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No ‘High-flyer’

The Jet Airways crisis has exposed the fault lines in the aviation industry and revealed systemic risks.

 

The domestic airline industry has been in the throes of a crisis with Jet Airways, failing to obtain emergency funding from lenders to pay for critical services. At one point India’s largest private airline in terms of market value, Jet Airways is now forced to ground its operations temporarily. The airline had been defaulting on payments to lenders, suppliers, lessors, and employees. With lessors taking over aircraft and airport slots and flying rights being allocated to rivals, the outlook for the beleaguered airline appears to be grim, even though the lenders led by the State Bank of India (SBI) have opened a late bidding process for new investors.

But, this situation has set the alarm bells ringing: Is there something fundamentally wrong in the modus operandi of the commercial airlines in India? Although the airline business is characterised by low profit margins, external factors also influence operating profits in India, which include the volatility in the exchange rate value of the rupee against the dollar, and the aviation turbine fuel costs buoyed up by high taxes. But, the specific reasons are more to do with the nature of price competition in the aviation market along with an expansion of capacity that has threatened the operations of full service carriers like Jet Airways. An aggressive expansion of fleet coupled with predatory pricing had led to mounting losses. Even then, efficiently managed low-cost carriers have succeeded in staying afloat. IndiGo, now India’s largest airline, reported a net profit of ₹ 2,24,237 crore in the financial year ending 31 March 2018.

The civil aviation statistics, published by the Directorate General of Civil Aviation, however, reveals some disconcerting facts. First, despite a 10.87% compound annual growth rate of passenger revenue kilometres (or airline demand, in simple terms) between 2007–08 and 2017–18, the year-on-year growth of demand in 2017–18 had actually declined to 18.65% compared to the 21.82% in 2016–17. Second, almost all airlines evidenced high passenger load factor (PLF) or seat sales, but for almost two-fifths of them the PLF exceeded their break-even load factor (BELF), implying that more sales have not necessarily translated into operating profits. Further, only about a third of the airlines are cost-efficient in terms of their operating costs per stage length.

With the industry being predominantly cost-driven, and nearly 70% of the market players struggling to tame their operating costs, competition on passenger yield is a potentially dangerous strategy both for the stability of the industry and sustainability of the “low-cost” models. This calls for capacity rationalisation in order to ramp up air fares, and more disconcertingly so, when the state policies fail to contain uncertainties.

However, apart from the structural and policy-related factors plaguing the industry, the current plight of Jet Airways is also due to its own making. Its financial troubles started with the purchase of Air Sahara in 2007. It reported successive losses for the last four quarters and in nine out of the past 11 financial years, while also succumbing to a fall in its market share by half. Further, it lacked a viable business model, for it was unable to make revenue to cover costs, but kept piling up debts.

Along with financial mismanagement, the failure to find a strategic investor to infuse equity also led to its growing troubles. Jet Airways had been slipping into negative equity, even though Etihad Airways had bought a 24% stake in the airline in 2013. By 31 March 2018, Jet Airways had reported a loss of ₹ 634.45 crore and it had a gross debt of ₹ 8,425 crore. Even then, the failure to inject equity and the obstinacy of founder Naresh Goyal to not cede control of the airline or agree to the conditions of interested bidders, thwarted any infusion of new equity on time, bringing the airline to its present predicament.

However, the larger question relates to why the financial institutions failed to act on time to save the airline from the brink, even when the acute financial problems were evident since 2018. The SBI alone has an exposure of 27% of Jet Airways’ total debt. If debt resolution had happened earlier, it would have prevented an erosion of the value of assets of the airline, as losses have accumulated over time. This, especially as the major lenders that happen to be public sector banks now face the prospect of a substantial haircut on their debt, which amounts to a total of ₹ 7,251 crore, if a new owner could actually revive the airline.

If this were to happen, it would force the public sector banks to make substantial write-offs to their exposure to Jet Airways. Thus, in all eventualities, it is the lenders who stand to lose heavily, apart from the 23,000 employees who have already lost their jobs.

Updated On : 15th May, 2019

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