WHEN A CONSORTIUM of lenders nudged out Naresh Goyal from Jet Airways on March 25 to gain control of the airline, the expectation was that they would immediately inject Rs 1,500 crore that the airline desperately needed to keep flying. Simultaneously, a search was on for a new investor. It seemed like there was light at the end of the tunnel.
However, much of the emergency funds never came. Jet already had a debt of around Rs 8,500 crore, and lenders were wary of throwing good money after bad. They chose to focus on the planned stake sale, offering as much as a 75 per cent stake in the airline in the hope of saving it from bankruptcy.
It was, perhaps, too little too late, as Jet had a hard landing on April 18, leaving around 20,000 employees high and dry. Many of them had not been paid for three months.
Four entities have shown interest in picking up a stake in the airline—Abu Dhabi-based Etihad Airlines, which held 24 per cent stake in Jet, private equity firms TPG Capital and Indigo Partners, and the National Investment and Infrastructure Fund. However, whether the lenders will get any firm bids at all is uncertain now, given the grounding of the airline. The Directorate General of Civil Aviation (DGCA) has started allocating slots formerly held by Jet to other airlines. Jet’s grounding has opened up more than 400 slots at various airports.
The reallocation of slots, which is said to be temporary, will benefit Indigo, India’s largest domestic carrier, and SpiceJet. Both have announced several new flights connecting Mumbai and Delhi.
These plum slots are the biggest attraction for potential investors in Jet. “The slot portfolio of Jet with a high share of Tier I airports like Delhi and Mumbai is the key attraction for any prospective bidder,” said Ansuman Deb of ICICI Securities. “Without slots, Jet will have minimal interest from any investor.”
It is not just the slots that Jet stands to lose. It was flying 120 planes last year, but is now left with only a few of them. Several of Jet’s grounded planes are being deregistered at the request of the lessors so that they can be leased out to other airlines.
SpiceJet, which also has a fleet of Boeing 737 aircraft similar to Jet’s, is set to be the biggest beneficiary. It is inducting 22 Boeing 737s on lease and has announced several new flights connecting Mumbai and Delhi and a slew of international flights. Air India is interested in operating Jet’s wide-body Boeing 777s in international sectors. The US Exim Bank, which is one of Jet’s lenders, may take possession of the 777s.
Keeping Jet flying would have served the lenders better. Chandramouli Nilakantan, CEO of TRA Research, said the banks should have taken the risk and provided additional funding. “Banks should have given a couple of thousand crores and run the airline even with six flights,” he said.
Nilakantan said Goyal delayed the decision to step down far too long and should have done it when investors like Tata Group were interested. “Banks forced out Goyal, which was not a bad thing as they might have felt that the airline was not being managed well,” he said. “But, after that, someone has to run the business. You can’t say I will shut it down and see what is happening. The complexity of the airline business, I am sure, the banks did not understand.”
There is still a lot of value in Jet that can be salvaged. “For instance, licenses, brand value and slots,” said Rajesh Gupta, managing partner of the law firm SNG & Partners. “But, the lenders need to act speedily as the value will start eroding the longer the airline remains grounded.”
Apart from the debt, Jet Airways owes around Rs 3,500 crore to lessors and vendors. Potential buyers will aggressively negotiate a deal and the lenders will have to take a huge haircut. “Ideally, what lenders should now do is insist on a certain stake in the airline. That way they could share the upside, if any, in the future,” said Ajay Bodke, CEO of the stock broking firm Prabhudas Lilladher.
The bidding process is expected to be completed by May 10. If no buyer emerges, there is a possibility of vendors and operational creditors dragging it to the bankruptcy court. The court will then appoint a resolution professional to oversee a stake sale process. However, it could be a long-drawn process and could see vendors, financial creditors, lessors and even employees fighting for their pound of flesh.
Rival carriers have been absorbing hundreds of Jet employees. But, thousands more are facing an uncertain future and waiting anxiously for a buyer to emerge. “I have worked with the airline for six years. I will wait till May 10. Hopefully, we will get an investor,” said a member of Jet’s ground staff.
Indigo and SpiceJet are expected to turn in a profit for the quarter ending March 31, thanks to their increased capacity and the high fares. That has weighed on their shares, too. While Jet’s shares crashed about 36 per cent in the past three months, SpiceJet has soared around 59 per cent and Indigo 33 per cent. These gains, however, could be temporary; crude prices are likely to go up, which in turn will push operational expenses up.
India’s aviation industry has seen double-digit volume growth in the recent years owing to cheap tickets. But this growth has come at the expense of profitability. If Jet is unable to fly again, it will join a long list of airlines that shut shop or were acquired by rivals in the past two decades. Most notable among them was Kingfisher, which was grounded in 2012. Other major airlines that crash-landed include Modiluft, East West and Damania in the 1990s, and several smaller ones like Air Pegasus, Paramount and MDLR in the past decade.