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Financially-strapped Jet Airways may have bought some breathing space through plans to convert debt owed to lenders into equity, but that may not be great news for the lenders themselves. Late last week, the airline’s board approved the debt-equity swap plan that would make a consortium of lenders led by State Bank of India (SBI) the largest shareholder in the airline. Jet Airways has more than $1.2 billion in debt, a quarter of which is owed to SBI alone. Although details are not available, reports suggest that lenders would take up a controlling stake either among themselves, or together with the National Investment and Infrastructure Fund, which is a government-run body set up to invest in infrastructure projects. In short, the government appears set to take indirect control of the private airline.

The deal may prevent Jet Airways from tipping over the edge, but further weaken the balance sheets of banks. State-run banks are already saddled with about $150 billion worth of bad debt. SBI, the country’s largest lender, had about $26.5 billion, or 8.7% of its total loans, in bad loans at the end of 2018. Even though the deal, in the near term, would prevent a further weakening, the relief would be short-lived. The bigger question is: what business do banks have owning an airline? They don’t have the necessary expertise and the future of Jet would best be secured if airline professionals are at the helm. So, in effect, the banks may be risking public money on a private airline. The deal also serves as a reminder of a similar arrangement banks had made back in 2011 by coming to acquire a stake in the now-defunct Kingfisher Airlines. Kingfisher owes banks about $1.3 billion and its promoter Vijay Mallya has been declared a wilful defaulter after he fled India.

While it is fair to assume the banks would look to sell their stake once Jet Airways is in a better financial situation, that’s easier said than done. Remember, the government’s efforts to sell Air India last year fell flat after no bidder emerged to buy the national flag carrier. Air India has been making losses and has almost $8 billion worth of debt on its books. Although Air India is much bigger than Jet Airways, and it does not necessarily mean Jet would face the same fate, the national carrier’s experience does underscore the difficulties in attracting investors, particularly for airlines that have heavy debt. Besides, high oil prices are weighing on the profitability of most airlines. Because oil is priced in dollars, the global strength of the US currency has added to their costs. Fuel comprises about 40% of airlines’ total cost. In addition, cutthroat competition and low fares aimed at gaining market share have meant profits have been hard to come by despite a nearly 19% rise in passenger traffic last year. Jet Airways’ market share has fallen from nearly 19% at the start of 2016 to just over 12% at the end of 2018. To be sure, with banks in the cockpit, Jet would stay airborne longer. But a permanent solution will lie in the new management’s ability to bring fresh capital and chart new strategies to claw back market share. That is not going to be an easy task.

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