Managing free tickets, unpaid lessors and a grocery shop owner

Managing free tickets, unpaid lessors and a grocery shop owner

On 20 April, as lawyers in Mumbai put the finishing touches on Jet Airways (India) Pvt. Ltd’s purchase of Sahara Airlines Ltd, Garry Kingshott was impatiently waiting for a phone call in Jet’s New Delhi offices.

The minute a Rs400 crore tranche that would set off the multi-stage transaction was paid, Kingshott, 54, wanted to get into Air Sahara’s offices and take control.

He had some inkling of what he would find: Air Sahara had been floundering for months before the Rs1,450 crore deal was brokered, and there were rumours that many of its creditors hadn’t been paid for months.

The extent of Sahara’s problems became fully apparent a few hours later, when Kingshott and his turnaround team tried to take a break for tea. The grocery store around the corner of Gopaldas Bhavan, in New Delhi’s Connaught Place business district, wouldn’t give a Sahara peon milk or sugar for tea. The store’s owner hadn’t been paid in full for months, and he wanted cash upfront, according to two people familiar with the incident.

“I am sure that there have been worse run businesses," said Kingshott. “But I just haven’t seen any."

Interviews with more than 20 Jet Airways, JetLite (the new name for Air Sahara, which is being recast as a low-cost carrier), and ex-Air Sahara employees paint a picture of Air Sahara on that April day as an airline on the verge of collapse, battered by bad management and brutal competition. It once had a 27-airplane fleet, making it among the Top 3 private airlines in India, and a coveted prize for Jet Airways founder-chairman Naresh Goyal. He outbid other players to buy it out in January 2006, only to change his mind in June 2006. Forced into arbitration by Sahara, he finally agreed to buy it early in April, telling investors that it was a smart move that would make Jet Airways stronger.

But by the time Kingshott’s crew took over, only 12 of Sahara’s Boeing 737s and three smaller Canadian Regional Jet or CRJ planes were in any condition to fly. In the one year that the two firms were locked in a legal battle over the merger, Sahara either couldn’t affo-rd to or refused to spend money on spare parts, and on government-mandated maintena-nce. A 737 in New Delhi and a CRJ in Goa became what the industry calls “Christmas tre-es"—they were stripped bare, their engines, seats and avionics systems rationed out to the rest of the airline’s ageing fleet.

At the same time, nearly 15% of the tickets on each flight were handouts to people that Air Sahara, or its parent company Sahara India Corp. Ltd, did business with, including 80% of business class tickets, the cash cow for any airline. Through the last months of 2006, as its fleet dwindled, and nimbler competitors added routes and dropped prices, the airline had seen its market share decline during a time of phenomenal passenger traffic growth. It had cut back on its international operations, sen-ding back two of its wide-body planes—14-year-old Boeing 767s—to their original lessors, leaving Air Sahara a shell of the airline that Goyal had offered more than Rs2,200 crore for in January 2006. (The final cash price settled on after arbitration was Rs1,450 crore).

“I can assure you of one thing," said Alok Sharma, who was the chairman of Air Sahara before it got sold and, along with Sahara honcho Subroto Roy, brokered the final sale. “This was the best deal in history for Sahara, the best bang for the buck. The owners walked away with all this money, and all the funds that are required to reactivate the planes, and to turn the airline around has to be borne by Jet. (As a seller) what could be better?"

Jet Airways’ purchase of Air Sahara in April couldn’t have come at a worse time for the airline. Even though it is still the biggest private airline in India by the number of passengers carried, it has seen its market share chipped away by Kingfisher Airlines Ltd, which aggressively woos Jet Airways’ business travellers. At the same time, it is in the midst of an ambitious and financially draining international expansion, which will sustain losses at least through the end of 2008. The Rs1,450 crore purchase cost of Air Sahara would drain almost 70% of the buyer’s cash reserves of Rs2,020 crore as of March 2007.

But of all the airlines in India’s struggling aviation industry, Jet Airways is perhaps the only one that can carry off the resuscitation of Air Sahara. Over the years, it has manoeuvred successfully past obstacles that other airlines found insurmountable—a deeply regulated industry, high taxes on fuel and near-crippling restrictions on foreign exchange transactions. It is definitely the only airline that generates enough revenues from its day-to-day operations to support this kind of a turnaround. It has had relatively consistent profits through the years, at a time when the Indian airline industry has lost over a billion dollars, and seen the demise of several early entrants.

Kingshott, whose nickname back in his native Australia was ‘Slingshot’, is especially experienced in turnarounds. During his years in aviation in Australia, he has closely watched the world’s only successful hybrid between full service and low-cost airlines: Quantas and JetStar.

If Kingshott and Jet Airways can pull it off, the payoffs are enormous. Even with 24 aircraft, JetLite would be the second biggest low-cost airline in the country, after the Deccan Aviation Ltd-run Air Deccan. With the advantage of the Jet Airways brand name, JetLite would be well positioned to take advantage of the explosive growth in low-cost passenger aviation still to come. Also, JetLite and its parent airline are the only private airlines in the country with permission to fly overseas, and Kingshott plans to take advantage of that by adding between four and six planes next year and reviving flights to Singapore and elsewhere.

But all of this costs money—more money than Jet is willing to admit to spending. Sharma, the ex-Sahara Airlines chairman, said he estimates that Jet Airways has spent an additional Rs150 crore to get the fleet repaired. It could be as high as Rs200 crore. Kingshott, the CEO of JetLite, says he doesn’t know the number. “I am not sure I want to publish that number even if I knew it," he said. “I try not to think about it." Jet Airways’ executive director Saroj Datta, too, declined details of such costs.

“Our focus very early on was to bring processes and systems that would help run the business," said Kingshott.

The other big priority was to get the fleet operational. The average lease on a 737 is approximately $400,000 or Rs1.65 crore a month (Kingshott wouldn’t say if Sahara paid more or less), and five of them just sat on the tarmac at airports across the country, waiting for maintenance that could cost almost $5 million for each plane. Those leases were renegotiated immediately, as were the leases for the seven regional jets, and brought down to the same levels that the more credit-worthy Jet Airways normally pays for its planes. Today, 15 of the 17 Boeing 737s are operational, and the firm plans to have the remaining two operational by September.

Because the maintenance costs were so high, Kingshott’s team focused on cutting costs wherever else they could. They closed down the office in Central Delhi, which cost Rs26 lakh a month in rent, and moved to a training centre near the airport. They redid the pilot’s rosters, forcing pilots to fly equal number of hours each month, as compared to Sahara’s policy of a fixed salary with no enforceable minimum flying time. They also outsourced back office functions to Jet Airways.

But the biggest savings came from two sources—one expected, the other unexpected. By coordinating their engineering spares with Jet Airways, Kingshott estimates they halved their costs of spares. But only when the sales team took a close look at how Sahara had been selling its tickets did they plug a hole that could have sunk the entire business—the free tickets.

Six months in, the airline’s struggles are not over. Its on-time performance is among the worst in the industry, caused mostly by maintenance issues. Its cost per available seat kilometre, airline lingo for the cost of flying an airplane one kilometre, divided by the number of seats on the plane, is about Rs3.9. For a low-cost carrier, the metric needs to be close to Rs2.5. And in spite of all the consolidation in the industry, fares countrywide actually fell by 2-3% in the last quarter, according to a study by American Express Business Travel Advisory Services, making the market even more competitive for JetLite.

“Can it be profitable? Yes it can," Kingshott said. “In the longer term, as a strategic move for Jet (Airways), it is a sound move."

With low-cost aviation market in India growing at about 25-30% a year, the JetLite chief executive thinks that it would be a strategic error for “Jet not to have a vehicle to compete in that market segment".

But when pushed about how much it is costing Jet Airways to purchase, and then to get a 24 aircraft airline up and running (costs that far exceed how much it would have cost Jet Airways to have just gone out and created a brand new subsidiary airline of the same size), Kingshott declines comment. “This is what I was given," he said. “My job is not to question why the hell did we do this, but how do we make this work."