Jet Airways is in extensive talks with lenders and lessors regarding its debt restructuring. Sources indicate that lenders are caught between a rock and a hard place as a default will mean they lose most of their capital while a restructuring would be contingent on providing additional loans.
At the core of the issue is the fact that Jet Airways loses more money than it earns. This is highlighted by a loss per available seat kilometre. In other words, the cost of flying each seat exceeds the revenue earned from the seat. For the second quarter of fiscal 2018-19, Jet lost Rs 0.59 for every seat flown every kilometre. The way out of this is to boost revenues and cut costs – so that lenders feel certain that the debt repayments will come through.
To boost revenue, Jet Airways has to resort to sales (the most recent being the global sale, including a 50 percent discount on domestic and international tickets). Other revenue initiatives like selling stakes in the frequent flyer program, sub-leasing the ATR fleet or charging for meals have not yielded the desired effect. On the contrary, they have become public perception challenges for Jet.
On the cost side, a 32 percent fall in crude oil prices in the last six months helps considering fuel is the largest cost component for Indian carriers. Fuel costs will be further aided by new the new fuel efficient Boeing 737 MAX aircraft being inducted, which are 10-12 percent more efficient than the existing 737NG they will replace. Further, industry sources indicate that Jet Airways is actively exploring all avenues of cost reduction, meeting with lessors, suppliers, and all vendors.
Addressing the fleet mix will also be key given that Jet has four separate types of aircraft in the fleet — the ATR 72, the Boeing 737, the Airbus A330, and the Boeing 777. Even within these major types, there are sub-variants which carry with it additional cost implications in the form of spares, maintenance, crew etc. Remaining cost initiatives fall solely on the operational costs effectively doing more with less and wringing more efficiency out of each process. Whether this is on the ground handling side or on the flight operations side or even pruning administrative costs remains to be seen.
The lenders are wary as Jet Airways already faces a debt burden, which is reflected in increasing interest costs. This is the cost lenders are most worried about. As of Q2FY19, the Jet Airways balance sheet showed debt due of Rs 8,052 crore. To add to this, a large portion of the debt is dollar denominated and affected by the weakness of the rupee as the US dollar gains strength.
The late payments of salaries and renegotiation with vendors all indicate that efforts are on to maximise cash flow. This is a double-edged sword as lenders view this as a cash-crunch and demand assurances of secured cash flow or a guarantee (which is being sought via Etihad) for additional lending.
On the revenue front, a quick scan of fares showed Jet Airways continues to price higher than competition in domestic markets where it has a stronger position, but in the international sectors, its pricing is amongst the lowest fare offerings. Given that 60 percent of Jet Airways’ revenues derive from the international segment, this is a cause of concern. Heading into the fourth fiscal quarter (January to March), which is the weakest quarter of the year, forward sales are being impacted and Jet Airways is further forced to resort to discounts.
Just this week, an up to 50 percent sale on all domestic and international tickets was offered on certain routes, and Jet Airways continues to be the lowest fare option. As speculation rises about the fate of Jet, frequent fliers continue to encash their accumulated miles. “How can Jet Airways be facing challenges? I flew on them and the flight was completely packed.”
Unfortunately for Jet, it is this combination of discounting and frequent flier encashment that has resulted in load factors of 80 percent or higher while revenues are just not covering costs. It’s a downward spiral.
On the network and operations front, Jet Airways has pulled out of the Gulf market and is making other adjustments to leverage its slot portfolio. It faces strong competition on its routes to the Gulf that delivered a bulk of profits during its heyday. Further network adjustments are inevitable, and fleet rationalization is the need of the hour.
Data from the Directorate General of Civil Aviation for November 2018 showed Jet received second highest complaints at 1.4 per 10,000 enplanements, after Air India, with an on-time performance of only 76.6 percent compared to the industry average of 78.5 percent. This is simply unacceptable for an airline trying to regain its title.
As highlighted by several media reports, equity dilution appears to be the preferred way to secure the desperately required funds for the beleaguered carrier. But with a credit rating downgrade by ICRA and growing financial challenges, deliberate and decisive action by the management is required to prevent the carrier from sinking.
Jet Airways must play to its own strengths: brand, service and international network, and not one thrown upon it by other airlines. As the airline continues to exhaust all its other options to stay afloat, it is time for Mr. Goyal to examine whether he would like the brand he created to live without him, or die with him.
Devesh Agarwal is the editor of BangaloreAviation.com. He is ranked 6th on Mashable's list of aviation pros on Twitter @BLRAviation. He is an elite level frequent flier with both Jet Airways and American Airlines, and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.
(An earlier version of this article incorrectly said Jet withdrew from Kerala.)
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First Published: IST