High selling, distribution costs of debt-laden Jet Airways under scanner

Commission paid to promoter-owned firm raises suspicion among analysts, auditors

At least two financial transactions conducted every year by full-service airline Jet Airways — selling and distribution costs and commissions paid by the firm to Jetair Private Limited — are coming under increasing scrutiny of auditors and analysts.

A closer look at the annual reports of all the airlines shows that while IndiGo and others spend around 2 to 4 per cent of their total revenue on selling and distribution costs, the corresponding percentage for Jet Airways is as high as 12.

In addition, a yearly amount — albeit much smaller — is paid to Jetair Private Limited, a company wholly owned by promoter Naresh Goyal and his family members. For the year ended March 31, 2018, this amount was Rs 760 million, up from Rs 660 million last year.

In an email response, the airline spokesperson said that “Jetair Pvt Ltd (Jetair) is one of the General Sales Agents of Jet Airways. As a result, certain commissions accrue to them every year per the terms of a contractual engagement entered into with them”.

He went on to add that “Jetair, being a related party to Jet Airways (India) Ltd, all the transactions with this entity have been made in pursuance to the Central government approval accorded under Section 297 of the Indian Companies Act, 1956 and thereafter in compliance with Section 188 of the Companies Act, 2013”.

However, a senior KPMG source said that it was “not very clear what these commissions were paid for” and while this amount had in fact been going down in the last few years, it remains on the books. BSR & Co, an affiliate of KPMG, is one of Jet’s auditors.

Further, eyebrows are being raised over the rather high selling and distribution costs of Jet vis-a-vis its rivals.

According to the latest annual report, the total selling and distribution expenses for the airline was Rs 28.26 billion, up from Rs 25.31 billion last year. This works out to 12 per cent of the total revenue from operations, which rivals say is “outrageously high”. In contrast, the numbers for SpiceJet and IndiGo are 2 per cent and 3.8 per cent for FY 2018, respectively.

In response to a query on why Jet’s distribution costs were so much higher, a company spokesperson said that Jet Airways is a network carrier with “code share relationships with 21 carriers across the globe. As a result, the airline is required to participate in the Global Distribution System (GDS) platform to enable reciprocal selling. While GDS participation requires a higher cost, it also improves the quality of revenue for the airline”.

He added that the increase in the reservation cost reflects the commensurate increase in business volume/traffic. 

But the argument doesn’t cut much ice with industry professionals. A senior former Jet official said: “The world over it has been proved beyond a doubt that the traditional method of GDS selling is not a prerequisite to success. The success of IndiGo and SpiceJet in India is the living example of this.”

He added that India as a market is probably unique in the sense that there is no premium pricing commanded by the full service airlines. Therefore, the average yield of Jet Airways is not very different from the average yield of IndiGo on an available seat kilometre basis.

As a result, he argued that “Jet and AI are caught is in an endless cycle of high costs and inability to charge premium yields whereas the plain fact is there are far better managed and structured airlines in the domestic market”.

A Mumbai-headquartered aviation analyst said that Jet Airways has been saying that they would cut selling and distribution costs for some years now but it hasn’t happened. He said that the matter has become a bone of contention with the airline’s auditors with the latter having threatened to walk out of auditing the airline’s books over these kinds of transactions.