some to below cost. On top of that, provincial taxes of as much as 30 per cent on jet fuel added to its expenses, while price-conscious Indian travellers refused to pay a premium for on-board meals and entertainment. Unlike budget operators, full-service airlines such as Jet Airways offer most of such amenities for free.

PROBLEM IN FINANCIAL STATEMENTS

In the first quarter of FY18, Jet posted its first quarterly loss of Rs 1,323 crore in 12 quarters. This was compared to a profit of Rs 53.50 crore in the same quarter a year ago. While it said that it has been working on operational efficiency but the loss only widened with each passing quarter. As we can see in the graph below:

STEPS TAKEN TO STAY OPERATIONAL

In August, it asked its employees to take a haircut of up to 25% on their salary as a part of the cost-cutting measure. In September, it stopped offering free meals on economy class bookings. And in October, there were reports that the airline had laid off nearly 30 employees from departments such as engineering, security, sales and senior-level executives from the in-flight services department.

REASONS TO TURN FROM ‘JET SET GO’ TO ‘LET JET GO’

Reason 1: Acquisition of Air Sahara

On January 2006, Jet made its first attempt to acquire Air Sahara. This news was received with mixed emotions amongst the investors in the market and analysts even suggested that Jet had overvalued Sahara. Even after getting a go ahead from the Indian Civil Aviation Ministry, the deal fell apart due to disagreement on the price. Lawsuits were filed by both the companies seeking damages from each other.

Then in April 2007, this time Jet Airways managed to buy Air Sahara for INR 1,450 Crores.

Why Jet wanted to acquire Sahara?

  • Jet airways will get access to leased fleet of 27 aircrafts of Air Sahara with its Infrastructure and Logistics
  • It will give more coverage to the areas where Air Sahara is not yet present
  • Jet will get more airlines pilots and maintenance facilities
  • They will get to capture more market share that will be around 42%

Why this deal was not a success?

  • The merger guidelines didn’t talk about aircraft hangars, check-in counters, cargo warehouses, passenger lounges and other such airport facilities post the acquisition
  • The Jet asked for 20-25% discount on its bid, stating that the merger was over-valued
  • Jet was expecting economies of scale to benefit for them but there was an upcoming merger of Air India and Indian Airlines which could have been a direct competition and a major threat to this merged entity.

Reason 2: Naresh Goyal’s inefficient management control

Experts say that there was a fault in Goyal’s management style. His decision to have a single management team, headed by himself, running all Jet’s operations was a critical mistake. Analysts say he should have had one team running the full-service carrier and other running the budget flyer. Jet lacked a concrete business model and played with it often, which confused investors and its passengers alike.

Several experts recently asked Naresh Goyal to exit as that could have been a way for Jet’s survival, since any investor coming on board wanted to take the control and hence due to immense pressure he had no other option but to step down.

Reason 3: Debt burden

Goyal has also been accused of making bad investments and failing to address the company’s deteriorating financial predicament while borrowing heavily. They spent more than they earned and also kept accruing debts. They have a total of Rs 8500 crores of debt in their books and they are trying to sell off their planes with hopes of fulfilling the debt but failed to do so.

Reason 4: Sale of stake to Etihad Airlines

In year 2013, Jet airways sold 24% of stake to Etihad airways for INR 2000 crores. This was also a year in which Jet faced a debt problem. And hence, it ends up taking competitive advantage of the new policy change allowing Foreign Direct Investment (FDI) in private sector. Even after having a 24% stake then, Etihad Airlines were not having major say in the functioning of the airlines. In March 2019 also when Naresh Goyal reached to Etihad, the maximum fund that they were agreeing to invest was INR 4200 Crores and with several conditions.

Reason 5: Purchase of mixed fleet

The other mistake was the purchase of mixed fleet of 10 wide-bodied Airbus A330 and Boeing 777 planes. Unlike his peers, Goyal decided to have only 308 seats, much lower than the global standard of 400, in order to give his customers a premium offering. He lost a fourth of the potential revenue in the process.

Reason 6: Fluctuating Crude Oil prices

All of India’s carriers are sensitive to fluctuations in global crude oil prices because they are major importers of oil. When the rupee is weak, which it has often been over the past year or so, fuel becomes more expensive, which is the largest expense for airline industry. Increasing oil costs and the Indian rupee hitting its lowest last year affected all Indian carriers. IndiGo and SpiceJet also reported massive losses but their books were resilient enough to survive the quarterly losses. However, Jet’s books were saddled with debts. “Jet Airways failed to manage its balance sheets and was caught out by these cyclical changes in the industry,” Mumbai-based economist Ashutosh Datar told AFP.

THE BEGINNING OF AN END

  • National Stock Exchange (NSE) announced that there will be no trading in Jet Shares w.e.f. 28 June 2019. Hence this lead to the fall in the share by 44%.
  • Jet owed SBI an amount worth of INR 8500 Crores. Jet Airways also owes over INR 10,000 Crores to its vendors as rental for aircraft which it had failed to pay up. At its peak, the airline was flying as many as 120 planes, most of which were on the lease. Jet Airways also owes around INR 3,000 Crores to around 23,000 employees who have not been paid since March 2019.
  • Future of, Jet depends on the new lenders, who are currently interested in buying it. But the problem is, lenders are not doing a great job and secondly they didn’t give them funds to keep pulling its operations. This is one of the reasons for shutting down business.
  • No one is interested in buying Jet’s grounded airplanes as there is no benefit for them in the books of huge debts. The books also consist of a huge expenditure in turnaround plans and salaries.
  • A lot of current slots of Jet has been taken off by other airlines.
  • Hinduja Group and Etihad Airways PJSC are nor proceeding to resurrect. Jet airways met with Ethihad Airways PJSC and Hinduja Group to look into the offer put forwards by them. But the lenders were not ready to accept the terms of the offer and decided to opt for insolvency proceedings instead. Hinduja’s offer would have meant that the lenders would take 95% haircut on their fund based exposure to Jet airways. “As far as bidding for Jet Airways is concerned, the Hinduja Group has taken a back seat now,” said a report. “The promoters of the group feel that it’s too risky for them to get involved (with Jet Airways) at the moment, due to ongoing government investigations and the recent insolvency pleas submitted by operational creditors at the National Company Law Tribunal (NCLT).”
  • In September, the income tax department raided Jet and drafted a report in February 2019. “The investigation report has found tax evasion of over INR 600 Crores. There were some transactions concerning a Dubai-based entity, which were of a suspicious nature,” an income tax official said.

    According to the investigation report, such payments were allegedly in excess of permissible business transactions under the Income Tax Act and is not considered as allowable expenses. “The survey was conducted at the time when Jet Airways was delaying the announcement of its June quarter result,” an income tax official told.”These are excessive payments made with the intent to divert funds abroad, so as to evade taxes.”

NCLT VERDICT

NCLT admits SBI insolvency plea against jet airways. It also asks (Insolvency Resolution Professionals) IRP to take hold of all its assets. IRP must try to close jet airways in 3 months. It asks IRP to first report it on July 5, 2019 and after every 15 days the report is been asked to be submitted. As this matter is of national importance, they gave them 90 days instead of 180 to resolve the issue related to Jet.

There is a hope as someone will come up with a resolution plan and aircraft will take off and employment will be secured again.

Other financial and operational creditors can also file their claims. National Aviator Guild will be filing claims on behalf of pilots before the IRP.

CONCLUSION

Jet Airways is on the verge of Bankruptcy. However, there are still some hopes for it. This case was taken by lender to NCLT and the application was accepted by NCLT then the company will proceed under IBC. Boards of directors have to step down and insolvency professionals will take over the Jet. This might revive the bids for the company as previously keen bidders wanted a change of management. This might give Jet their old good flight.

Author
Apoorva Goenka
Team Leader- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2018-20)

Connect with Apoorva on LinkedIn
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