Jet will need more capital post-rescue
2 min read 19 Oct 2020, 10:42 PM ISTThe winning bidders are expected to restart Jet’s operations by April 2021Challenges for the beleaguered airline include its heavy debt and high costs of restarting operations, amid low travel demand
PremiumThe Jet Airways rescue deal is sufficient to return the airline to skies, but its new owners will need to quickly raise more capital to turn around the airline, bankers and industry experts said.
On Saturday, lenders to Jet Airways (India) Ltd accepted a ₹1,000-crore bid by a consortium of UK-based Kalrock Capital and UAE-based entrepreneur Murari Lal Jalan to revive and operate the airline that last flew on 17 April 2019.
According to two bankers involved in the resolution process, lenders plan to discuss capital infusion with the new owners after deciding on the initial payout to lenders from the first round of investment. The winning bidders are expected to restart Jet’s operations by April 2021, the bankers said on condition of anonymity. The resolution plan now needs approval from the National Company Law Tribunal (NCLT).
“Although there is value in the airline, they (consortium) will have to see whether they have enough backers (for funding) in place to sustain operations. Cash recovery for financial creditors will be very small —initially about ₹700 crore to ₹800 crore—and will be paid in a staggered manner, over the next few months," the first of the two people cited above said.
“An initial fund infusion of about ₹1,000 crore is good enough to restart operations in a small way, with about 10 aircraft. However, it needs to be seen whether they can bring more capital after that," the person added.
At present, various creditors have a combined claim of over ₹25,000 crore against the airline, which includes claims of over ₹8,000 crore by financial creditors. However, financial creditors are expected to recover only a fraction of their dues.
“It is a high-profile resolution plan, but creditors are getting very little in terms of recovery. From a broader perspective of a turnaround, it has been keenly followed,“ said the second person cited above.
“They (winning bidder) have to bring in more capital, and given that there are expectations the airline industry would revive at some point, we are hopeful of a successful resolution," the second person added.
Airline industry experts see a tough task ahead.
“Based on information available, funding and strategic resources required (to run the airline) have been grossly underestimated. Lenders have got a face-saver after agreeing to a large haircut in the hope of realizing equity value in future," said Kapil Kaul, South Asia CEO of CAPA-Centre for Aviation. “The (deal) structure agreed (by creditors and winning consortium) doesn’t make sense," Kaul added.
As things stand, Jet’s assets include its air operator permit (AOP), a stake in a profitable frequent flyer programme, few relatively old planes, including Boeing 777 and Airbus 330 aircraft, and brand value.
Challenges include its heavy debt and high costs of restarting operations, amid low travel demand due to the pandemic.
“The size of operations, once restarted, will depend on the portion of money infused by Kalrock and partners that will be used for operations after paying creditors," said a former senior airline official, who has occupied top management positions at several domestic airlines.
“An investment of ₹1,000 crore is good enough to start a medium-sized airline like JetBlue or Azul from scratch. But, when the airline has a debt obligation, one would assume a much higher investment is needed," the person added, requesting anonymity.
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