- 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.
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