For a business that is inherently difficult,
Indian aviation is brutal. Despite an abundance of fleet, passenger numbers multiply and even airports, the only thing that is in short supply is profitability.
Profits are as thin as a boarding pass. Skyrocketing — forgive the pun — losses are common. This has been pretty much the story since the aviation sector was liberalised in India. The history of Indian aviation is littered with airlines that have gone bust. NEPC, Damania, East West Airlines, Air Costa, Paramount, Air Pegasus, Air Carnival are just some of the examples of airlines that failed. There is a bigger list of airlines that did not take off: Fly Easy, Indus Air, Volk, Archana Airways etc. Some of these even had their aircraft ready but couldn’t see the light of the day in India.
Also Read: Naresh Goyal agrees to bring down stake in Jet Airways to 9.9%
Against this bleak backdrop, what is happening with
Jet Airways needs a deeper understanding of how airlines reach a situation they eventually succumb to. The seeds of the Jet Airways issue were sown long ago.
The airline has consistently failed to clock operational profits (income from operations minus expenditure of operations). The last time the airline made an operational profit was in 2015. The net profit which the airline has recorded in the last few years has been from the money it got for the sale of land at
Bandra Kurla Complex or the money it received in tranches for the partial sale of its loyalty program Jet privilege private limited (JPPL). When The Fund Pipe Dried
That said, Jet’s funding troubles came under the spotlight only after the money that was coming almost every quarter from
Etihad for JPPL stopped; it was paid in full.
What led to this situation? The expenditure of the airline was more than its income. This was the phase when Jet was fiercely competing with Kingfisher Airlines and low-cost airlines led by Spicejet, GoAir and IndiGo were making in-roads after the Air Deccan acquisition by Kingfisher. To grab more market share and be present in the LCC space, Jet Airways gobbled up Air Sahara. Raking up additional costs related to integration, contracts, maintenance and people when the airline itself was not holding additional cash to fund its own operations and expansion effectively.
As the airline often found itself earning lesser than what it spends, the airline was forced to take loans (working capital primarily) and like any other loan, it had to repay that as well. So the airline, which was not making money, decided to take up working capital loans. It had to now ensure that it makes enough money to breakeven and repay the loan which came at an interest.
If you cannot achieve that, you are not just short of the breakeven, now you are short of breakeven and the loan (similar to the EMI which an individual pays). Now, this deficit has to be bridged and one way to bridge this deficit is to take another loan to repay the first loan.
Now you have to ensure that you can make enough money to breakeven and repay the loans which you have been taking, along with the interest. As the cycle continues, you reach a point where neither are your operations are profitable nor do you have money to repay the loan.
This is compounded by the fact that you have lost everything you have to pledge and ask for new loans!
The stake of promoters, all assets and anything else that you may have already been pledged for loans, or there are few things you are not willing to pledge and there is a limbo.
This is staring at the crisis, helplessly! While you kept hoping that the market conditions would change to have the business turn profitable and to such an extent where not only are the operations profitable but they are so profitable that you can repay the loans.
Running Out Of Options
Jet Airways also explored other options to repay the loans. One was to sell assets. In case of an airline, the asset can be an aircraft, real estate, slots or stake in the company. Jet tried everything except slots. There are only select airports worldwide which allow selling of slots. Thus, this strategy had its limitations.
Jet sold planes, prime land at Bandra Kurla complex and a stake in the company – to Gulf airline Etihad — to an extent that it hived off its loyalty program and sold a stake in that too.
The proceeds from these were used to repay some of the loans and some money used to fund the loss-making operations of the company. While real estate is an appreciating asset, airplanes are not. The cost of the airplane today is lower than what it was when the airline bought it a few years ago. And by selling the planes, the airline has leased them back, adding to the monthly outgo of lease rentals – which more often than not is paid in US dollar.
It hurts more when a depreciating asset like aircraft sees its depreciated value being lower than the loan which it has to repay. Ergo, selling the plane can’t get you enough money which will help repay the loan which was taken to purchase that plane, not to mention the interest which you have already paid towards that loan.
The only way out is to find someone who believes that they can do something which nobody could for the last few years. That is making operational profits and enough more to repay the loans. Other options: renegotiate contracts, reduce costs and ask banks to take a hair cut to give them their money back but without interest.
It remains to be seen if the airline finds such a white knight. Or banks take control appointing a board to run the company like they did with Satyam and eventually selling it off to someone.
But the moral of the Jet story is that airlines need to keep making profits at an operational level. It is time the capacity is optimised and fares rationalised to ensure that that airlines (through banks’ money) do not pay to take passengers from one place to another.
Ameya Joshi is founder of aviation analysis blog NetworkThoughts.