Jet Airways’ debt and all that ails the aviation industry, explained

After Air India (AI) and Kingfisher, financial troubles have caught hold of Jet Airways now—specifically, a huge debt burden of Rs 8,052 crore.

On Thursday, February 7, Etihad Airways, Jet’s second-largest shareholder—with 24% shares—infused the airline with Rs 252 crore by pre-purchasing tickets through its loyalty programme, Jet Privilege, says the Economic Times.

Jet is due for a loan repayment of Rs 1,700 crore, and has, so far, been unable to secure other funding; hence, Etihad’s lifeline feels like a small drop in the bucket. However, according to reports, Jet and Etihad are in talks of restructuring the company’s equity as well. This could result in Jet Airways’ Chairman Naresh Goyal stepping down from the company.

Major developments in Jet’s financial history

Jet Airways has had a strong 25-year run and is currently the country’s largest full-service airline by market share. Now, it has hit an all-time low by defaulting on pilots’ salaries and repayment of loans.

Livemint reports Jet voiced concerns last August about funding and asked its employees to take a 25% cut in salaries. Again, in September, the airline was only able to pay 84% of its employees; it, however, pledged to “inject funds and cut costs by more than 20 billion rupees in two years”.

However, as Jet’s profitability decreased in the coming months, credit rating agency ICRA Limited downgraded its ratings on debt facilities. This means ICRA believed there was considerable risk of Jet being unable to meet its financial obligations on time because of rising fuel prices and a lack of funding from outside investors.

In January, lenders led by the State Bank of India proposed a $900-million bailout plan that would oust Goyal, who holds 51% equity, as majority stakeholder. Reason: Etihad infused more cash for greater equity. Goyal, who wants to retain his control, proposed a different plan that would save his place on the board. Now, Goyal and Etihad are at loggerheads as lenders deliberate over the plans, says Bloomberg.

Indian airlines’ money trouble

Like Jet Airways, Kingfisher was also in a financial conundrum. The airline is infamously remembered for its 2012 collapse and absconding chairman Vijay Mallya, who is currently battling extradition in London.

AI also joins the ranks of failing Indian airlines with a loss of Rs 5,765 crore in 2017. Business Standard says AI was unable to increase its revenue due to aircraft unavailability and mismanagement of resources, like manpower. The airline also has a mounting debt of Rs 55,000 crore that the government tried to tackle through privatisation.

Although the government tried to sell AI, the airline’s huge debt and poor credit record put investors off. Other conditions of this sale were also unattractive: the government would retain 24% control and the winning bidder must stay invested for at least three years and not merge the airline with other businesses.

AI is expected to lose close to Rs 14,000 crore in 2019-20. Spicejet is also in a similar situation; it incurred losses amounting to $5 million for the last six months and delayed payments to the Airports Authority of India. IndiGo, too, has declared a loss in the last quarter.

Rising fuel prices

In 2018, although Indian stocks performed well overall, airline stocks declined, says The Economist. Other sources reported airlines’ capacity to transport passengers has increased year after year, but the corresponding yield has declined.

Fuel prices account for a mammoth portion of an airline’s expense, almost 40%. So when those fluctuate, the profitability of an airline decreases sharply. India is already the world’s third largest consumer of oil; in 2017, it increased its oil imports by 1.8% or 4.37 million barrels per day.

The Financial Express says fuel prices have “witnessed a year-on-year increase of 33.6% during April-September 2018”, an especially troubling statistic for IndiGo, Jet Airways, and Spicejet, who were all impacted by it.

Jet Airways CEO Vinay Dube said on May 23, “Financial performance during the quarter was weaker due to the continuing increase in the price of Brent fuel without a corresponding increase in air fares.” He also said the weakening rupee contributed to the issue.

Depreciating rupee

Another cause for turbulence in the aviation industry is the depreciation of rupee. In August 2018, the rupee hit an all-time low of 70.59 against the dollar. Today, the rupee is valued at 71.76 against one dollar. Around a third or half of an airline’s operating expenses are in dollars, including foreign currency debt, lease payments, maintenance, and fuelling. Along with rising fuel prices, the depreciation of rupee exerts immense pressure on the aviation industry.

Price war

Despite the airlines’ ability to carry more passengers, ticket prices have not gone up. Reuters says no Indian airline is financially secure enough to afford to raise its price and lose market share in the process. “Most carriers are ill-equipped to withstand cyclical downturns… Airlines have completely lost pricing power as a result of the rapid influx of capacity,” says the article.

Moreover, government’s incremental cash infusions into AI make it more difficult for competing airlines to raise their ticket prices. Called “drip feeding”, it means the government gives AI just enough to survive but not enough to make major changes.

Loss of employment

This fiscal, AI, SpiceJet, IndiGo, and Jet will likely incur a collective loss of Rs 88 billion, halting expansion plans that won’t raise extra funds. Sources add that from this year on till 2021, the aviation industry is going to require Rs 200 billion capital.

Moreover, as Indian airlines default on salary payments and stare down the barrel of insolvency, their employees stand to lose livelihoods–a topic likely to divulge into partisan talking points.

Manish Tewari, spokesperson for the Congress, said employment “is going to be at the forefront of the campaign… There has been gross mismanagement of the economy… It is not surprising that even aviation and some of the airlines that have been doing very well in the past are now bleeding and haemorrhaging.”

India’s aviation industry is a public unfolding of all the failures of the country’s economy, from a prioritisation of political gains and bad coordination between the public sector and private investors, to a dipping rupee and reliance on imported oil that has an oscillating price point. The loss of jobs and tumultuous business climate will be important issues for the government to tackle in 2019.


Rhea Arora is a staff writer at Qrius

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