Why Jet Airways is on perpetual cost-cutting drive

The airline's problems are peculiar and go beyond just wafer-thin margins in aviation

A fortnight ago, Jet Airways announced a new work-life plan that would result in reduced pay and benefits for junior pilots. It also asked its pilots to furnish a surety bond worth Rs 1 crore for five to seven years of service.

Jet Airways Chief Financial Officer Amit Agarwal says this is not a cost-saving exercise, but simply an effort to recalibrate the working hours of pilots based on demand; the airline needs them for fewer hours in the present situation, and will pay them accordingly. While it will mean a 30 per cent cut in the salary bill for the airline, it is not a pay cut as it is made out to be, he says.

Pilots, however, are not happy with the development. They say the move creates more “ill-will” than anything else, and it will result in the airline handing over at least some of its pilots to its competitors at a discount. 

“This is a pattern —  excess pilots, shortage of pilots. We see it repeating every few years. Every time a new HR or finance head comes in, the airline comes up with new-fangled ideas on ways to cut costs,” says a senior Jet commander, who has been with the airline for 18 years.  It seems the airline is perpetually on a “cost- cutting” spree, he adds.

Jet Airways, however, is no exception. Airlines the world over operate on wafer-thin profit margins, and are constantly looking at ways to cut costs across functions. While they have little control over fuel, the largest component of their costs, other expenses are easier to chop and prune.

But Jet Airways faces at least four other factors which are unique to itself. The biggest of them is the mindset. The airline was — and remains — a full-service carrier at heart. No matter what the management has attempted, it has failed to change this mindset. Kingfisher grappled with this problem, too, when it tried to lower costs after Air Deccan buy-out. “Once the initial cost structure is defined, it’s hard to realign it at any stage,” says a former Jet Airways CEO, who spoke on the condition of anonymity.

So, Jet Airways offers meals, lounges and other frills in India — add-ons that have enabled Jet to command a premium of Rs 300-700 over LCC fare and draw corporate fliers (they are less price sensitive). Agarwal says corporate fliers account for half the airline’s domestic traffic.

Yet, the domestic traveller seems to value these perks less and less. Aviation analysts say the very fact that IndiGo’s planes are full means the passenger — corporate or otherwise — is quite happy to pay for his meal. The former Jet CEO quoted above says the Jet management has been struggling to figure out whether to retain or remove the frills; they add to costs, but removing them also has a cost. It’s akin to taking a toy a child plays with regularly away from him. The child is bound to be unhappy, he says.

The second problem facing Jet, say experts, is its top-heavy structure; it has 35 vice-presidents and senior vice-presidents, several of whom do similar jobs. “To plug operational inefficiencies that creep in, the airline’s response has often been to hire more senior-level staff with the hope that more heads and hands will help, which doesn’t happen,” adds the former CEO. 

He says the airline “splurges in good times but fails to cut back effectively in bad times”, citing the 2008 HR and PR disaster when Jet tried to fire 1,900 employees at one go and couldn’t. He argues an “on-going and regular” review of staff is a better approach than ad-hoc pay cuts — which almost always create bad blood. 

Agarwal, however, disagrees the airline is top-heavy. For an airline with annual revenue of Rs 22,000 crore and an operation that straddles both international and domestic routes, its management is the right size, he says.

He adds the airline has managed to reduce net debt by 30 per cent over the last four years, and its cost per seat available kilometre, excluding fuel, has fallen significantly — both evidence of improved efficiency for the carrier.

Yet, as is the case with large organisations, inefficiencies have crept into Jet’s operational structure. For instance, the utilisation of major resources — aircraft and crew — is less than optimal. On many domestic routes the airline is using the A330 — an aircraft designed to deliver best results on a six-hour plus haul. The A330 is a fuel guzzler, and its engines require that much more power. To maximise the return from the aircraft, it is ideally suited for longer distances. But the airline has been using its A330s on routes like Delhi-Mumbai and Delhi-Bangalore, among others. “This is less than optimal use of the wide bodies,” says the senior Jet commander.

The management, however, says the A330s deployed domestically are flying at peak times on busy metro sectors and are making money. 

Add to these factors, Jet’s propensity to acquire, buy or lease aircraft on a piece-meal basis rather than through bulk orders. Other than the 75 Boeing 737Max order in November 2015 (the aircraft are yet to be delivered), most of Jet’s existing fleet has been acquired in “bits and pieces”, depriving the airline of discounts  that come with bulk orders. 

Besides adding to costs, the piece-meal approach adds to paperwork and regulatory hurdles to be tackled before the planes land in. “Each time, you pay the advisors and brokers — the middlemen who facilitate the deal,” says a former Jet official, who has been a part of several aircraft acquisition deals.

Jet’s CFO says taking old aircraft on short-term lease works well for the airline; it’s cost-efficient (rentals are less for used aircraft), and the airline retains its flexibility by not being saddled with planes it may not need if demand falls.

Changing market dynamics may be a bitter truth for Jet Airways, the country’s oldest private carrier, but when it comes to cost management, it may need to learn a few tricks from newer players in the Indian skies.