Can A Fund Infusion Revive Jet Airways?

A fund infusion isn’t likely to help India’s second-largest airline.

Jet Airways (India) Ltd. in a conference call said it’s considering a range of options, including selling aircraft, capital infusion and a stake sale in its loyalty programme, to meet its debt repayment obligation of over Rs 1,500 crore with less than four months left in the current financial year.

What it really needs is a radical restructuring in its cost structure and revenue enhancement to be more competitive in the industry, said Kapil Kaul, chief executive officer-South Asia of the international aviation consultancy firm CAPA. “Fund infusion is just the first step, but more than that they will have to restructure their cost and enhance their revenue.”

Jet Airways has been struggling to hold ground in the world’s fastest growing aviation market with competition from low-cost operators such as IndiGo, run by InterGlobe Aviation Ltd., and SpiceJet Ltd. Jet Airways’ market share has more than halved in the past decade to about 15 percent. The company’s long-term ratings were downgraded thrice in six months due to delays in the implementation of the proposed initiatives to ease tighter liquidity conditions. It had resulted in delays in payment of employee salaries and lease rentals to the aircraft lessors.

Jet Airways being a full-service carrier has a higher cost structure compared with peers such as IndiGo and SpiceJet Ltd. And its weighed down by high fuel, maintenance, employees and finance costs, according to BloombergQuint’s analysis of the airline’s financial. The airline’s employee cost, the analysis showed, is higher than that of state-run Air India Ltd.—which is reportedly overstaffed and inefficient—as are its finance and aircraft maintenance costs due to higher debt and older fleet.

Although Jet Airways has deployed three-fifth of its capacity on international routes that enjoy the benefit of lower taxes, it pays a higher fuel cost compared with its domestic peers. Indian states charge as much as 30 percent in sales tax on aviation turbine fuel, on top of a 14 percent excise duty, making it the costliest in Asia.

The airline lacks the ability to generate enough revenue to meet its cost due to stiff competition and lower occupancy. Jet Airways’ cost per seat kilometer has been higher than its revenue for at least the last three years.

Cheaper fares offered by peers has forced Jet Airways to either reduce its fares or operate at lower occupancy levels. And that doesn’t bode well Naresh Goyal-founded airline, according to Jitendra Bhargava. The former executive director of Air India said competition to gain market share will force Jet Airways to infuse funds after every six-eight quarters.

“All airlines are regrettably chasing market share at the expense of profitability which is not a sign of maturity,” Bhargava said. “Even after the proposed fund infusion, Jet Airways will continue to need periodic fund infusion if market dynamics don’t change, i.e., airlines charge higher fares to cover costs.”

A change in market dynamics is less likely to happen given the large aircraft orders placed by domestic airlines. “Huge numbers of aircraft and their induction in the coming years is unlikely to allow airline companies to enhance fares, fearing loss of market share,” Bhargava said.

Déjà Vu

Jet Airways isn’t unfamiliar with fund infusions to service debt obligations. The airline had in April 2013 received funds from UAE-based Etihad Airways for 24 percent stake. It also sold stake in its loyalty programme, while receiving a bank guarantee from Etihad for $150 million.

Despite receiving a support of over Rs 3,600 crore from the Etihad group five years ago, Jet Airways again needs a fund infusion to continue operations because of its inefficiency.

Mark Martin, the founder and chief executive officer of Martin Consulting, argued against a fund infusion. “Fund infusion in an inefficient organisation makes no sense,” Martin said, adding: “Real solution lies in restructuring their operating environment totally and realigning their business model.”

To be sure, the fund infusion did reduce the company’s debt, but its high cost structure, which led to massive losses, led to increase in debt.

For the last three consecutive quarters the company reported losses in excess of Rs 1,000 crore due to lower yield, a weaker rupee and higher fuel prices. This is also not the first time that the company has reported losses of such extent. In the last decade, the carrier reported a loss in 20 quarters compared with a profit in 21. The amount it lost was thrice what it earned as profit—a total net loss of Rs 12,457 crore against a profit of Rs 4,122 crore—owing to its high cost structure.

To beat this, the company has been trying to reduce its non-fuel cost over the last year. However, a weaker rupee hasn’t worked in its favour. Santosh Hiredesai, an aviation analyst with SBI Caps, said that Jet Airways is doing the right thing, but at a slower rate.

Jet Airways might be doing the right thing of bringing down the non-fuel cost, but it does not have time on its side, said Hiredesai. “Jet Airways is in process of restructuring its cost, but till then it will require cash support to sustain.”

The airline had on Nov. 20, 2017 outlined a plan to reduce non-fuel cost by 12-15 percent in the next eight to 10 quarters, which it reiterated on Aug. 27, 2018 when it announced its earnings for the quarter ended June.

The beleaguered airline has reportedly approached Tata Sons and Etihad for funds. Goyal is also said to approach Abu Dhabi-based billionaire MA Yusuff Ali of Lulu Group for investing in the struggling airline, Times of India and MoneyControl had reported quoting anonymous people. However, a fund infusion without a clear turnaround plan would fail to revive one of India’s oldest private airlines.

Kaul of CAPA said that a return to the current situation isn’t an option. “New investors and current promoters have to be cognisant of the fact that post this new funding, restructuring and becoming profitable is imperative so that they do not reach a similar situation again,” Kaul told BloombergQuint.

“They [Jet Airways] have to do their best to become fundamentally sound and profitable.”