India’s biggest bane has been its reluctance to let go of unproductive units
Last week distressed airline Jet Airways finally threw in the towel and pulled the plug on all its operation. A note sent to the stock exchanges from the country’s one of the largest airline summed up its predicament: “Since no emergency funding from the lenders or any other source is forthcoming, the airline will not be able to pay for fuel or other critical services to keep the operations going."
The big question is whether the airline will fly again or end up like the other big disaster story in Indian aviation: Kingfisher Airlines. Not only does its exit leave a gaping hole in aviation capacity, it has also put on line the future of some 15,000 employees, not to speak of the ₹8,000 crore debt owed to banks that could end up as write-offs, further exacerbating the bad debt position of the consortium of lenders led by the State Bank of India. Clearly, consumers, employees and the banks will be looking to see whether any of the bidders that have evinced interest will follow through.
While this is indeed the case there is an important sub-text to the entire episode: the tough love from the lending banks. It is probably the first time that an enterprise of this size and scale is being subjected to such a ruthless lesson in the rule of the law. It is a big signal to promoters, especially the errant ones, that there is no back-stop facility anymore: now you play and perish by market forces. This is in contrast to the exception-based regime that the country has been accustomed to and something this column has repeatedly flagged.
Previously, a bailout would be proffered either by banks or by the government in the form of some policy relief. But this time, despite several pleas, no lifeline was forthcoming. It is indeed remarkable that the Bharatiya Janata Party (BJP)-led National Democratic Alliance, which is in the middle of a fierce re-election battle, did not blink even after it became public that a large number of employees would be rendered jobless; all the more since it has been busy fending off charges of “jobless growth" levelled by the opposition after leaked official numbers revealed little job creation during their tenure.
While the boom and crash of the two airlines have been almost identical, the big takeaway this time has been the process of the wind down. The banks are running the process—an entirely new terrain for them as they have been used to following the bidding from New Delhi—and have adopted a transactional approach. Exactly why eventually Naresh Goyal, the promoter of the airline, was shown the door; instead, the bankers have initiated a bidding exercise to pick another promoter.
This kind of creative destruction as defined by Austrian economist Joseph Schumpeter is essential in the evolution of an organization in a market economy; destroying the old economic structure and replacing it with a new and more productive structure. India’s biggest bane has been its reluctance to let go of unproductive units and then throwing good money after bad money to justify the decision. As a result the price of risk capital has never been defined and the consequences are there for us to see.
We will know over the next few months whether Jet Airways will fly again in a new avatar. Till then we will have to get used to not seeing the iconic yellow tunic of its flight personnel at airports over the last two decades. Take it as the price we have had to pay for embracing the rule of the law. Nothing comes for free.