If the lenders fail to find a worthy buyer for their client gone bust, Jet air may go the Kingfisher way.
It is official. As we write, the lenders consortium front headed by SBI have not yet found a buyer for the beleaguered Jet airways & it may not happen till the end of June 2019. The refusal of the stakeholders to pump in some funds to stop the airlines from being grounded completely said a lot about the skepticism of the concerned in finding a short term fix of the mega problem. Once, one of the biggest pioneering private airlines got grounded, this cast a spell of doom in the aviation industry. There were some poignant scenes witnessed after it operated its last flight to Amritsar with the crew & the cabin getting emotional about the whole affair. Any post-mortem may be futile considering that the most of what the Indian Aviation industry is going through has got a lot to do with how the powers to be think of this industry & how the owners turn neglectful of their risk & responsibilities towards their own businesses.
The large sentiment prevailing in the aviation sector is that Jet’s financial troubles owe their genesis to the 2006 purchase of Air Sahara for $500 million in cash. It is believed that founder Naresh Goyal ignored the advice of professional associates who thought that the valuation was too much going by market dynamics. Even the market reaction to the deal was also decidedly mixed. The budget carrier was rebranded “Jet Lite” but it bled too fast & Jet was compelled to write off the entire investment in 2015. Coupled with the fact that the India’s aviation sector is fiercely competitive and Jet has taken a battering from a number of hugely successful low-cost airlines, including IndiGo, SpiceJet and GoAir.
Interestingly Jet airways never respected the other competitors as genuine challengers to its supremacy in the skies. It thought of all others as fringe players & that has cost it dearly. So while Jet always catered to corporates, it failed to recognize that low-cost carriers were attracting customers who were price sensitive. Experts put a lot of the blame on Goyal’s management style. They say his decision to have a single management team, headed by himself, running all Jet’s operations was a crucial mistake. Aviation analysts further say Goyal’s failure to find a strategic investor to pump money into Jet extended the airline’s losses, contributing to the financial predicament it finds itself in today.
What compounded the problems for the airlines was that it failed to convince Tata to buy a stake as well as prevail on its partner Etihad Airways to pump in more money. Ostensibly none of the two wanted Goyal to stay on at the top. Even when he did give up control of Jet last month as part of a debt resolution deal that saw a consortium of lenders led by the State Bank of India take over the airline, that didn’t bring in any buyer out rightly to save the airlines from getting grounded. It is now up to the lenders to find a buyer. If they don’t then Jet is likely to become the first major Indian airline to go bust since fugitive tycoon Vijay Mallya’s Kingfisher Airlines ceased operations in 2012.
It is true, air travel in India is booming. Of all the Indian airports put together, Delhi alone has handled 70 odd million passengers in 2018. And according to the latest report of the Directorate General of Civil Aviation, the regulatory body for civil aviation under the ministry of civil aviation , between January and September this year, domestic airlines flew 10 crore passengers as against 85 lakh in the corresponding period last year. Simply put a growth of 20.94 per cent, the highest in the world.But while air passenger numbers are booming, the sector itself seems to be hurtling towards bust.
It is in this context that the governments have been found wanting to save the aviation sector from earning a bad name & erode any semblance of credibility & trust of the passengers. Hence the real story of India’s civil aviation industry is in the footnotes& not the headlines. What is intriguing is that Air India, the state carrier is vying for a share of the beleaguered airline’s pie when its own track record is anything but credible. It is running colossal losses & it is on the brink of nose-diving, save for the exchequer funding these losses. It is like one loser looking at hiring another one, as if to suggest that they were better at losses. Air India has also asked for leasing few of the Jet’s planes & it wishes to operate few of the vacant routes internationally in the absence of Jet air.
It is also true that owing to rising aviation turbine fuel (ATF) prices, the depreciating rupee and competitive ticket pricing, not a single airline in India is earning more than it is spending. The losses run into thousands of crores of rupees. Industry body Federation of Indian Airlines (FIA) has approached the civil aviation ministry asking it to grant airline operators additional time to pay oil companies and airport operators.The aviation industry has always been considered a challenging one as the margin of profit is nominal and at the same time sensitive to unpredictable factors such as fuel prices, recession, wars and so on.
Though airlines make marginal profits on international routes, it is domestic travel where they carry the bulk of the passengers. And where they incur losses; But the larger problem for the aviation industry remains that almost all airlines, for many years now, have been pricing tickets well below the cost of production of a seat. “You cannot make money when you do that. The heavens will not fall if they increase prices, but they will not do that as they are guided by the future,” says Bhargava.
The silver lining is that the government can help ease the situation & make it feasible for the carriers to operate. Though it has relaxed foreign direct investment conditions for airlines. It could do more by reducing the tax on ATF or bringing it under GST. It could also bring down the airport landing charges and other taxes among many other complementing measures to resurrect the fledgling airline industry & restore some sanctity in the skies.