Naresh Goyal doesn’t play poker. But it would be a sight to watch him take the table. His smile, which reminds one of Air India’s Maharaja, would make his opponents think that he has a straight flush more often than not. While Goyal is still smiling, his airline is in a real tight spot.
This time around, the crisis at Jet Airways is worse than what happened during the years leading up to the Kingfisher Airlines shutdown when crude oil was close to the today’s level – about USD70 a barrel. That’s because besides the high fuel prices, the falling rupee is adding another sucker punch, making airlines dizzy.
Last quarter, Jet’s daily losses were about INR14 crore. This could escalate further in the current lean-travel quarter before some respite in the popular Diwali-New Year festival stretch.
“Jet has been very resilient over the years. It will fight,” says Keyur Joshi, co-founder of India’s largest travel portal Makemytrip, with a note of caution that “Jet remains vulnerable.”
The airline has delayed a substantial chunk of employee salaries several times this year. Some of these salaries will be paid in installments.Goyal faced a similar situation about three years ago when Jet went through a corporate restructuring at the behest of Etihad Airways.
This time, Goyal doesn’t have too many options. Companies in such situations can either load up more debt or dilute equity. And the business is no stranger to failure. Airlines going belly up is a common phenomenon worldwide. After the Deregulation Act of 1978 came into effect in the US, in the first 10 years, more than 100 new airlines were set up and over 100 were shut following bankruptcy, including major ones such as Pan American and TWA.
With rising debt and competition, higher costs, and steep daily losses, Jet is the elephant in the room. “I think we should be cautious,” says a former top executive of a domestic airline, who asks not to be named,“but not panic still.”
There are two reasons why one should not panic.
From a policy perspective, Jet has more leeway now compared with Kingfisher, as it can sell up to 49% to a foreign airline. Etihad already owns 24%.
And two, Jet still has some aces up its sleeve. The airline is planning to sell stake in its frequent-flyer programme, Jet Privilege, in which Etihad already owns 50.1%. The airline also owns 13 planes, mostly widebody, some of which can be sold and then leased back to get some liquidity. It can also open advance-fare sales and get money for selling tickets for future travel to keep its operations running.
“All these elements have to happen like a clockwork, else it will fall apart like a deck of cards,” says the former airline official quoted earlier.
In the past, when airlines became financially sick, non-payment of fuel bills, airport charges, vendor payments for spares, salaries, air-navigation charges, lease rentals, servicing of interests on loans, statutory liabilities, payments to the reservation-systems provider, hotel bills of crew, and the like were critical. The inability to pay grounded a flight even after passengers boarded the aircraft.
“When passengers begin to panic and ask for refund, future bookings will dip, further aggravating [the situation]
and creating a snowballing effect,” says Air Deccan founder GR Gopinath.
More equity infusion is the best option
Short-term measures will allow Jet to continue to function for a few quarters or perhaps months. What it really needs is fresh capital, and for that Goyal will have to cede control, which he has never done so far.
“Increasing debt will only postpone death and will lead to diminishing value of stock and returns,” Gopinath, who sold his airline to Vijay Mallya at the right time, says. “Raising equity with speed is the best option. Most Indian entrepreneurs operate in setups that are family-run or promoter-controlled. They are reluctant [to dilute stake] because external equity will impose strict oversight on cash flows and regular reports. Institutional investors demand not only corporate governance but accountability. But if it is too late, they may lose the company itself,” Gopinath says.
Ideally, says an analyst who does not wish to be named, given that airlines keep turning sick, the government should formulate a policy on the lines of the US bankruptcy laws, allowing the promoter to step aside and the airline to be run by an independent board.
A policy like this was discussed by the aviation ministry after the Kingfisher Airlines and SpiceJet episodes, but it hasn’t seen the light of the day yet. In its absence, the ad-hoc mechanism to help airlines continues to raise eyebrows.
Will Goyal let go?
A person close to Goyal who does not wish to be named says Goyal would not like to dilute stake as he has only 51% left. Even if Etihad, which owns 24%, agrees to lend a lifeline, Goyal may not be comfortable as anything above 24% will give the foreign airline several rights under Indian regulations.
“What he would like to do is focus on cost cuts and all other things short of equity dilution, and wait for his time in the sun,” the analyst quoted earlier says.
There are no guarantees that cost cuts will work since beyond a point, most major costs are similar for all airlines, he adds.
Jet’s relationship with Eithad itself has been wobbly. Consulting firm CAPA predicted earlier this year that Etihad may pull out of the airline at some point. Jet denied this.
Eithad has been silent as the Jet drama has played out over the past few weeks.
“As a minority shareholder, Etihad continues to work constructively with the Jet Airways board, promoter, and the management team,” an Etihad spokesperson says in an e-mail response.
The spokesperson did not offer comments on whether Etihad would be interested to raise its Jet Airways stake to 49%.
The path for Jet Airways from here on will be tougher. Fuel prices have gone up even more, and the rupee has depreciated further. Also, September is a lean travel period for domestic airlines.
Pending clarity on the availability of funding in relation with the change in crude/currency, ICICI Securities has put Jet Airways’ ratings under review.
"Jet is poised with significant challenges which pose insolvency risk," it said in its September 3 report after an analyst call with the Jet management.
Credit ratings agency Icra also downgraded Jet Airways’ ratings on September 4 – the second time this year – saying the “overall credit profile of the company has deteriorated, characterised by high debt levels and weakened liquidity”, and things will remain stretched in the medium term. Sale and leaseback manoeuvre
Jet has said it will cut costs but has also announced expansion of its services adding more Boeing 737 Max planes.
While it is entirely possible that the airline is getting some upfront cash for selling and leasing back these planes, helping bring in immediate liquidity, it is unclear if it will drain its resources further in a high-cost environment.
“It is very alarming that the board has chosen to continue to accept new aircraft deliveries and is talking about enlarging the fleet even more. Investors beware. What has been reported in Jet's statements as efficiency programmes are very generic statements with no substance. Jet needs top management to take a hard look at today's airline and basically turn it upside down by coming up with a new business plan and a new way of thinking. It does not appear this is being done and as such Jet's survivability is highly questionable,” New York-based former Jet Airways CEO Steve Forte says.
The signs of strain are clear. Jet has already delayed salaries at least four times this year. It has started some airfare sales, including a global sale, this month. It also recently started an unusual sale, asking passengers to select seats on a flight at a discount. It is considering selling meals in its economy class, a major shift from the complimentary meals its serves at present, and many of the products on its Jet Privilege site are up for grabs at a discount.
Invoking the government hand
There is another route, that of government intervention.
Relaxations from the government,such as allowing delayed oil payments, have in the past helped airlines tide over crises. Perhaps that’s why soon after the August AGM in Mumbai, Goyal flew down to Delhi to meet the aviation ministry’s top bureaucrat Rajiv Nayan Choubey.
“He gave a brief account operation. He did not seek any specific help…” Chaubey said in a text message to ET Prime on what transpired in the meeting.
Yet two weeks after the meeting, the ministry made public statements on how the sector had descended into a cyclical downturn and aviation minister Suresh Prabhu called upon finance minister Arun Jaitley. “(We) discussed about aviation matters related to [the] finance ministry. FM [is] positive about most of the issues..,” Prabhu tweeted later that day without elaborating further.
On September 4, Chaubey disclosed at an International Air Transport Association event in the capital that the government was working on a relief package for the airlines. The details were not disclosed.
Former Air India executive director Jitender Bharagava says the government will need to be very careful in helping private airlines.
“You are giving it (aid) to a private airline and not giving it to your own airline? You are opening yourself up to criticism,” Bhargava says, adding, “If they (the Centre) lend any kind of financial support to Jet Airways, it will have to give support to Air India 10 times over.”
Bharagava is referring to how after a botched privatisation attempt by the Narendra Modi government – which ran for over a year – Air India has been left paralysed. The promised equity support to Air India is already delayed.
“Jet can say both Air India and Jet are after all ‘national airlines’ and should be supported wholeheartedly,” says a person aware of airline lobbying, who does not to be named.
The contours of the support are likely to become clear over the next few weeks.
Validating the numbers
Of course, any help from the government or a capital infusion will need an assurance that Jet’s accounts are all good. This is a task more difficult than one can imagine.
When Kingfisher Airlines was in a bad financial state, aviation regulator Director General of Civil Aviation (DGCA) had constituted a committee to do a special audit to check if its finances are impacting safe flight operations. Even before the report could come, the then director general was removed overnight and replaced by an aviation ministry official. The audit team was dismantled and a new team was formed.
This time around, DGCA has been quick to announce a Jet Airways audit, but even that could become controversial.
The August 3 order issued by DGCA’s joint director general Lalit Gupta says, “Special audit of Jet Airways is hereby ordered to be carried out at Mumbai by the nominated team members at the earliest. The report for the audit shall be submitted by team members to DGCA (headquarters) on or before August 25, 2018.”
In the note Gupta nominated Sanjay Bramhane as the team leader for the audit. The team has three other members.
Bramhane was the head of the revised team that was asked to do Jet Airways’ rival Kingfisher’s audit. But what is even more interesting is that both Gupta and Brahmane have close family members who are Jet Airways employees, ET Prime has learnt.
Gupta’s daughter is married to Amit Katna, a senior official in Jet Airways, while Mumbai-based Brahmane’s brother Ajay Brahmane also works in Jet.
Can there be free and fair audit when your relatives work in the same airline?
Ajay evaded questions and did not confirm whether Sanjay was his brother. Gupta appeared to see nothing wrong in the process.
“All files of Jet Airways are put up to the director general for approval,” Gupta tells ET Prime in a text message and then adds a few minutes later, “Further,Brahmane is not the only person doing audit. There are three more senior-level officers from different directorates involved in audit.”
To be sure, director general BS Bhullar, who is a career bureaucrat and has a master’s degree in agriculture, took charge only one and a half years ago, while Gupta and Brahmane specialise in aviation regulations having shaped their careers at DGCA. It is unlikely that Bhullar can win a technical argument with the other two.
Aviation minister Prabhu and secretary Chaubey did not respond to an e-mail seeking comment, but an analyst called it a blatant violation of probity.
“This looks like a complete farce. How has the government allowed this?” says Jet’s former CEO Forte. “What is really needed is an independent forensic audit of Jet Airways.”
But then, they don’t call Naresh Goyal survivor for nothing.
(Graphic by Ankita Mehrotra)
This time around, the crisis at Jet Airways is worse than what happened during the years leading up to the Kingfisher Airlines shutdown when crude oil was close to the today’s level – about USD70 a barrel. That’s because besides the high fuel prices, the falling rupee is adding another sucker punch, making airlines dizzy.
Last quarter, Jet’s daily losses were about INR14 crore. This could escalate further in the current lean-travel quarter before some respite in the popular Diwali-New Year festival stretch.
“Jet has been very resilient over the years. It will fight,” says Keyur Joshi, co-founder of India’s largest travel portal Makemytrip, with a note of caution that “Jet remains vulnerable.”
The airline has delayed a substantial chunk of employee salaries several times this year. Some of these salaries will be paid in installments.Goyal faced a similar situation about three years ago when Jet went through a corporate restructuring at the behest of Etihad Airways.
This time, Goyal doesn’t have too many options. Companies in such situations can either load up more debt or dilute equity. And the business is no stranger to failure. Airlines going belly up is a common phenomenon worldwide. After the Deregulation Act of 1978 came into effect in the US, in the first 10 years, more than 100 new airlines were set up and over 100 were shut following bankruptcy, including major ones such as Pan American and TWA.
With rising debt and competition, higher costs, and steep daily losses, Jet is the elephant in the room. “I think we should be cautious,” says a former top executive of a domestic airline, who asks not to be named,“but not panic still.”
There are two reasons why one should not panic.
From a policy perspective, Jet has more leeway now compared with Kingfisher, as it can sell up to 49% to a foreign airline. Etihad already owns 24%.
And two, Jet still has some aces up its sleeve. The airline is planning to sell stake in its frequent-flyer programme, Jet Privilege, in which Etihad already owns 50.1%. The airline also owns 13 planes, mostly widebody, some of which can be sold and then leased back to get some liquidity. It can also open advance-fare sales and get money for selling tickets for future travel to keep its operations running.
“All these elements have to happen like a clockwork, else it will fall apart like a deck of cards,” says the former airline official quoted earlier.
In the past, when airlines became financially sick, non-payment of fuel bills, airport charges, vendor payments for spares, salaries, air-navigation charges, lease rentals, servicing of interests on loans, statutory liabilities, payments to the reservation-systems provider, hotel bills of crew, and the like were critical. The inability to pay grounded a flight even after passengers boarded the aircraft.
“When passengers begin to panic and ask for refund, future bookings will dip, further aggravating [the situation]
and creating a snowballing effect,” says Air Deccan founder GR Gopinath.
More equity infusion is the best option
Short-term measures will allow Jet to continue to function for a few quarters or perhaps months. What it really needs is fresh capital, and for that Goyal will have to cede control, which he has never done so far.
“Increasing debt will only postpone death and will lead to diminishing value of stock and returns,” Gopinath, who sold his airline to Vijay Mallya at the right time, says. “Raising equity with speed is the best option. Most Indian entrepreneurs operate in setups that are family-run or promoter-controlled. They are reluctant [to dilute stake] because external equity will impose strict oversight on cash flows and regular reports. Institutional investors demand not only corporate governance but accountability. But if it is too late, they may lose the company itself,” Gopinath says.
Ideally, says an analyst who does not wish to be named, given that airlines keep turning sick, the government should formulate a policy on the lines of the US bankruptcy laws, allowing the promoter to step aside and the airline to be run by an independent board.
A policy like this was discussed by the aviation ministry after the Kingfisher Airlines and SpiceJet episodes, but it hasn’t seen the light of the day yet. In its absence, the ad-hoc mechanism to help airlines continues to raise eyebrows.
Will Goyal let go?
A person close to Goyal who does not wish to be named says Goyal would not like to dilute stake as he has only 51% left. Even if Etihad, which owns 24%, agrees to lend a lifeline, Goyal may not be comfortable as anything above 24% will give the foreign airline several rights under Indian regulations.
“What he would like to do is focus on cost cuts and all other things short of equity dilution, and wait for his time in the sun,” the analyst quoted earlier says.
There are no guarantees that cost cuts will work since beyond a point, most major costs are similar for all airlines, he adds.
Jet’s relationship with Eithad itself has been wobbly. Consulting firm CAPA predicted earlier this year that Etihad may pull out of the airline at some point. Jet denied this.
Eithad has been silent as the Jet drama has played out over the past few weeks.
“As a minority shareholder, Etihad continues to work constructively with the Jet Airways board, promoter, and the management team,” an Etihad spokesperson says in an e-mail response.
The spokesperson did not offer comments on whether Etihad would be interested to raise its Jet Airways stake to 49%.
The path for Jet Airways from here on will be tougher. Fuel prices have gone up even more, and the rupee has depreciated further. Also, September is a lean travel period for domestic airlines.
Pending clarity on the availability of funding in relation with the change in crude/currency, ICICI Securities has put Jet Airways’ ratings under review.
"Jet is poised with significant challenges which pose insolvency risk," it said in its September 3 report after an analyst call with the Jet management.
Credit ratings agency Icra also downgraded Jet Airways’ ratings on September 4 – the second time this year – saying the “overall credit profile of the company has deteriorated, characterised by high debt levels and weakened liquidity”, and things will remain stretched in the medium term. Sale and leaseback manoeuvre
Jet has said it will cut costs but has also announced expansion of its services adding more Boeing 737 Max planes.
While it is entirely possible that the airline is getting some upfront cash for selling and leasing back these planes, helping bring in immediate liquidity, it is unclear if it will drain its resources further in a high-cost environment.
“It is very alarming that the board has chosen to continue to accept new aircraft deliveries and is talking about enlarging the fleet even more. Investors beware. What has been reported in Jet's statements as efficiency programmes are very generic statements with no substance. Jet needs top management to take a hard look at today's airline and basically turn it upside down by coming up with a new business plan and a new way of thinking. It does not appear this is being done and as such Jet's survivability is highly questionable,” New York-based former Jet Airways CEO Steve Forte says.
The signs of strain are clear. Jet has already delayed salaries at least four times this year. It has started some airfare sales, including a global sale, this month. It also recently started an unusual sale, asking passengers to select seats on a flight at a discount. It is considering selling meals in its economy class, a major shift from the complimentary meals its serves at present, and many of the products on its Jet Privilege site are up for grabs at a discount.
Invoking the government hand
There is another route, that of government intervention.
Relaxations from the government,such as allowing delayed oil payments, have in the past helped airlines tide over crises. Perhaps that’s why soon after the August AGM in Mumbai, Goyal flew down to Delhi to meet the aviation ministry’s top bureaucrat Rajiv Nayan Choubey.
“He gave a brief account operation. He did not seek any specific help…” Chaubey said in a text message to ET Prime on what transpired in the meeting.
Yet two weeks after the meeting, the ministry made public statements on how the sector had descended into a cyclical downturn and aviation minister Suresh Prabhu called upon finance minister Arun Jaitley. “(We) discussed about aviation matters related to [the] finance ministry. FM [is] positive about most of the issues..,” Prabhu tweeted later that day without elaborating further.
On September 4, Chaubey disclosed at an International Air Transport Association event in the capital that the government was working on a relief package for the airlines. The details were not disclosed.
Former Air India executive director Jitender Bharagava says the government will need to be very careful in helping private airlines.
“You are giving it (aid) to a private airline and not giving it to your own airline? You are opening yourself up to criticism,” Bhargava says, adding, “If they (the Centre) lend any kind of financial support to Jet Airways, it will have to give support to Air India 10 times over.”
Bharagava is referring to how after a botched privatisation attempt by the Narendra Modi government – which ran for over a year – Air India has been left paralysed. The promised equity support to Air India is already delayed.
“Jet can say both Air India and Jet are after all ‘national airlines’ and should be supported wholeheartedly,” says a person aware of airline lobbying, who does not to be named.
The contours of the support are likely to become clear over the next few weeks.
Validating the numbers
Of course, any help from the government or a capital infusion will need an assurance that Jet’s accounts are all good. This is a task more difficult than one can imagine.
When Kingfisher Airlines was in a bad financial state, aviation regulator Director General of Civil Aviation (DGCA) had constituted a committee to do a special audit to check if its finances are impacting safe flight operations. Even before the report could come, the then director general was removed overnight and replaced by an aviation ministry official. The audit team was dismantled and a new team was formed.
This time around, DGCA has been quick to announce a Jet Airways audit, but even that could become controversial.
The August 3 order issued by DGCA’s joint director general Lalit Gupta says, “Special audit of Jet Airways is hereby ordered to be carried out at Mumbai by the nominated team members at the earliest. The report for the audit shall be submitted by team members to DGCA (headquarters) on or before August 25, 2018.”
In the note Gupta nominated Sanjay Bramhane as the team leader for the audit. The team has three other members.
Bramhane was the head of the revised team that was asked to do Jet Airways’ rival Kingfisher’s audit. But what is even more interesting is that both Gupta and Brahmane have close family members who are Jet Airways employees, ET Prime has learnt.
Gupta’s daughter is married to Amit Katna, a senior official in Jet Airways, while Mumbai-based Brahmane’s brother Ajay Brahmane also works in Jet.
Can there be free and fair audit when your relatives work in the same airline?
Ajay evaded questions and did not confirm whether Sanjay was his brother. Gupta appeared to see nothing wrong in the process.
“All files of Jet Airways are put up to the director general for approval,” Gupta tells ET Prime in a text message and then adds a few minutes later, “Further,Brahmane is not the only person doing audit. There are three more senior-level officers from different directorates involved in audit.”
To be sure, director general BS Bhullar, who is a career bureaucrat and has a master’s degree in agriculture, took charge only one and a half years ago, while Gupta and Brahmane specialise in aviation regulations having shaped their careers at DGCA. It is unlikely that Bhullar can win a technical argument with the other two.
Aviation minister Prabhu and secretary Chaubey did not respond to an e-mail seeking comment, but an analyst called it a blatant violation of probity.
“This looks like a complete farce. How has the government allowed this?” says Jet’s former CEO Forte. “What is really needed is an independent forensic audit of Jet Airways.”
But then, they don’t call Naresh Goyal survivor for nothing.
(Graphic by Ankita Mehrotra)
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