The overview: a turbulent flight
Jet Airways has been a permanent fixture across Indian for as long as India’s private aviation sector has existed. This persistence throughout various turbulent times in the last 25 years is commendable to say the least. This is not to say Jet hasn’t had issues of its own. In fact, given its heavy losses, it has been to the credit of founder and promoter Naresh Goyal that the company steered clear of tricky corners. But the storm that has hit Jet Airways now may prove to be much more difficult.
The market at this point of time is quite unfriendly to operators within the aviation sector. Even though the number of passengers is on the rise, so are fuel prices. To compound problems further, the rupee’s continuous decline in international currency markets has caused quite the slowdown. The Low-Cost Carrier, IndiGo, India’s largest airline by market share, has reported a 97% decline in its profits, whereas SpiceJet posted a loss of Rs. 38 Crores in the Q1 of the 2018-19 Financial Year. But if the market conditions were to be seen as the catalyst of a crisis, Jet Airways has invariably faced the brunt of it, with losses worth Rs. 1323 Crores in the same timeframe, partly because about 73% of its rising debt is dollar denominated. But a detailed look at the airline shows that most of the losses are a result of hemorrhaging elsewhere, bringing to light a huge paradox that Jet particularly needs to deal with.
The Paradox: the premium for a premier standing
Being a full-service airline, Jet has always had a very high cost model of operations.
The cost to fly one passenger for Jet is about Rs. 3.17 per km, compared to IndiGo’s Rs. 2.04 per km. Having been bent on maintaining its image as a premium full-service carrier, Jet has incurred high costs for things such as catering and free services that other airlines would charge for. But given the volatility and price-sensitivity of the Indian market, this can become quite an anchor.
At this point of time, Jet Airways is confronted with an uncomfortable conflict – between maintaining its standing as a premium carrier or cutting costs to finance their woes. The problem is that any move to economize or try and remove costs of passenger service hurts the airline’s image of a premium carrier. But in preservation of image alone, they will allow their high cost model to keep hemorrhaging cash. This renders any method to raise funds without confronting this conflict, futile. The crisis demands for a fix in the cost model, such that it does not largely compromise the image, and also prevents further losses. This is where compromises become necessary.
A specific example of such a compromise is the introduction of what Jet calls “New Fare Choices.” Essentially, they have decided to remove the complimentary refreshment served with the lowest two fares in domestic flights. Instead, a buy-on-board menu called JetBistro is provided, which serves full meals based on the time of the day. The higher fares shall continue to receive complimentary meals as earlier.
What this does is that it adds an incentivizing element in Fare Choices that was lacking earlier, particularly when it comes to giving a reason for consumers to pay for higher fares. With added benefits of a complimentary meal, higher miles and lower-to-nil cancellation/change fee, people can legitimately think of the fare they want to pay. On the other hand, JetBistro is an ancillary method with the potential to generate more revenue. Nevertheless, it is still ancillary, and at a larger level, other significant measures are required.
Goyal’s toughest test?
Naresh Goyal has been known to strike deals that were considered almost impossible, given the situation of the market. Be it his persistence that led to the Air Sahara deal in 2007 or the tactful thinking that roped in Etihad’s investment in Jet’s stake in 2013, Goyal has crafted a legacy for his airline. But after all the tough turnarounds accomplished, the current crisis might be the toughest test Goyal has faced.
His promoter’s stock is currently at 51%, which may indicate that offloading any of it would not be an option until the last resort. After all that Goyal has steered Jet Airways through, relinquishing control to save the company would not necessarily be his first option. Unlike the Etihad deal in 2013, there is no way he can offload stock without relinquishing control.
Considering what might be called a more realistic option, the airline is reportedly thinking of monetizing its loyalty program, aptly titled JetPrivilege. Frequent-flyer programs are often valued higher than the airlines themselves and are, as financial entities, not affected by the cycles that affect the airlines themselves. Valued much more than the airline itself, diluting the existing 49% stake the airline has in JetPrivilege, would not really affect their control of the primary business, whilst also raising a substantial sum of money.
Jet Airways is, therefore, looking for investors to infuse fresh capital. Reports suggest that the Tata group was considering an investment, but there is no confirmation. For Tata, such an investment for Tata will prove to be an expansion of their existing aviation sector, having already invested in 2 major airlines – Vistara and AirAsia India. However, given that Tata might be looking for management control, Jet may not necessarily prefer that option. Several others suggest that Etihad may invest beyond its existing 50.1% share in JetPrivilege, having already proposed a financial restructuring plan, and a pre-purchase payment of $35 million. Ultimately though, Etihad’s partnership depends on two key factors, which move beyond the crisis in general. There are two important factors to consider here – Etihad’s profitability from investment in Jet and Jet’s growing friendship with Air France-KLM and Delta, who could be potential partners.
The uncertain and the certain –
Etihad has bought minority stakes in a lot of airlines all over the world, such as Alitalia, American Airlines, Air New Zealand and All Nippon Airways besides many others, including Jet Airways. The main aim was to enhance their own network and reach, so as to compete with regional rivals Emirates and Qatar Airways. But the losses have been quite high, up to about $2 billion. Although it has divested its stake in some of its partners, the company has quashed any rumors about divesting its stake in Jet. However, it would not be inconceivable for them to exit a volatile market like India. After all, the winds might be blowing in a different direction.
For a while, Jet Airways partnership with Air France-KLM and Delta has been strengthening and growing. They are chief members of SkyTeam, which is one of the three largest airline alliances in the world, besides Star Alliance and Oneworld. By the look of it, a SkyTeam membership could be huge for Jet Airways and a significant boost for Jet’s European and Trans-Atlantic operations. But, despite their urge to deepen the alliance with Jet, Air France-KLM has not expressed any interest in investing in Jet. Given this hanging uncertainty of their involvement, and the impediment the crisis may have, Jet has to consider its options carefully, as this move away may be a big turnoff for Etihad.
At a firm-specific level, there does exist some certainty for Jet Airways though. They are scheduled to receive new Boeing 737 MAX aircrafts, which shall lead to a reduction of fuel cost, and can allow them to lease their older 737s. This is also a larger part of their fleet and aircraft restructuring measures. They have proposed a plan to cut costs by Rs. 2000 crores, and plan to raise Rs. 3500 crores by the JetPrivilege sale. However, what is fundamentally clear is that beyond the persistent turbulence and problematic cycles, this time is different for Jet Airways. Being an established brand for more than 25 years, it is crucial for Jet to find the right balance between cost-efficiency and image preservation in a sensitive market like India. This decision requires extra care in Jet’s case, given its potential alliance options. Such challenges are not commonplace among Indian airline carriers, which makes Naresh Goyal’s task of keeping the beleaguered airline flying ever so difficult.