Jet Airways

What are the options for Jet Airways to get out of the financial crisis?

In the last week, Jet defaulted on loans to banks in the midst of a major liquidity crisis. Out of its total debt burden of Rs.8500 crore, nearly 30% comes up for repayment in the next 1 year. That is where liquidity becomes so important. In a highly volatile industry, Jet Airways is one airline that has survived for over 25 years. But the big question is; what are the options in front of Jet? Should the government intervene now?

Bridge the cash shortfall

The first priority for Jet Airways will be to bridge the cash shortfall. That is not a tall ask. Jet still has a robust business model and institutional investors have also reposed faith in the company. If the margins are managed better and the business model tweaked, the company has a good chance of returning to profitability. Bridging could include short term lines of credit, moratorium on payments, negotiated settlements etc.

What about ownership?

The government must get involved at this stage to facilitate a smooth shift in ownership. The company needs to sell equity and Naresh Goyal needs to reduce his stake. The government can also provide a temporary guarantee as a special case to the creditors, especially the international creditors to ensure that the global belief in the stock says. Let a government nominee on the board also monitor the progress continuously.

Tweak the business model

That is perhaps the need of the hour. Jet’s current business model is just too vulnerable to oil price volatility and pricing pressures. Both these factors are likely to work against Jet in the near future. The revamped board of Jet really needs to take a call on whether it needs so many international flights or whether it really needs so many business class seats in each flight. Jet has already been cutting down on its lounge expenses and other frills but then the business may require a quantum shift if it has to become profitable. Jet may have to look at entirely turning itself into a low cost airline where the cost management would be a lot easier. That will also ensure that its spread between the RASK and the CASK is sustained at profitable levels.

Macro level changes too

The irony is that Indian airlines are bleeding at a time when global airlines are expected to earn combined profits of $32 billion. Firstly, the ATF pricing has to be a lot more predictable so that budgets don’t go for a toss. Secondly, allow airline companies to look at innovative hedging strategies so that their oil price risk and currency risk is better managed. Thirdly, government must stop this artificial subsidizing of Air India. That is literally distorting the risk return trade-off for the industry. Time may be running out for Jet!