The author has worked with Deccan Herald for two decades, and also with various TV channels such as al-Jazeera and CNN. He currently heads the Eastern Bureau of Parliamentarian
Is Jet Airways, India’s premier private airlines, wobbling midair, looking desperately for an urgent fuel (cash) injection? Reports trickling out of a thick veil of corporate cloud reveal a grim tale that could very much trigger apparition of now bust Kingfisher Airlines. On the one hand, Jet Airways has sought a moratorium on loans from the banking consortium, it has even asked for fresh funds on the other, to urgently tide over a cash crunch, people familiar with the inside developments say.
The urgency for a cash infusion is fraught with trouble because, already, the airline has grounded a dozen aircraft as part of a thorough review of its existing network; the measure is obviously aimed at reducing unprofitable domestic routes. The Mumbai-headquartered carrier, part-owned by Etihad Airways PJSC, is understood to have undertaken an exercise to identify and lay off people from non-core areas to prevent itself from sliding deeper into trouble.
Once bitten, twice shy; the Indian banks that already have an exposure to Jet, have developed cold feet, having suffered severe setbacks after heavily lending to failed Vijay Mallya’s Kingfisher Airlines. The banks have become extremely cautious now as the country’s first and the biggest full-service carrier has reported no profit for nine out of its past eleven years of service.
Secondly, the depreciating value of Indian Rupee coupled with a diehard competition from the domestic budget carriers have put the Naresh Goyal-led Jet Airways on a warpath, where it has to raise fund at any cost, for survival. The Rupee has been extremely volatile and the Reserve Bank of India has already issued strong guidelines to the major banks on trimming their NPA (non performing asset) levels. Plus, a general election is close on the horizon, putting tremendous pressure on banks to either perform or perish. The lenders, loathe to inject cash, have asked for a detail action plan from the airlines board for a turnaround even as the shares of the airlines tanked 75 per cent this year, shrinking the market value of the company to around Rs 2,384 crore.
Shares of Jet Airways fell as much as 2.3 per cent. They have tumbled about two-thirds this year, headed for their biggest decline since 2011, and are trading at their lowest level since June 2015. The airline has been making desperate moves to bolster its finances after reporting a loss in the year ended March 31, 2018. Jet’s struggle for survival stems from the introduction of two-cent fares where the rising price of jet fuel is perfectly negating the gains despite a surge in number of domestic passengers. Rising jet fuel prices have eroded cash and inflated its total debt to 55.4 times of its earnings before interest and tax as of March.
According to a statement issued by the carrier in August last, the audit committee did not recommend financial results for the board’s approval, “pending closure of certain matters.” The National Stock Exchange of India sought clarification from the company on why the results had been delayed and advised Jet Airways to disclose the fresh date for its earnings.
State Bank of India, HSBC Holdings Plc and Axis Bank Ltd. are among the lenders to the Mumbai-based carrier, which owes a total about Rs 9,400 crores ($1.4 billion). It had cash and equivalents of Rs 320 crores at the end of March this year. Querries seeking details of loan exposures in HSBC, SBI and Axis Bank have so far elicited little response on the plea from lenders that client-sensitive issues are not disclosed. Jet Airways has Rs 3,120 crore worth of loan repayments due in the year through March 2019, ICRA Ltd. said in May last.
The local unit of Moody’s Investors Service also lowered the airline’s rating a notch to BB+ with a negative outlook, a score that signals moderate risk of default regarding timely servicing of obligations. Moddy’s had cited Jet’s inability to pass on increasing fuel costs to its consumers in view of cut-throat competition.
According to aviation insiders, the Jet Airways board unveiled some sketchy details of a turnaround plan sometime in August after the banks have begun prodding it with proposals to sell shares. The bankers prefer that the company raises money from a share sale before they could commit to any fresh credit.
“The board approved turnaround strategy is under implementation. The strategy encompasses various cost-reduction and revenue enhancement initiatives including working on restructuring of our balance sheet via debt-reduction, streamlining cash flows, payroll optimization, exploring funding options such as capital infusion, monetization of company’s stake in its loyalty program, and several other measures, to realize higher productivity and operational efficiencies,” Jet Airways said in a statement. That the carrier is continuously evaluating commercial viability of its operations, is obvious from its statement. Following this, shares of the company jumped as much as 4 percent on the stock market in Mumbai in October based on optimism that any successful arrangement with bankers could help the carrier get its finances back in order. But it was just a flicker and Jet stocks have continued to tumble in the stock market.
Incidentally, Jet Airways has the highest portion of short-term debt to total debt, compared to its Asian peers, at 46 per cent. The carrier was one of the first to take off in the early 1990s after India opened up aviation to non-state carriers.
Among other proposed measures it had announced were the sale of the carrier’s stake in its frequent-flier programme, capital infusion, paring of debt and trimming costs by as much as Rs 2,000 crores ($271 million) over the next two years. While Blackstone Group LP and TPG Capital were reportedly in talks for an undisclosed stake in the loyalty program, JetPrivilege, the carrier is yet to make any announcement or provide any indication which confirms that it is anywhere close to a deal.
Jet Airways owns 49.9 percent of JetPrivilege, with the rest held by Etihad Airways PJSC, which separately owns 24 percent of the Indian carrier.
Cash and equivalents at Jet Airways crashed to Rs 320 crores as of March, from as high as Rs 2,080 crores three years earlier. Net debt was at Rs 7,360 crores as of June 30, 2018, 65 per cent of which would require to be denominated in dollars, Chief Financial Officer Amit Agarwal said in August. The rupee’s 13 per cent slide against dollar is making matters worse by threatening to drive up plane financing costs, signalling the urgency to raise capital and tide over any squeeze.
According to SBI chairman Rajnish Kumar, Jet Airways is among the companies which together owe Rs 24,600 crore in debt and might be finding it tough to repay. But he declined to reveal further details citing client confidentiality agreement. The SBI chairman’s disclosure promptly triggered a reaction from Jet Airways which claimed that there had been no delay in meeting any of its loan obligations and no loan amount was overdue.
Globally, the picture is not quite encouraging either. A sharp spike in crude oil prices leading to a rise in jet fuel costs, have hurt other carriers in the region as well. Cathay Pacific Airways Ltd., which is in the midst of a three-year overhauling program, reported a surprise loss for the first half of the year, while Singapore Airlines Ltd. said profit dropped 59 percent in the quarter to June.
While rising fuel costs are pushing some airlines like JetBlue to look for cheaper and potentially more environmentally friendly fuel options, Wall Street analysts have said higher fuel costs could actually be a benefit for airlines.
“There has been a level of debate amongst investors around the implications of higher oil on Airline shares, and in our opinion, higher is a good thing,” analyst Rajeev Lalwani of Morgan Stanley observed earlier this year when oil prices began to increase. “This is because it instills: 1) Pricing and capacity discipline; 2) Financial constraints on costs and capex; and 3) Margin and multiple expansion.” For every 10 dollar hike per barrel, airline margins can contract 1-2 percentage points, according to an estimate by the bank. Because fares tend to move in step with fuel prices, airlines will have reason to raise fares again and recapture the 5-10 points of lost pricing from recent years.
India, which is one of the world’s fastest growing aviation markets, is also one of the toughest to operate in; because, carriers are being compelled to sell tickets below cost to attract a fast-growing middle class. Kingfisher Airlines, started by Indian tycoon Vijay Mallya in 2005, was one of the nation’s leading carriers until it folded its operations in 2012 amidst mounting debt. Air India Ltd. is surviving though on repeated bailouts of billions of dollars of taxpayers’ money by successive governments in New Delhi.