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Woes mount at Jet Airways: How did the airline get here?

Woes mount at Jet Airways: How did the airline get here?

Woes mount at Jet Airways: How did the airline get here?
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By Sindhu Bhattacharya  Aug 7, 2018 7:26:42 AM IST (Updated)

Jet Airways has been waging a battle on several fronts in recent months. It is also losing share of the domestic market at an alarming rate even though it remains the second largest airline by passengers. How did the airline reach this crisis, with precious little cash and the crying need to snip wages?

Jet Airways has been waging a battle on several fronts in recent months but lately, India’s second largest airline by passengers has had to face bad press too. After a statement allegedly made by chairman Naresh Goyal went public, indicating a delicate cash position at the airline and urging employees to take a steep and prolonged pay cut, the Jet scrip was hammered at the bourses.

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Some pilots began speaking out against the top management for proposing such pay cuts while also being responsible for the current mess. Jet has been waging a tough battle on costs and the latest salvo was asking pilots and other employees to take a pay cut of up to 25 percent to help the company tide over the present crisis.
How did the airline reach this crisis, with precious little cash and the crying need to snip wages? All fingers point to the external cost environment but this is affecting all airlines operating in India, not just Jet. Why Jet and the Air India (both are full-service carriers) are impacted more than the LCCs by external cost factors has to do with their full-service model where costs are necessarily high.
Besides, facing intense competition from the more efficient LCCs, Jet and Air India have both been slowly increasing dependence on international markets. The Gulf routes now account for a fifth of Jet’s capacity deployed but the growth here has been slowing too, just when the domestic market share has been shrinking.
And Jet will continue to find the going tough in 2018-19 as well. “Indian carriers are extraordinarily sensitive to jet fuel prices, a result of the high taxation regime that magnifies global price changes. Other input costs are also high, including the cost of leasing aircraft… For most carriers, the fuel price is already close to or at the break-even price… Full-service carriers are likely to feel the impact more acutely,” Global aviation consultancy CAPA said in a report last week.
That things began worsening for Jet since the March quarter this calendar year is clear from what chairman Goyal has said in the latest annual report, where he blamed costs beyond control for reporting a loss in 2017-18 while patting himself on the back for achieving profitability ahead of self-imposed deadline. 
“Not too long ago we had laid out a three-year roadmap to return your company to profitability. We hit that target a year early and followed it up with another profitable year in FY 2016-17. In fiscal 2018, although our overall revenue increased from Rs 24,175 crore in FY 17 to Rs 25,177 crore in FY 18, your company reported a consolidated loss of Rs 636.45 crore due to increase in costs beyond our control, which impacted our results," he said.
"Key external factors that slowed down our momentum were, weakening of the Indian rupee, around 16 percent increase in Brent rates with consequent rise in fuel costs, industry’s inability to pass on increased costs to the consumer and no corresponding increase in ticket fares. In addition, there was a considerable increase in maintenance, landing and navigation costs during the year,” he further added.
Goyal also pointed out how the company “took every step possible to maintain a sharp focus on costs and worked to reduce net debt.”
The upset employees, of course, are not swallowing any of this and some have accused the management of “mismanagement”, improper utilisation of pilots of JetLite, shutting down profitable routes and turning a deaf ear to their earlier complaints.
Anyway, if the proposal for a pay cut for pilots for the next 24 months has been shelved, as some news reports suggest this morning, then the company will have to find other ways of trimming ex-fuel costs. And these may not be any less painful. Even if the proposal has merely been tweaked by proposing lower pay cuts, as some other news reports suggest, the difference in cost savings will have to be met through other means.
Could this then lead to more job losses instead of just pay cuts? It seems the management has already said that some jobs are on the line, though there is no clarity on how many and at what levels.
All this noise over pay cuts and potential job losses at Jet brings back memories of a similar back-and-forth that Goyal oversaw a decade back. In 2008, at the Hyderabad airshow, Goyal was painfully aware of intense media and government pressure to take back proposed 1,000 job cuts. Jet had just announced an alliance with Kingfisher Airlines and rationalisation of jobs at the combine seemed a logical step to take.
But Goyal had to relent. He did so in a televised and tearful address, where he said he could not sleep the previous night due to the proposed cuts and would cancel such plans. It is another matter that over the next few months, Jet had to quietly slash jobs in small numbers instead of doing the same thing in one fell swoop. Goyal had no option but to do this, then. He may have little leeway even now, when the airline is struggling in a fiercely competitive, high-cost environment with dwindling business. Only, the noise surrounding this exercise now may help postpone it a bit.
On its part, Jet issued a statement on Friday saying “recent media reports about the sustainability of the airline are not only factually incorrect but also malicious. The airline would also like to deny any conjecture of a stake sale. Indian aviation is experiencing strong growth and Jet Airways is well placed to be a part of this growth story.
The company is committed to create a growth-oriented, sustainable future and a revitalised experience armed with the addition of 225 Boeing B737-MAX fuel efficient aircraft, which will be inducted in its fleet over the next decade, with 11 being inducted this fiscal. This envisioned growth will in fact, require additional human capital.”
But no one can deny that Jet has had an uphill task through the last many quarters, as it battled an increasingly competitive market where LCCs hold the sway and pricing power has all but vanished due to incessant capacity addition by all airlines. It has been losing share of the domestic market at an alarming rate even though it remains the second largest airline by passengers.
Jet held 23 percent share or close to a fourth of the domestic market in April 2015, which fell to about 20 percent within a year, by March 2016. The downward spiral continued, however, and Jet settled at just 15 percent share of the domestic market in June 2018. That is a loss of seven percentage points in market share in about 24 months.
In a conference call with analysts after the Q4 results this May, CEO Vinay Dube mentioned that in the last two years (the period when it consistently lost market share), airfares remained flat while fuel prices doubled.
An analyst pointed out today that not just employee costs, the airline needs to also trim costs towards sales and distribution and some other overheads. He was echoing what the Jet management has been saying anyway for some quarters now. Dube told analysts in May “our focus continues to be on the non-fuel CASK (cost per available seat kilometer). We are on target to deliver the 12 percent to 15 percent non-fuel CASK reduction”.
The timeline is 18-24 months. Jet is slated to announce the Q1 FY19 results on August 10.
But the airline is unlikely to see visible benefits from cost cutting in the near future. The analyst quoted above referred to the 58 percent increase in repair and maintenance costs and a 43 percent jump in ‘other expenses’ last fiscal despite Jet having tightened the belt. The former was due to engine shop visits outside third party maintenance contracts for the wide bodies.
“Though the cost print remains disappointing in Q4FY18, the annual cost reduction targets remain unchanged. As such, the thesis of cost improvement continues to be valid for Jet, more so considering that the major reductions are supposed to start from 1QCY19. However, the competitive pressure in domestic market along with adverse crude/currency effects could more than nullify all cost improvements in FY19,” a report from brokerage ICICI Securities said.
This clearly shows how continuous and aggressive cost cuts may also not save the blushes for the airline in the current fiscal and may be more long term. This brokerage estimated a loss of Rs 1500 crore in FY19 under present crude, currency and fare scenario for Jet. This works out to almost a Rs 4 crore daily loss for Jet Airways. This analyst said he expected non-fuel CASK (cost per available seat km) including depreciation and interest to reduce by 5 percent in FY19 compared to FY17 and by 11.5 percent in FY20 compared to FY17. So things will probably begin looking up for Jet from next fiscal onwards.
Sindhu Bhattacharya is a journalist based in Delhi.
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