On Thursday, Jet Airways approved a bailout plan after reporting consecutive losses in the last three quarters.
This Bank-led Provisional Resolution Plan (BLPRP) will allow lenders to convert loans they gave Jet to equity and become shareholders of the airline.
Specifics of the deal
The approved bailout plan will be funnelling Rs 8,500 crore into Jet with a mix of equity infusion, debt restructuring, refinancing of aircraft, and others, says the company in an official press release.
The Jet Airways board has agreed to gives its lenders, namely SBI, a 50.1% ownership stake in the bailout plan. Under this deal, SBI will be allotted 11.4 crore shares at a value of Re 1, and it will have the power to nominate members for a seat on the Board of Directors.
The plan also allows a sanctioning of interim credit facilities on terms that are in agreement with government requirements. The BLPRP envisages the company receiving the requisite approvals from shareholders at their meeting scheduled on February 21, says Jet.
Other shareholders equity will be diluted in the process: Chairman Naresh Goyal will own 25% and Etihad Airways will own 12%. Both have reduced their ownership stake by half.
Jet Airways CEO Vinay Dube said, Jet Airways continues to make steady progress on its operational and financial turnaround, and with today’s approval of the BLPRP by its Board of Directors, we remain confident of delivering a more strategic, efficient, and financially viable airline.
Why did Jet need a bailout?
Like its contemporaries, Jet Airways became another Indian airline trying to keep its head above the water amidst heavy financial troubles. The airline defaulted on debt repayment and reported a net loss of Rs 732 crore in the third quarter.
Last August, Jet vocalised concerns about its funding and cut employee salaries by 25%. Then, in September, the airline only managed to pay 84% of its employees.
Prior to Jets concern about its own financial stability, other agencies had already begun to read the writing on the wall. The ICRA, a credit rating agency, downgraded the airlines rating in regard to its ability to repay debt.
Dube added, We are indebted to our employees who, despite our interim challenges, have worked tirelessly to ensure the highest levels of operational reliability and customer services for our guests, in line with our core values.
Aviation industry is bleeding cash
Jet Airways is only one in a long line of Indian airlines that have reported financial turbulence. Kingfisher, owned by Vijay Mallya, collapsed in 2012 and Air India is still in the midst of finding bidders for its Rs 55,000-crore debt.
Although Jet, IndiGo and other airlines are able to fit more passengers on board, their yield is decreasing because of rising fuel prices. As fuelling accounts for close to 40% of an airlines expenses, the fluctuating prices of oil have a severe and unavoidable impact on their financial health.
Last May, Dube had said, Financial performance during the quarter was weaker due to the continuing increase in the price of Brent fuel without a corresponding increase in airfares.
Other reasons the Indian aviation industry is bleeding cash are a depreciating rupee and a price war among airlines. Airlines incur a considerable amount of cost in dollars because of renting, refuelling, and maintenance at overseas landing spots. And they cannot offset these costs with ticket prices because none own a significant enough market share to hike fares.
Along with issues plaguing the aviation industry, regular staff and employees are also in the line of fire, because they risk receiving only a portion of their salary or losing their jobs entirely.
Rhea Arora is a staff writer at Qrius