On a wing and a prayer

Reviving Jet and then selling won't be easy for lenders

Naresh Goyal’s departure from the Jet Airways board and the halving of his and partner Etihad Airway’s shareholding to 25 per cent and 12 per cent, respectively, to make room for banks to take a controlling stake has only postponed the day of reckoning for this former market leader. Monday’s announcement said lenders to the airline, led by State Bank of India, had agreed to take a little over 50 per cent stake in the airline. The stake issued to the banks will be valued at Rs 1 on their books. Banks will also immediately pump in about Rs 1,500 crore into the airline. A bidding process will be initiated by lenders for selling shares to a new investor, expected to be completed in the June quarter.

But this may be wishful thinking on the part of lenders. With a net debt of Rs 7,300 crore at the end of December, ballooning other liabilities (suppliers’ credit, salary and tax, refunds of cancellations and so on) and sustained losses over the past four quarters, it is clear that the airline is all but bankrupt. Given the fierce price competition in the market, and the grounding of its Boeing 737 MAX fleet, the airline is unlikely to earn the surpluses to repay all its liabilities anytime soon. In this background, it may be difficult to attract enough interested parties without offering them a significant haircut.

In such a situation, one solution would have been to take the airline through the insolvency and bankruptcy process. But this would be a time-consuming process and banks would not get anything much when an urgent solution is required. Plus, except for Jet’s stake in Jet Privilege and over a dozen planes, there would be little else of value to sell, as landing rights do not belong to the airline. Thus, closing the airline and selling its assets would also not have been a financially smart option for banks.

The important issue now is that banks, with their 50 per cent stake, valued at around Rs 1,450 crore based on Monday’s share prices, have to protect their downside on debt. Besides the equity stake, they have bet another Rs 1,500 crore, which puts their existing exposure to further risk. However, Indian aviation is a hugely competitive industry and the new buyer is going to expect that banks take a haircut on their loans even as it pays for the equity stake. According to aviation consultant CAPA, passenger growth will be robust at 14-16 per cent in FY20. But this growth is principally on account of low average fares, which is causing airlines to bleed. Together with growing capacity additions (IndiGo alone has added nine planes a month for the past few months), yields are being severely dented. In FY19, says CAPA, the three major low-cost carriers are projected to register losses of $200 million from profits of $330 million in FY18, a swing of $500 million for a full year. In FY20, CAPA predicts airlines’ consolidated losses could rise to $700 million, and more if oil prices rise sharply. All this will weigh on the buyer’s mind before writing the cheque. If a deal fails to materialise, lenders could be stuck with both debt and equity in a business they do not understand. They would have then thrown good money after bad.