Mumbai: Naresh Goyal may have to settle for a lower stake in Jet Airways (India) Pvt. Ltd as the struggling airline finds the door to other funding options slammed shut and prepares to sign off on a plan to sell $400 million (Rs1,844 crore) worth of new shares to large investors through a qualified institutional placement, or QIP.
Buffeted: Jet’s Naresh Goyal. Ramesh Pathania / Mint
Goyal set up Jet Airways in 1992 and owns 79.99% of it through Tail Winds Ltd, his investment company registered in the Isle of Man.
The extent of the stake reduction depends on how much money the company he heads eventually raises from investors. An initial $200 million QIP will pull down his stake to around 65%, but this could plummet to as low as 53% in case there is a $200 million follow-up QIP.
Funds are also expected to be generated through sale and leaseback deals with financiers and a plan to sell two plots of prime land at the Bandra Kurla Complex in Mumbai, home to several large companies and financial institutions.
Jet Airways is also moving ahead with plans to cut costs, rework routes and build a more robust hub-and-spoke network to help it navigate a turbulent patch for the global airlines industry.
Two senior Jet executives said that the airline was originally considering a mix of a rights issue and a QIP to raise the $400 million. Goyal preferred a rights issue to avoid diluting his control. Both executives spoke on the condition of anonymity.
Jet shareholders approved the fund-raising programme on 24 September at an extra-ordinary general meeting.
Last resort: A file photo of passengers at the Jet Airways counter. The carrier also plans to cut costs, rework routes and build a more robust hub-and-spoke network to help it navigate a turbulent patch. Ramesh Pathania / Mint
“Jet Airways has dropped the rights issue as of now and is proceeding with the QIP. At current market prices, Goyal will have to dilute at least 10-15% of his promoter stake. Jet Airways will raise $200 million through QIP in the first phase,” said one of the executives, requesting anonymity.
The equity dilution will be bigger if the entire $400 million is eventually raised through QIPs.
The share sale will be the company’s first since its successful initial public offering in 2005, when it sold shares at Rs1,100 a share. Shares of Jet Airways rose 1.18% on the Bombay Stock Exchange on Monday to close at Rs456.20.
Jet’s market capitalization on 16 November was Rs3,938.56 crore, or $854.35 million. Over the last one month, the stock has risen 14.57%, as investors bought airline shares.
Jet Airways’ executive director Saroj K. Datta said the airline is yet to get an approval from government agency Foreign Investment Promotion Board, or FIPB. “It would be speculative to comment about the stake dilution as we are yet to hear from FIPB. The dilution will be based on the conditions set by FIPB,” Datta said.
The financial restructuring plan comes at a time when domestic airlines are in the midst of gut-wrenching turbulence.
Domestic carriers reported a combined loss of $2 billion in the last fiscal year. Jet Airways had a net loss of Rs406.69 crore for the quarter ended September 2009 while rivals Kingfisher Airlines Ltd posted a quarterly net loss of Rs418.77 crore and SpiceJet Ltd posted a loss of Rs197.54 crore.
Datta said that Jet Airways, like other international carriers, is also trying to slash costs. The airline has already, as part of its attempt to cut costs, moved two-thirds of its capacity to Jet Airways Konnect, a low-fare service.
“Domestic seat factor in Q2 was at 69.8% with a sequential traffic growth of 7.6% which was despite pilot strike in September. We expect JetKonnect to drive market share gains in a market which has already reversed declining trends. International seat factors at 80.6% enabled the company to achieve close to profit break even. We expect Jet to sustain momentum due to strong franchise,” wrote research analysts Anand Kumar and S. Arun, at global brokerage DSP Merrill Lynch Ltd, in a 28 October report.
There are other cost-cutting initiatives on the anvil as well.
A third Jet Airways executive, who did not want to be identified, said the airline is renegotiating with vendors for lower rates. “We are talking to everyone, including maintenance providers, repair firms, caterers, hotel companies and other vendors,” he said.
The executive said Jet Airways has also placed orders for 15 pairs of winglets, curved wing extensions that increase the flow of air over the tips of an airplane’s wings, thereby reducing turbulence. A winglet costs around $500,00.
“A winglet can reduce flight drag by 4-5% and enable an aircraft cut fuel costs by 4-6%. Winglets also help planes climb quicker, and hence need a smaller runway for take off,” said Michael N. Garrett, director (airplane configuration, integration and performance—commercial airplanes) at aircraft maker Boeing Co.
Fuel costs account for between 30-40% of the operating cost of a typical airline.
Jet Airways is also trying to rework routes and become a network carrier.
“Jet Airways is largely a point-to-point carrier. Therefore, whatever positive or negative happens on a particular route, for example, Mumbai-London, will impact Jet Airways. So you need to de-risk your business by transforming your company from a point-to-point carrier to a network carrier,” said K.G. Vishwanath, vice-president—commercial strategy and investor relations of Jet Airways.
For example, British Airways Plc uses London Heathrow as its hub to take passengers to 150 destinations in 75 countries. Emirates Airline reaches over 100 destinations in 62 countries using Dubai as hub.
“The India-London sector is largely dominated by business travellers. So how do you de-risk your business against a possible fall in demand? You should get more leisure traffic. So we have started connecting South-East Asia. That will also supplement our Mumbai-London business,” Vishwanath, who joined the company in November 1998 as a management trainee, said.
Vishwanath said all successful airlines in the world are either true low-cost carriers or network carriers.
“So we are using Mumbai and Delhi as hubs. There are at least eight flights originating out of south Indian cities that aggregate passenger in Mumbai and Delhi to be later redistributed to West Asian markets,” he said.
“By utilizing the synergy of Mumbai and Delhi, we are trying to explore sixth freedom like Singapore Airlines and Emirates Airline,” Raj Sivakumar, vice-president—revenue management of Jet Airways, told Mint.
“Sixth freedom” refers to the practice of carrying passengers between two foreign destinations through a home point. Singapore Airlines and Emirates have insignificant home traffic and depend heavily on traffic generated from India and Europe.
So, Jet Airways is positioning its Mumbai-Bangkok flight to feed its Mumbai-London traffic. “We are having 30-35% increase in passengers in certain flights due to this sixth freedom strategy. On certain days, our Mumbai-Bangkok flight has almost 80-90% filled with passengers for London coming via Mumbai,” Sivakumar said.
“A guy sitting at Nagpur can now opt and book Jet Airways to fly to Philadelphia. At the end of the day, you are filling aircraft with the help of your alliance partners and taking passengers to all points,” Vishwanath said.