How Will Jet Airways Revive Itself?

On October 17th 2020, a consortium of investors (Kalrock Capital and Murari Lal Jalan) proposed to relaunch the country’s oldest private sector airline with an initial investment of ₹1000cr ($136mn) over the next five years.

Their bid for the Airline secured over 99% votes from the Committee of Creditors which will now be submitted to the National Company Law Tribunal (NCLT) for approval.

The news has brought major relief to over 4,000 employees (currently on payroll) who were left in the lurch since the Airline grounded its operations in April 2019. It has also jacked up Jet’s share price by around 21% within the last five trading days (today’s close: ₹46.50).

Backstory

Jet Airways was launched by businessman Naresh Goyal and began air services in 1993. It grew steadily over the next decade to emerge as India’s largest commercial passenger airline in 2010 with a market share of 22.6%.

Jet acquired Air Sahara in 2007. Then there was the purchase of the 10-fleet strong Airbus A330 and Boeing 777 planes. Both depleted its war chest considerably.

In 2013 the Airline sold a 24% stake to Etihad for $379mn. However, circumstances gradually declined owing to stiff competition from rival low-cost carriers, higher operational costs, volatile crude oil prices ($80/barrel), a depreciating rupee (20% fall against dollar), piling debt (almost ₹8,000cr), and highly stressed working cap, ALL leading to the Airline’s eventual demise.

All domestic and international operations of the Airline ceased in April 2019. Goyal stepped down as the Chairman soon thereafter and pledged over half his shares to banks in exchange for releasing interim funds for the working capital of the company while the resolution process underwent.

Who Are the New Investors?

Kalrock Capital is a global investment and advisory firm that was founded by the Lichtensteinian based entrepreneur Florian Frisch. Frisch is credited with much real estate success in Germany and has a tech-focused investment history (consumer internet, cleantech, e-mobility etc).

Murari Lal Jalan, on the other hand who started with trading in paper and photographic equipment is now a UAE-based businessman involved in a host of different businesses including real estate, mining, FMCG, tourism, etc.

How Will This Affect the Ownership of the Company?

Since Naresh Goyal stepped down as Chairman in April 2019, the consortium of lenders led by SBI own a 51% controlling stake in Jet Airways. Mr. Goyal owns 24%, Etihad 12% and the rest is publicly-held.

If the deal is finalised the Kalrock-Jain group will take controlling stake and have the option of buying out the rest of the shareholders, dilute their stake through more public-issues or retain them as minority shareholders.

What Are Their Plans for Jet?

The fine-prints of the plan aren’t public yet but this is the reported preliminary idea:

• To pay out upfront ₹866cr ($117.9mn) to all lenders (₹380cr to financial creditors and some deferred payments to creditors).
• To “relaunch Jet Airways as a full-service airline, but with a special focus on cargo”.
• Banks will get a 9% stake in the Airline.
• Employees will be offered a 75% stake in the ground handling arm PLUS a “financial incentive” close to ₹20,000 ($273) each.

What Picture Are We Looking At?

The Airline incurred a total debt of ₹8,000cr ($1.08bn) to the banks (However, some claim that the total debt admitted in the resolution plan was somewhere around ₹15,525cr ($2.1bn)!

The company which was once the face of the Indian airlines and boasted a fleet size of more than 120 is currently down to twelve.

The employees have claimed dues approximating ₹1,428.7cr ($194mn).

Most of the international flight operations are either standstill or taken over by Etihad.

What Challenges Lie Ahead?

The need for copious amounts of cash cannot be underscored for the Airline at the moment. Especially if the goal is to wake it from slumber ongoing for close to a year and a half now.

Infusion of ₹1000cr seems deficient in this regard. Rebooting flight operations, restarting expenditure cycles and paying off existing debt requires a lot more than that (Simply getting the aircrafts into flying condition may take almost $10mn, as per Business Standard’s reports)!

The most aggrieved entities in this affair are the banks which have agreed to take a 90 percent haircut on payments to make this deal happen. If the deal materialises, banks will get repaid to the tune of ₹800cr ($109m) and maybe gain some equity in the process, if nothing more.

Next challenge is the resumption of operations. Almost all of the flying slots of the Airline have been re-allocated to others during its hiatus. Re-obtaining those will be difficult.

Also, domestic air travel is dominated by low-cost Airlines like Indigo and SpiceJet. Beating that model can be done in two ways; delve into the low-cost regime yourself or embark on a route of massive expansion through big-time capex exercises and retail campaigns ultimately requiring major overhaul in business strategy.

The former will cut down profit margins enormously, which is unaffordable at a time when clearing dues with vendors, suppliers and airports is primary. [Also FYI: Forget about “full-service” relaunch].

The latter will require investments of immense proportions which we are yet to see.

Another cause of concern is with the rehiring of personnel, most of whom have either jumped ship to other airlines. The same crop of talented and experienced employees will be hard to find.

So, No Cause For Rejoice, Then?

Sure, there is.

The news of a revival means things getting into motion, more jobs being created and creditors finally getting their dues cleared.

However, there are certain aspects of this deal which need fine-tuning. Let’s not forget that the pandemic has muzzled air travel business considerably so getting business up and running is tougher now than ever.

Regardless, the Jet shares have picked up steam in the last few weeks, thanks to the news of new investment abound.

Nevertheless, the picture isn’t as promising as one can expect. Share price for Jet is now ₹46 ($0.62), down from ₹200 ($2.71) last year when shareholders agreed to convert debt into equity.

From now, it’s just hope that new investors are successful in formulating and launching “Jet” propulsion theory of Jet Airways.

(Originally published October 23rd 2020 in transfin.in)