A consortium led by Murari Lal Jalan and Kalrock Capital intends to reinstate Jet Airways from its erstwhile hubs in Delhi, Mumbai, and Bengaluru. . The plan is to revive Jet Airways as a full-service carrier, returning to a full schedule of domestic and international flying. The promoters intend to appear in front of the National Company Law Tribunal (NCLT) later this week.
Jet Airways went down in 2019, a year before Covid-19 hit, and when the global economy was doing extraordinarily well. As I said then in an op-ed in The Hindu BusinessLine , airline failures are messy because running an airline is not easy. Airplanes need fuel, the price of which is set by global, volatile oil markets. Hedging is expensive and can work against you at a time of falling oil prices. The capital-expenditure ratio is one of the highest among service industries as airlines have to borrow billions of dollars to buy or lease planes.
Shaky recovery
Labour costs are high and every aspect of the airline’s operations is overseen by some government agency, raising compliance costs. Governments regard airlines as cash cows and hit them for landing fees and ticket taxes. Insurance is expensive. An airline seat is a perishable inventory. If a seat is not sold by the time the aircraft’s door is closed, revenue from that seat is lost forever.
There is also the question of how viable a full-service airline is in the Indian market. During the last ten years, the market has turned to rewarding efficiency, low-cost point-to-point flights, and quick turnarounds at airports. IndiGo Airlines has emerged as the country’s leading carrier. Not one of these business conditions has changed in Jet’s favour. If anything, these conditions have significantly worsened.
Covid is rampaging through the world again, bringing in near lockdown conditions in many parts of the world. Seoul celebrated rave reviews as a city that knew how to tame the pandemic. Now, the city is facing a crisis not seen since early March. The announcement that Pfizer and Moderna will soon distribute vaccines has barely tempered worldwide anxiety about the virus. Many people doubt that a vaccine would be effective and most doubt that distribution to everyone who wants it may not happen until the end of 2021.
Even if travel conditions return to normal — that is, governments no longer require proof of PCR tests, and lift institutional and at-home quarantine restrictions, air travel is unlikely to return to 2019 levels for many years yet. Businesses have learned to be effective without requiring employees to get on a plane -— and these are the very kinds of customers that Jet wants to rely on to return to recovery.
Financial fallouts
The global aviation sector is hurting like never before. The big American carriers are bleeding cash. During the busy Thanksgiving holiday last month, the busiest four-day period during the entire year, bookings struggled to reach 40 per cent of 2019 levels. Some carriers are counting on transporting vaccines in the bellies of their planes — and overcharging the government to recoup some of their losses. Indeed, the new Jet Airways management also alluded to this opportunity. But distributing vaccines is not the bread-and-butter business model of a full-service passenger airline.
The details of the consortium’s reorganisation plan were not available but in past attempts, the old management of Jet Airways sought to borrow even more cash on top of Jet’s existing debt. The NCLT is a bankruptcy tribunal, so if proceedings at the meeting go as in Western countries, each stakeholder involved — the former promoters, lenders, including the big Public Sector banks, aircraft leasing companies, pilots, rank and file employees, vendors, airline partners, potential investors, and the government — will make their case to recover what is owed from the old Jet Airways.
Haircuts coming
There is a hierarchy of creditors — banks are preferred over investors — and the NCLT will decide how much of a “haircut” each will have to suffer. It is the consortium’s best hope that existing creditors will give up a lot more so that the value of the company, sans its debt, is much more attractive to invest in and improve. Operational restructuring plans may have to include Jet shedding unprofitable routes and even changing its business model to a point-to-point carrier. But the consortium’s insistence that Jet would be revived for what it once was seems much too ambitious.
The aviation sector wants the new Jet Airways to become successful. But the path ahead is riddled with headwinds, a truth masked by the new consortium’s recent statements to the press. I was a fan of Jet Airways and have flown the carrier numerous times. I remain sceptical that Jet Airways will ever become what it once was. In fact, I am sceptical that it will take off at all.