Jet Airways has a plan to stave off a potential bankruptcy

  • The cash-strapped airline has posted consecutive quarterly losses and is unable to pay its employees or meet it short-term debt obligations.
  • Jet Airways’ problems are symbolic of the state of India’s aviation sector, which has been battered by rising crude oil prices, a depreciating rupee and inability to hike airfares significantly.
  • However, it plans to turn things around by selling a stake in its loyalty programme, cutting costs and renegotiating some of its debt agreements.
Jet Airways hasn’t had an easy go of it as of late. Following a brief spell of profitability a few years ago owing to low oil prices, it reported a loss of ₹7.7 billion last year and ₹13 billion in the first quarter of 2018-19.

And isn’t expected to return to profitability anytime soon. Its debts are mounting and it doesn’t have the cash on hand to meet its short-term spending obligations. In fact, it can’t even afford to pay its staff, regularly defaulting on their salaries, even after cutting them by as much as 25%.

At the beginning of September, Jet Airways received its third ratings downgrade from ICRA, a credit rating agency, in less than two years owing to its weak financial condition. The airline’s fall from grace was capped in dramatic fashion last week when the pilots on a flight from Mumbai to Jaipur forgot to turn the cabin pressure on, resulting in severe discomfort for passengers.

The airline’s problems are symbolic of the larger state of India’s aviation sector, which has been battered by rising crude oil prices, a depreciating rupee and inability to hike air fares significantly amid intense competition.

However, Jet Airways has announced a plan to try and turn its fortunes around and reassure its creditors.

Firstly, it expects to raise around ₹3.5 billion by offloading a 49% stake in its frequent flyer programme, Jet Privilege, which is majority owned by Etihad Airways.The sale will allow it to infuse fresh capital into its operations. If it is unable to complete the sale in time, then it will apply for a bridge loan to meet its urgent financing needs. It is reported to be in talks with private equity giants Blackstone and TPG regarding the sale.

Secondly, it plans to cut ₹2 billion worth of costs by 2020. In addition to cutting staff and salaries further, it will focus on reducing sales and distribution expenses and rationalising its fleet, which will save maintenance and storage costs. This will likely involve a sale-and-lease-back approach, wherein it will sell a portion of its fleet and lease them back in monthly instalments.

Thirdly, it will try to renegotiate the terms of its credit facility, which mandates that it earn a profit of at least $100 million in the current financial year. The contract was struck when oil prices were lower and the rupee was stronger. In fact, it will have to revise all its profitability targets, given the fact that fuel prices aren’t decreasing in the medium term and the government recently levied a 5% duty on imports of aviation turbine fuel.

Finally, the airline has pledged to earn a minimum revenue of $100 million every quarter. This won’t be possible unless it is able to pass on its high fuel costs to customers through higher air fare, which seems unlikely given the pricing pressures it faces from low-cost carriers like IndiGo and SpiceJet.

As things stand, the immediate future looks extremely bleak for the cash-strapped airline.