7 PM | Jet Airways Crisis | 18 April, 2019

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Context

Jet Airways on Wednesday announced temporary suspension of all its international and domestic flights

The airline has a debt overhang of ₹8,414 crore (as of March 31, 2018), and accumulated losses of over ₹14,000 crore. Jet Airway request for more money from banks to which was turned down. After this refusal, the airline ran out of funds to continue operations and had to shut down. 

Timeline of event
1993: Jet Airways starts as an air taxi operator
1994: Sells 20% stake each to Gulf Air and Kuwait Airways in 1994; both exit Subsequently
2004: Starts international flights, Chennai to Colombo
2007: Acquires Air Sahara for ₹1,450 crore
2013: Sells 24% stake to Etihad Airways for $379 million after prolonged negotiations
March 2018: Defers employee salaries in the first sign of crisis
Jan-March 2019: Jet grounds more than 100 aircraft
Mar 25, 2019: Jet board approves debt-to-equity conversion; lenders to be issued 114 million shares and pick up over 50% stake Anita and Naresh Goyal resign from board
Apr 8, 2019: Jet’s lenders invite expressions of interest to invest in airline Last date for submissions is April 10, which is extended to April 12
Apr 17: Jet grounds all operations

 

Reason for crisis

  • Purchase of Air Sahara: Many aviation experts believe the start of Jet’s financial troubles can be traced back to the 2006 purchase of Air Sahara for $500 million in cash.
  • Merger with Jet lite: The government refuses to approve Jet’s merger with its subsidiary JetLite, nearly three years after the proposal was made. The merger would lead to greater efficiency in cash management of the merged entity
  • Competition from Low-cost airlines: The arrivals of LCCs (Low cost carriers) like IndiGo, SpiceJet and GoAir lead to wearing down the market share of the premium airlines LIKE Jet Airways. To moderate the decline in market share, the Jet airlines were forced to reduce their fares and this in the long run lead to a pricing war amongst the airlines with potentially affecting the financial viability of the carrier
  • Poor fleet acquisition: Acquisition of widebody aircraft such as Airbus A330s and Boeing 777 proved uneconomically later.
  • Higher fuel costs for the airlines: Soaring oil costs might have also contributed to collapse of Jet Airways.
  • Rupee Depreciation: the recent rupee’s depreciation has had negative impact on the airline industry. About 25-30% of airline costs (excluding fuel) are dollar denominated. Example: aircraft lease rents and maintenance costs to ground handling and parking charges abroad.
  • Corporate mis-governance: Many experts believe that company decision often lacks transparency. Company top management accused of making bad investments and failing to address the company’s deteriorating financial predicament while borrowing heavily.

Impact of Jet crisis

  • Loss of jobs: One of the biggest fallouts of Jet’s collapse is the loss of approximately 16000 jobs.
  • Rise in Fare: With Jet Airways grounding operations, the supply of airline seats has gone down. Given this, prices of other airlines are bound to go up in order to ensure that supply matches demand.
  • Lending to Airlines Will Be Further Constrained: Airlines require large amounts of capital towards aircraft leases/purchases. With Jet airways, banks would reluctant to provide loan
  • Risk Premiums Likely to Rise: The Indian market has in the past witnessed an increase in risk premiums after the collapse of Kingfisher airlines and it took several years to rebuild confidence. Situation is somehow similar

Steps to be taken

Government should take necessary steps to bailout Jet Airways from crisis. Some of the options available with government are

  • Takeover Jet Airways Management: Government should form an expert management committee to take over Management of Jet Airways. This would improve the investors’ confidence and reduce the domino effect on civil aviation sector.
  • Rationalise Airfare hike: with the breakdown of Jet airways there is high probability that air fare would rise. Government must take necessary steps to rationalise it to save the commuters
  • Facilitate to move planes: Government should act as a facilitator to move planes of the Jet Airways to other operator to recover loss.
  • Strong corporate governance law: Government should take necessary steps to bring transparency in corporate decision making in order to avoid these situation
  • Inclusion of aviation turbine fuel within GST: This will help airlines to reduce their tax outgo as the new indirect tax system is without the cascading effect of taxation.

Way ahead

The entire Jet Airways story brings forth the crisis faced by civil aviation sector. It is reported that government has asked state-run banks to rescue privately held Jet Airways without pushing it into bankruptcy, to avert thousands of job losses.

But many experts believe that bailing out Jet Airways is not a viable option as government already has Air India to do deal with, an airline that has losses of more than Rs 40,000 crore. Instead the government should focus on providing avenues for expansion of civil aviation. This will benefit the employees of Jet Airways, as competing airlines will need newer employees to fuel their expansion plans.


Source: https://www.thehindu.com/opinion/op-ed/the-end-of-the-runway/article26866791.ece

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