People in India are seeing Jet Airways, its second-biggest airline by market share, facing the worst financial crisis in its 25 years of existence with no respite in sight in near future. It has no working capital, is strapped for cash, and laden only with losses and debt. Jet defaulted on loan repayments in December, delayed employee salaries, and didn’t pay its aircraft lessors in time.
Talks among Jet Airways, its lenders and partner the Abu Dhabi carrier Etihad Airways over a possible rescue are not moving forward.
The Gulf carrier Etihad currently owns 24% of Jet. It has been asked to put in more money by way of additional equity. Etihad on its part, too, is not in the best of financial health. It has to be careful with its airline investments, in view of those it has made in Europe, such as Air Berlin and Alitalia.
They did not fare well. This has affected its own financial health. Etihad posted losses of $1.52 billion in 2017, and $1.87 billion in 2016 which does not make a happy reading. As per Fitch Ratings, Etihad will remain in the red till 2022. Recently, Etihad had to cancel an order for 10 Airbus A320neo planes for Air Serbia, in which it owns a 49% stake.
In view of such a precarious situation, Etihad will not like to invest further in Jet Airways. It may be simply not in a position to offer its shares in Jet as collateral against loans to Jet Airways.
Banks, on their part, don’t see any merit in providing liquidity assistance to Jet. They may consider this only when the existing shareholders – Etihad or Mr and Mrs Naresh Goyal – put in adequate security.
Also Read: Will Lessors Repossess Jet Airways’ Planes?
HSBC Dubai and Mashreq are overseas lenders to Jet. Etihad has already given guarantees to them for some of their exposure. They, too, don’t see any feasible option to revive Jet Airways in view of present condition of Jet which at best can be described as hopeless since there does not seem to be any increased revenue generation possibility. Presently Jet has:
– Grounded planes,
– Laid off manpower,
– Reduced capacity,
– Nonviable flights,
– Its lessors preparing for taking their planes back,
– Its potential investors – Tatas and Etihad – not so keen,
– Its net worth and market cap regularly being eroded, and
– Its losses and financial troubles still building.
Jet currently has a debt of over Rs 8,000 crore and, its loan repayment obligations till FY21 are a little over Rs 6,300 crore. In such a scenario, the lenders led by State Bank of India (SBI), wonder how an airline like Jet can ever re-pay its debt. The world has already seen the Kingfisher Mallaya episode. Given the worsening financial health of Jet Airways, the lendors are reluctant to further put any money on Jet without covering their exposure with adequate security.
Even when Naresh Goyal gives up his management control and majority stake to 22% from 51%, Etihad will have to bring in another Indian partner, because Etihad can’t have a majority stake in an Indian carrier, according to current Laws. Talks with the Tata Group have remained inconclusive.
Naresh Goyal did meet government officials at the highest level, appealing for a possible bail out. He was recently greeted with a statement from the Minister Suresh Prabhu:
The lenders also view the proposal to convert debt to equity in Jet as a non-feasible option. This further endorses the opinion that there is nothing organically profitable in airline business. The Minister, too, subscribes to this view. See: With Cost of Interest on the Debt, Air India Can Never be in Profit: Suresh Prabhu