Jayachandran/Mint
Jayachandran/Mint

Opinion | The cost of flying on flawed assumptions

With compliant lenders as co-pilots, Jet Airways’ descent was a foregone conclusion. The pity is that the inevitable was delayed for so long that much of its market value has been wiped out

For months now, Jet Airways has been trapped in a vortex with seemingly no end in sight. On Wednesday night, its ordeal finally ended in complete capitulation. The obstinacy of its original promoter Naresh Goyal has made a once-proud carrier fold its wings, but he is not the only one to blame in this sordid saga of mismanagement and adventurism. Banks and regulators have had parts to play as well. Those trying to portray Goyal as a wronged hero (and that includes a certain Vijay Mallya), a businessman who created a worthy company only to be let down by circumstances beyond his control, would do well to recollect his many bad moves.

In hindsight, it is clear that Jet flew into an air pocket that would send it spiralling down as far back as April 2007, when it acquired the loss-making Air Sahara for 1,450 crore. The deal itself, despite Goyal’s reputation as an adroit deal-maker, was almost forced upon him. Legal and regulatory issues had kept the acquisition in abeyance for over a year, and it was believed that Jet only saw it through till the end because it risked losing the 500 crore it had already paid for it. By the time the deal was finalized and a merger of the two mismatched airlines could even begin, Indigo had started operations as a rival carrier with a clear focus on operational efficiency. The low-cost model that Jet acquired Air Sahara for was Indigo’s raison d’etre from the get-go and it would reap huge rewards in the form of a whopping 42% market share in less than a decade.

Coupled with a confused aircraft purchase strategy, all this knocked the bottom out of Jet’s finances. From a pre-tax profit of 681 crore in 2005-06, it plunged to a loss of 442 crore in 2007-08.

Since then, apart from two profitable years—2015-16 and 2016-17—it has consistently lost money. By 2011-12, its net worth had started getting eroded. The airline’s death spiral had begun.

Goyal, it seems, continued to believe that an ability to influence policy decisions to his advantage would keep Jet airborne. Thus, in 2013 when Etihad picked up a 24% stake in the company for $379 million ( 2,060 crore), it was the first beneficiary of an easing of rules by the government that allowed foreign airlines to buy up to 49% of a domestic carrier’s equity. Etihad paid a big premium for Jet’s shares, an indication of how keen it was to enter the Indian aviation market. For its part, Jet said it would use some of the proceeds from the sale to retire some of its $2.3 billion debt. The airline’s growth debt- fuelled growth has all along been facilitated by compliant bankers, among them the country’s top two public sector lenders, State Bank of India and Punjab National Bank.

Even when Jet defaulted on its repayments at the end of 2018, Goyal’s interests seemed to prevail in efforts to work out a solution. It was last August, when Jet’s auditor raised questions over its survival, that its main creditors should have started looking for buyers. Instead, the banks convinced themselves that they could convert their debt into equity and keep it going. Those shares today are worth only a fraction of their former value.

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