Blogs

Jet Airways, can the airline weather the storm?


  • India’s growing, but brutal aviation industry
  • Impact of Jet’s failure on several stakeholders?
  • A brief timeline of the crisis
  • Revival plan, a succinct account on bank-led Provisional Resolution Plan
  • Can the company reinvent its operational model?

 

‘Notoriously difficult’ is how India’s airline industry is often described. The cut-throat competition and fierce price wars often push fares to levels below operating costs. In addition, so far, airlines in India have refrained from passing on the effects of any input shocks to the customers, fearing a loss of the market share.

A few years back, Kingfisher Airlines ceased its operations (2012) when it was unable to pay off its dues to staff, banks, airports and lessors. Another airline, SpiceJet also nearly faced closure in the year 2014. Even state-owned Air India continues to survive on generous government bailouts. In fact, even the local ventures of AirAsia and Singapore Airlines are seemingly unable to run profitably. This only shows how brutal the Indian aviation industry can be. Jet Airways is no exception to the rule. A major private airline, once commanding a domestic market share of c. 14% and flying to 37 destinations, but now, it is yet another airline struggling to stay afloat.

What led Jet to this state?

After the Indian skies were flooded with several LCCs (low-cost carriers) in the mid-2000s, which offered no-frill flights, Jet dropped airfares in order to attract more customers. A brutal pricing competition, rising fuel costs coupled with a weak rupee weighed down on Jet Airways. Further, in order to fight off the budget carriers and, in turn, appease the Indian price sensitive customer, the flyer offered onboard entertainment, food and beverages for no fee adding to its cost.

Several stakeholders could be impacted adversely by the collapse of Jet, one of India’s major private airlines with a loss of approx. 23,000 jobs and this will be specifically infamous for the ruling government. Furthermore, the airline’s survival is crucial for Etihad Airways, which holds a 24% stake in the company. Etihad itself has been facing a downturn after a slew of unsuccessful investments in sick airlines as part of its growth strategy, including Alitalia, Air Berlin, Darwin Airlines, Air Seychelles, Jet Airways and Virgin Australia. The collapse of Jet, however, would benefit other airlines, which are scrambling to take up more market share, while also pushing up the airfares.

While Jet Airways had been making news for all the wrong reasons over the past few months, alarm bells rang in December 2018 when the airline defaulted on its debt payments to banks, triggering a further downgrade on its ratings by ICRA. The company is severely cash-strapped and debt-laden, the airline is in talks ever since, with Etihad and several other stakeholders for interim financing. In the meanwhile, the airline has cut down on several unviable routes along with transitioning to a no-frills airline model by altering its baggage and free meal rules. The following is a brief timeline of the unfolding of a crisis in the past few months.

On February 14, 2019, as part of its revival plan, Jet’s board approved a bailout known as the BLPRP or Bank-led Provisional Resolution Plan. The BLPRP, which was approved by the RBI (Reserve Bank of India) just last year is applicable to companies with negative net worth. The plan will allow a group of lenders, led by the SBI, the option to convert loans into equity thereby making them the major shareholders in the airline. While this measure is expected to be temporary, it would allow the airline to raise equity from investors to meet its funding gap of INR 8,500 cr. via an appropriate mix of equity infusion, debt restructuring, sale/leaseback/refinancing of aircraft.

The severely cash-strapped airline has had to ground its aircraft owing to non-payment to lessors. Presently, around 50 aircraft of the airline are grounded, which is further adding to its distress situation. Additionally, the recent Ethiopian Airline crash made the Indian aviation regulator ground five of Jet’s Boeing 737 MAX among other airlines, which was in line with passenger safety concerns. It is due to this the demand for the older versions of Boeing 737s has risen globally with several countries grounding the infamous aircraft (Boeing 737 MAX). Two prominent lessors; including the Fly Leasing Ltd. and BOC Aviation Ltd. have even indicated that they could reallocate some of Jet Airways leased Boeing 737-800 aircraft to meet the rising global demand. Moreover, with 45% of the airline’s 119 aircraft grounded along with cancellations of multiple flights, routes and sectors, Jet Airways market share has dropped down to 5.3% as of January 2019 (DGCA) and this has greatly benefited Indigo Airline.

While several attempts are in place to financially revive the company and conjectures regarding Naresh Goyal’s status doing the rounds, the big question remains!

Can the airline compete against the budget carriers in India’s brutally competitive market?

It is estimated that 68% of all the domestic passenger traffic was served by the LCCs in 2018, thereby indicating shrinking popularity for the full-service carriers. While fresh equity infusion and financial support from its partners is a temporary lifeline and wooing price-sensitive customers with cheap airfares might not be much of an issue, however, the real struggle for existence will come to fore when the competitors will leave no stone unturned to stifle the airline further. Jet Airways would have to reinvent from within learning from its past mistakes. There are reports that the company has already started transitioning its business model to match one of LCCs, the next 2-3 years’ time period is crucial for Jet Airways to win back customer confidence and regain its lost market share.

Your Rating

Slack set out to kill E-mail

Started as a side project for internal use in a gaming company High revenue growth with recurring revenues Went Public by offering shares through the Direct Public Offering ...

Tire manufacturing industry, analysing the cost and margin trends

The global market for tire manufacturing stands at $180 billion. Michelin anticipates the long-term demand to rise at the rate of 5 to 10% a year in developing markets and 1 to 2% a year in mature...

An analysis of Malaysian rubber glove industry

How big is the international rubber gloves market? Reasons behind the healthy and steady growth Malaysia’s role in the industry Why are companies struggling for stable...

Failure of Amazon in China, an analysis

E-commerce market in China Online consumer product retailers in China Performance of Amazon in China   Amazon is a global e-commerce player selling a wide...

Rapidly growing Indian online food delivery industry and its unrealised profits

Evolution of online food delivery industry in India Geographical penetration and scope for expansion Key players and their zeal to balance revenue and costs   Online...

Can lithium-ion anode demand for needle coke reduce availability for electrode players?

What is needle coke? Uses of needle coke Lithium-ion battery manufacturers demand needle coke   Needle coke? Needle coke is a specialised form of petroleum coke...

Is the radio broadcasting industry in the U.S. dying? An analysis

Radio, the most powerful medium of reach in the U.S. Why the industry is moving at a slow pace? Radio’s health is still sound, will it continue in the long-term?   ...

Carbon black industry, strong potential for supernormal profitability?

What is carbon black? Its uses Impact of the environmental curbs in China   What is carbon black? Carbon black is a fine carbon powder and it is a disorderly...

Housing finance market in India. Is affordable housing driving the growth?

Overview of the housing finance sector in India Key players dominating the segment and their dynamics Factors driving aggressive demand for housing   The housing...

Sri Lankan economic and political crisis

Sri Lanka’s latest political crisis, who governs the nation? Poor economic indicators adding to the nation’s woes   Sri Lanka is currently embroiled in a political crisis,...

Blockchain, an emerging concept, a disruptive technology (Part 1)

What is blockchain? How is blockchain revolutionary? Cryptocurrency, the new money ICOs, the new way of raising money Summary Blockchain is a software architecture...

Indian wood panel industry, growth drivers and present trends

Current market scenario in the Indian plywood industry Growth in the housing sector and rapid urbanisation to provide the boost GST rationalization to reduce price difference...

Rice industry outlook 2018

Major rice producers and consumers Global rice trade Factors dominating the trade   Rice is the 3 rd largest produced agricultural commodity in the world, after...

Rise of Ant Financial, will the success story continue?

What is Ant Financial? Journey to become king of unicorn Will regulatory curbs hinder its success journey?    Ant Financial, an affiliate and integral part...

Malaysian rubber glove industry, an update

Rising global demand for gloves Impact of USP 800’s implementation and the US-China trade war on Malaysia’s rubber gloves industry Key challenges for the Malaysian rubber...

Baidu’s Apollo, the underdog of autonomous driving platform

Overview of the autonomous vehicle sector in the global automobile industry Search giant Baidu’s entry into the autonomous driving space Baidu’s approach in becoming a front-runner...

Unnoticed growth of the media and entertainment industry in India

Overall industry brief Growth of the M&E industry and its segments Major supporting elements of this growth   Media and Entertainment (M&E) is a very wide industry...

Battle for the textile and apparel industry in Southeast Asia

The reasons for China’s decreasing presence in the industry Initiatives by the governments in Southeast Asia to boost the textile trade Vietnam and Bangladesh’s quest to conquer...

OYO Rooms, an Indian start-up to enter Japan

Growth story of OYO Rooms in India Business model of OYO Rooms Analysis of strategy to enter Japan   OYO Rooms, the Indian start-up has decided to venture in Japan...

What’s in store for India’s first commercial REIT as it hit the market with Blackstone teaming up with Embassy Group

Overview of the partnership and assets of Embassy Office Parks Comparison of the Indian commercial office market space with other developed markets Road ahead for India’s...