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5 Reasons why Jet Airways Failed

IndianMoney.com Research Team | Posted On Tuesday, April 23,2019, 04:14 PM

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5 Reasons why Jet Airways Failed

 

 

Jet Airways is an Indian International Airline headquartered in Mumbai with secondary hubs at Delhi and Bengaluru. It has currently suspended all its operations. In October 2017, Jet Airways was the second largest airline in India, with a market share of 17.8%. Last Wednesday (17th April), Jet Airways flew its last flight from Amritsar to Mumbai. It is not sure if Jet Airways would ever return. If they do so, then it would be under a new ownership structure.

The last few quarters have been horrendous for Jet Airways. Naresh Goyal, the founder of Jet Airways, had to give up the reins last month as lenders took charge of the airline. Jet Airways was left with no money to operate. Jet Airways cancelled all flights last Wednesday, after failing to raise an interim emergency funding of Rs 983 crores from lenders. 

“Late last night, Jet Airways was informed by the State Bank of India (SBI), on behalf of the consortium of Indian lenders, that they are unable to consider its request for critical interim funding. Since no emergency funding from the lenders or any other source is forthcoming, the airline will not be able to pay for fuel or other critical services to keep the operations going" Jet Airways has released this statement.

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5 Reasons why Jet Airways Failed

The Timeline Of Jet Airways Failure

2018

Aug 3: Jet Airways dismissed media reports of not having enough funds to fly beyond 60 days.

Aug 11: State Bank of India (SBI) said it has put the loan of Jet Airways on the watch list. Jet Airways said it is paying back regularly.

Aug 27: Jet Airways reported losses in the June quarter. It said funds would be injected. Jet Airways cut down costs by over 20 Billion Rupees in two years.

Sept 6: Media reported non-payment of salaries to employees. Jet Airways said they have paid salaries to 84% of the staff when pilots warned of non-cooperation if salary was defaulted.

Nov 5: The media reported that Tata Group is looking to buy 51% stake and merge the airline with Tata’s Vistara.

Dec 5: Jet Airways and UAE based Etihad Airways were involved in rescue talks with Jet’s bankers.

2019

Jan 1: Jet Airways delayed payments to the consortium of Indian banks led by SBI.

Jan 11: Etihad Airways was reported to be not in a position to sink new equity into Jet Airways.

Jan 17: SBI said that Jet’s lenders would consider plans of resolving debt issues.

Feb 8: Jet Airways grounded four aircraft after failing to make payments to debtors.

Feb 14: The Jet Airways board approved the rescue deal, which made lenders the largest shareholders, in a bid to fix a funding gap of 85 billion Rupees.

March 19: It was reported that the Indian Government asked the state run banks to rescue Jet Airways from bankruptcy.

March 25: The Jet Airways founder Naresh Goyal, stepped down as chairman and his wife Anita Goyal resigns from the Board. For immediate funding, lenders to pump in 15 billion Rupees.

March 30: The Jet Airways CEO said that the airline would pay December salary to employees.

March 31: Jet Airways pilots said that they are giving a deadline of two weeks to clear unpaid salaries and defer plans to strike.

 April 3: The Jet Airways forced to ground more than three quarters of its fleet, is waiting for bailout funds.

April 11: Jet Airways grounded 10 more flights, fleet size reduced to less than 20.

April 12: India’s aviation secretary said that Jet Airways has funds to stay in operation only till 15th April 2019.

April 15: Jet Airways does not get interim funds and hence plans to extend suspension of international flights.

April 17: Jet Airways forced to suspend its operations as their petition for getting emergency funds was not honored by lenders.

Reasons For Failure

1) Purchase of Air Sahara in 2006 for $500 Million in Cash

Trouble began for Jet Airways way back in 2006, when it purchased Air Sahara for a whopping USD 500 million. Many people had advised Naresh Goyal, the then CEO of the airline, to not go ahead with the deal as the price was a little too high. But, little did Naresh Goyal care about the advice he got, he went ahead and closed the deal with Air Sahara. The budget carrier was renamed ‘JetLite’, it suffered losses and the Jet Airways wrote its entire investment off.

2) Poor Management

A major flaw was the chairman’s style of management. There was only one management team and this was headed by Goyal himself. The management team was running all operations of Jet Airways. Experts believe that Goyal should have had two separate managements to run the full service center and budget flyer. Naresh Goyal was accused of making bad investment decisions and lacked transparency. He also failed in addressing the company’s ailing financial state. In simple words, the Jet Airways spent way more than what they earned and kept piling debt.

3) Low-Cost Carriers Were Underestimated

The aviation industry is highly competitive and Jet Airways failed to compete with the low cost airlines trio of SpiceJet, IndiGo and GoAir. Jet Airways did not take the low cost trio seriously, which were founded in 2005-06. The trio offered airfares at low cost and also flew to unserved routes. The trio is attractive to customers who are price sensitive.

4) Fluctuation in Oil Prices and Fall in Rupee

All Indian carriers are highly sensitive to fluctuations in global crude prices, as India continues to be a major importer of crude oil. The Rupee has fallen against major currencies and this has made crude oil a major burden on the aviation industry. No Indian carrier was spared from price fluctuation while Jet suffered the most.

5) Failure to Find an Investor

Jet Airways failed to find strategic investors to pump big money into the company and this resulted in a financial crisis. Jet’s attempts with Tata and Etihad Airways failed and led to Naresh Goyal’s exit from the management, as a part of debt resolution deal which saw lenders consortium led by SBI, taking over the airline.

How Will the Shareholders Be Affected?

Stock price of the airline is falling continuously. Few investors are holding on to their stocks hoping for a turn-around.  Experts feel that even though Jet has a considerable market cap, the balance sheet would not leave anything for shareholders on account of unsustainable debt and zero equity value.

The Jet Airways has a debt of more than Rs 8,500 cores. Even if the airline resumes partial operations, it will not be in a position to service this debt completely in the near future.

This would create a case for conversion of debt into equity. Adding new equity increases the payback period and the current shareholders would receive no money. Further, it is seen in most bankruptcy cases that when a new investor pumps in money, the current capital is either cancelled or restricted to less than 10% of the new capital. Under this scenario, the current shareholder would not generate returns for a long time. 

In such a case the existing shareholders will not generate returns for many years. The existing liabilities exceed the existing assets and the airline has a negative net worth. The equity value is almost zero. These parameters depict a negative arithmetic scenario and shows incompetency of the airline to pay shareholders even when revived. Jet Airways’ shares rose by nearly 9% today, as reports of Etihad Airways, TPG Capital and Indigo Partners reconsidering taking over the troubled airline emerged.

Experts say that high risk investors are looking at stocks of Jet Airways. The airlines’ stocks are in a zone where risk-reward has become favorable for high risk investors. These high risk investors had previously burnt their hands with similar bets on Reliance Communications and JP Associates.

Similarity With Past Failures

India has seen failures of various private airlines like East-West Airlines, Air Deccan, Sahara Airlines, Damania, ModiLuft, and Kingfisher Airlines. The latest inclusion is Jet Airways. The failure of Jet Airways takes us back to 2012, as it matches the failure of Kingfisher Airlines.

A major reason for Kingfisher’s failure was continued losses and the purchase of Air Deccan which was rebranded to ‘Kingfisher Red’. Similarly, Jet Airways bought Air Sahara and it was a big mistake, say experts.

Prior to Kingfisher Airlines being completely grounded, it didn’t pay salaries to 7,000 employees, which Jet Airways resembles. Another major similarity is the outstanding debt and negative worth. Kingfisher Airlines had an outstanding debt of Rs 7,000 crores and negative worth of Rs 12,919 crores while the Jet Airways is having unsustainable outstanding debt of over Rs 8,500 crores. 

With multiple non-compliances, Kingfisher Airlines’ stocks are prohibited from trading, leaving 2 Lakh share investors stranded with the long grounded company. If Jet Airways goes on similar lines, then it would surely be a major setback for the Indian airline industry.

How will Jet’s Failure Affect the Economy?

Effects due to the closure of a big airline will not just be restricted to employees and shareholders. It is going to have a major impact on the economy as a whole, as it results in loss of jobs, rise in unhealthy competition and increase in airfare, as other airlines would try to fill up the void created.

The loss of job of one employee would affect 5 others in the value chain. Jet Airways has nearly 16,000 employees, this means, loss of work for 80,000 people.

Jet’s closure is posing a major challenge to avoid price surge, especially in the holiday season due to lesser domestic capacity. Other airlines are putting in their efforts to increase capacity, but immediate results cannot be seen.

Further, fuel suppliers, airport operators and other vendors would lose a customer. Airports across the nation, GMR infrastructure Ltd, GVK Group and other similar organizations would lose out on revenue, which is earned through parking and landing charges.

There would be talks of bringing ATF under GST. This helps airlines reduce costs and builds resistivity to high fuel prices, poor airport infrastructure and other factors.

Conclusion

Shutting down Jet Airways is due to various factors, few of them are incompetency, bad management, high fuel costs and inability to find investors.

Jet Airways and the Government are trying every possible scenario to revive the once largest airline of India, but even with revival, shareholders and investors would suffer losses. For now, airfare has seen a surge and requires some time to get back to normal.

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