"It takes nerves of steel to stay neurotic," Herb Kelleher, co-founder of Southwest Airlines, once famously said. Lenders to the beleaguered airline, Jet Airways (India) Ltd, have shown they have nerves of steel with regards to the troubled investment, but the moot question is if their continued support of the airline borders on neurosis.

The lenders, led by State Bank of India (SBI), said on Monday that they will pump in another 1,500 crore into Jet Airways, to get the airline in shape for an eventual sale. At the end of December, Jet Airways had an unmanageable net debt of 7,299 crore.

With recovery becoming increasingly challenging, the lenders had converted some loans into equity, giving them a 51% stake in the company. Unless a buyer emerges for the airline, the lenders will just be saddled with more debt.

Jet Airways also announced that its founder Naresh Goyal and his wife Anita Goyal will step down from the board. While the fund infusion is expected to help the company get its grounded planes back into service, the change in board composition is expected to help attract a strategic investor. The lenders, therefore, seem to be betting on a new owner for Jet Airways, which will take some of load off their backs.

SBI chairman Rajnish Kumar said the bank expects Jet Airways to get a new investor within two months. While the two steps mentioned above will help the cause, the key thing to watch out here would be if a deal is possible, given the airline’s high leverage.

Based on Monday’s share price, Jet Airways’ enterprise value (EV) works out to 31,800 crore. This includes the present value of future rentals, using a rough capitalization factor of seven times rentals, and calculates market capitalization using an expanded equity base. This would mean an EV-Ebitdar ratio of 12.5 times using FY18 earnings, a relatively stable period for earnings.

Ebitdar is earnings before interest, tax, depreciation, amortization and lease rentals.

In comparison, the same measure for market leader InterGlobe Aviation Ltd, which runs IndiGo airlines, stood at 11.6 times. While there is no reason anyone would want to pay a premium over IndiGo to buy Jet Airways, perhaps a potential buyer may factor in possible cost savings, which result in a lower valuation multiple.

Besides, Jet Airways’ international slots are an attractive selling point. The big swing factor may well be the change in board composition, given that reports had earlier suggested interest from the Tata Group, with one of the conditions being full control.

But all of these positives will not guarantee a deal. The company’s operations have scaled down, considering that about half of its planes are grounded. As the chart above shows, Jet Airways had already lost considerable market share by end-February. Returning to normalcy can be an uphill task, especially with some competitors successful in poaching some of the airline’s resources. Even before Jet Airways’ current troubles, its cost structure was far higher than that of its peers.

Cumulatively, these factors could well mean that Jet Airways’ sale will not take off easily. Investors are taking note of this. Small wonder then that despite the rally in its shares on Monday, the stock is still trading 58% lower compared to the beginning of FY19.

So, when banks try to find a strategic investor for Jet Airways within the next two months, their only hope is of others who have similar nerves of steel. Else, their latest show of support will be a case of false bravado.


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