I am often asked the meaning of the phrase ‘legacy-carrier’ and I would like to think those who were witness to the rise of Jet Airways in the 1990s would be familiar with its meaning.
Jet Airways began as an Air Taxi Operator in 1994. Later when the government chose to protect the two national carriers Indian Airlines and Air India, the airline found its solace with the NDA government and the then Civil Aviation Minister Pramod Mahajan and that paid off.
The casualties during this time were NEPC, ModiLuft and Damania Airlines. Two well managed full-service carriers were forced to shut shop leading to a total market job loss of 3,000 employees, including pilots and engineers, in 1997.
With funds from International Financial Corporation-World Bank, Jet Airways with a new Boeing 737NG fleet in 1998 became India’s largest private airline by market share while it geared itself to deal with the challenge that came from Kingfisher Airlines, IndiGo, GoAir and SpiceJet. And thus, began the airline’s tryst with sustainability and survivability.
Closer to the world financial crisis in 2008, oil prices shot up to $120 on the barrel leading to most airlines either realigning their operating models or folded up. Jet Airways chose the path that it felt was best – bank lending and approach the government for a bail out package in 2011.
When the FDI in airlines was cleared to 49% later, it chose to find its ‘future’ and working capital in the hands of a joint venture partner Etihad, which was half its age, half its fleet and twice as aggressive in expansion.
Tumultuous past
The solution for Jet Airways, which is facing cash crunch at present, lies with understanding its past. The very basis of sustainability is depended on the environment that one is in and its ability to adapt and thrive. Jet Airways’ tumultuous past comes at the cost of growing too fast and its promoter Naresh Goyal’s fetish for monopolies and the lack of foresight in pre-empting market risks.
India is the world’s third largest aviation market. Yet there remains stark, glaring difference between how CEOs and Boards of India’s airlines function compared to their peers elsewhere. Promoters and CEOs in India are looked, strangely, more as “demi-gods”. In many instances, we have seen them being far less as “accountable managers” in their ability to manage and mitigate risk and define strategies.
Two examples
First – despite knowing about the Dubai Airport closure a year before, no Indian airline here took steps to lobby or put up a case on slots.
Second – while it was obvious to every airline about the expected spike in oil prices to $ 74 on the barrel, it is strange that no airline reacted with steps to either hedge or take pre-emptive action ahead to ensure balances are maintained. And this in some way explains why Jet Airways is partially in the spot that it is in today.
Etihad’s minority stake in Jet Airways is possibly the worst that could have happened to the airline. The network values of most West Asian carriers is to drive traffic and revenue into its hubs and re-distribute that traffic thereon. But what seems so simple a step to infuse working capital also is a network killer.
Etihad brought Jet Airways’ international routes down to its knees while only allowing it to retain the established south-east Asian market. It also diverted and repatriated nearly all of Jet Airways earnings into Abu Dhabi via revenue share, code-share and partnership agreements. This allowed Etihad to take back both profits and earnings.
With Etihad, we have two examples – Alitalia and Air Berlin – where two investments that were ‘re-routed’ of all its revenue and profits back to Abu Dhabi. In the case of Air Berlin, there was a court intervention that was in some sense a defensive barrier to this practice. For Jet Airways – the industry watched in silence.
Mergers and Acquisitions
Mergers, acquisitions and consolidation are not the best options for survival because what you end up taking on becomes a bigger burden to what you already have. We have previous examples in India itself with Kingfisher-Sahara, to take one example.
Mergers and acquisitions are not the best way to improve efficiencies and lower debt. The more we review Jet Airways today with the reported total debt of $1.5 billion, the more it appears very similar to the situation Air India is at the moment.
Debt, bad decisions and losses cannot be wiped out with a merger, but it can be balanced with improved earnings and higher deployment of seats in the market to offset a hefty right side of the P&L.
This strategy has worked extremely well with United Airlines post the September 11 terror attacks in 2001 after its restructuring.
Options available
An option before Jet Airways might be to completely realign its operating model, de-merge its airline services as separate companies and push for an austerity drive, including a comprehensive pay-cut in exchange for stock in the airline.
This is something that United Airlines did way back in 1996 that managed to keep the airline afloat and lived to tell the tale.The failure of Jet Airways will have a catastrophic effect.
The sudden vacuum of one airline dropping out from the market will lead to a surge in ticket pricing, lesser options to fly into Tier-3 and Tier-4 towns, over 4,000 losing jobs, collective revenue losses for airport operators and the AAI and a drop in Air Navigation Service Revenue.
The stockholders who have put their precious life savings into the airline’s stock will also suffer immensely. The loss to the exchequer will also be sizeable in nature – dip in import duty earnings, GST, tax collections and weaker demand for jet fuel.
The management need to enlist support from its employees and shareholders besides working out an aggressive operating model that would help Jet Airways to be more lean, fragmented and functional.
(The writer is the Founder and CEO of Martin Consulting, an aviation consulting firm. Views are personal)