Exit the cockpit

Lenders must ensure Jet promoters lose operational control

India’s largest private full-service airline, Jet Airways, is struggling under the burden of its debt. It owes a consortium of banks and other lenders Rs 8,000 crore, of which over Rs 6,000 crore has to be repaid in the next two years. This problem has become a crisis since the airline defaulted on some repayments at the turn of this year, leading to a further downgrade of its debt. Nor is it making money — it has reported three consecutive quarters of losses of over Rs 1,000 crore, which makes its possibility of repayment without a funds infusion or debt restructuring extremely unlikely. It is not just financial creditors who are having to wait for their money — so are regular creditors, including the Airports Authority of India and oil-marketing companies. Employees, too, are not all being paid their salaries in a full and timely fashion. For an airline, such stress is not just a matter of financial survival — it also creates safety issues. Regulators in Singapore, for example, have reportedly had to crack down on the airline. Cutting corners to save costs can have major implications for airlines, which need to ensure that safety inspections are up to date and thorough.

 
Various reports about Jet’s future have caused the airline’s share price to fluctuate widely. The long-expressed hope that minority shareholder Etihad Airlines, which is based in Abu Dhabi, might up its stake in Jet to the legal maximum of 49 per cent and thus solve the immediate capital problem, resulted in a recent upward spike in Jet’s stock. Etihad itself is not in excellent condition, and is having to trim back other expansion plans — it reportedly will no longer seek to compete on international routes with Emirates, based out of Dubai, or with Qatar Airways, both of which are larger and better funded. What is important, however, is that no further forbearance for the existing Jet Airways management and ownership be considered on the part of its lenders. The lessons from the Kingfisher Airlines debacle should be learned by the banks in particular. It is in every way preferable that Jet continues to operate. But this should come at a price.

 
In particular, the long-term promoters of Jet should no longer have a major role in the running of the airline post any restructuring. This is supposedly a demand from Etihad that the promoters have been resisting — but it should also be non-negotiable for the consortium of lenders. There is no doubt that the promoters, who launched Jet Airways in 1993 when air travel in India was at a nascent stage, kickstarted the sector’s growth and put the country on the aviation map. But 25 years later, their position have become untenable. Banks themselves should be careful of taking up too much equity in return for their debt — the last thing bankers are capable of doing is running an airline. They should instead work with the airlines regulator and the government to ensure that if a white knight, including Etihad, is willing to bail out the airline then the regulatory and financial paperwork is sorted out in short order. Jet continues to have valuable properties — its frequent flyer network among them — and thus the capital loss associated with a shut-down should be avoided. But, certainly, there should no longer be any operational control with the existing promoters, which seems to be a necessary condition for bringing in fresh capital.