Jet Airways saw a phenomenal rise from its humble beginnings when the Indian skies opened up to private enterprise, but the last few years have seen a steady decline. What caused the decline? Has it got to do with Jet Airways and its management, or is there something endemic in the Indian airlines’ sector that has seen the rise and fall of many an airline over the years? An analysis….
To some, the sky is the limit and to those who love aviation, the sky their home. A poor boy, born in Punjab in 1949, dreamt of making the sky his home by creating a well-respected airline company.
The poor boy was Naresh Goyal and his airline company, Jet Airways. It was a real rags-to-riches story, he literally flew from the street to the sky. Naresh Goyal lost his father when he was a child. He worked in the office of his maternal uncle, who was in the travel agency business, and in the process of his working, he learnt the tricks of the trade. He wanted to be a Chartered Accountant but due to poverty, he could only complete graduation in commerce. Next, he started his own firm with some money from his mother and partly from his salary. The firm was named ‘Jet Airways’ and its business was marketing for foreign airlines. People used to laugh at the name of his firm, which represented something big connected to actual flying, but that didn’t demoralise the young man. The firm gradually went on expanding its business and it became a general sales agent (GSA) of some important Middle East country airlines.
An important event that happened in Naresh Goyal’s life was when Jet Airways started its own commercial airline in 1993 after the liberalisation of the Indian economy and the open sky policy of the government. Initially, the airline started with four leased aircraft with seed money coming from M/s Tail Winds, incorporated in The Isle of Man. The backing of some Middle-East investors including Gulf-Air and Kuwait-Air helped in nurturing the newly born company. Jet Airways went on adding strength by creating its own fleet of aircraft. Following the IPO of Jet Airways in 2005, Naresh Goyal emerged the 16th richest man in India as per the Forbes magazine. This high position was lost in in 2007. Jet Airways acquired Air Sahara for Rs.1450 crores. Market experts believed that it was a costly buy but Naresh Goyal was bullish as it would give a big market share to Jet Airways. The company had to go into debt to finance this costly purchase. Jet Airways had another feather in its cap, when in 2013, Etihad acquired 24% of its shareholdings. The peak period of the company thereafter continued for some time and then the decline started. Due to bad weather, an aircraft faces turbulence. In the same way, Jet Airways started experiencing turbulence due to surrounding circumstances.
Jet Airways is in the news these days due to the sad exit of Naresh Goyal along with his wife from the Board of the company. The ill health of the company was in the news for the last one year as the loss booked by the company for FY 2017-18 was Rs.636 crores when for the same year Indigo reported a profit of Rs.2242 crore. The debt burden of Jet Airways as on 31 March 2018 was a mammoth Rs.8425 crore. But Naresh Goyal was still confident that he would get some angel investor to save his company. As reported in the media, he contacted Mukesh Ambani, the Tatas and Etihad for help. Help did not come forth unless he stepped down, and he never wanted to do that.
Meanwhile, the liquidity crisis went out of hand and some aircraft were grounded. Pilots threatened to stop flying unless their salary arrears were paid. As a last resort, Naresh Goyal approached lender banks and they agreed to help the company provided Goyal together with his wife would step down. As per the terms of the settlement, banks would advance Rs.1500 crore emergency fund and they would get 11.4 crore shares of Rs.1 each, for a majority shareholding of 50.1%. It has been explained by SBI that the acquired shareholding would be a temporary phenomenon and a suitable buyer for the company would be located by May end, while a lender-banks created management would administer the company in the interim period.
Jet Airways had a fleet of 124 aircraft at the start of the year but it was flying only 26-28 aircraft on March 24 before the exit of the Goyals. It was a sudden fall for the czar of aviation, who had moved to the sky from the streets after reigning for a long period of 26 years, in the highly competitive and specialised industry of aviation, which requires a lot of skill and training.
"Jet Airways acquired Air Sahara for Rs.1450 crores. Market experts believed that it was a costly buy but Naresh Goyal was bullish as it would give a big market share to Jet Airways"
The steep fall of Jet Airways raises the question as to whether this is a stand-alone case or whether there are deeper problems in our aviation sector? Our national carrier, Air India, is no longer Maharaja, as it was known earlier. Taxpayers’ money was being used for the last many years to keep it in flying condition. It has huge accumulated losses so much so that the government has failed to attract any suitable buyer. Kingfisher came with a huge bang from the courtyard of billionaire Vijay Mallya and vanished in a short-time with the promoter running away from the country with the money taken from banks to keep Kingfisher flying. SpiceJet was in deep trouble when the old management sold the company lock, stock and barrel. In the earlier period of privatisation of the sky, some small airlines got sucked in by the bigger airlines then.
There seem to be some paradoxes in the Indian aviation sector. India has the third largest and the fastest growing aviation market in the world in terms of domestic tickets sold. In the year 2016-17, the annual growth in domestic passenger departures was 23.5%, as compared to 3.3% in the US and 10.7% in China. But the aggregate loss of the aviation sector is expected to reach Rs.3600 crores in FY 2018-2019, up from Rs.2550 crores in FY 2017-18, according to credit rating agency ICRA.
The obvious reason as seen by experts for the decaying financial health of aviation sector companies are summarised in brief here. First, rising fuel prices. Here, the airline company has no control, as airline turbine fuel (ATF) price is controlled by oil exporting countries. Second, the depreciation in the value of the rupee adds to the cost of imported ATF. Third, unsustainable the competition in the domestic market is killing. Airlines sometimes sell tickets at a loss to beat competition in the market and thus remain in business by depending upon volume and market share. Fourth, it is the higher capacity addition which works as a multiplier of the loss. There is a technical term, ‘aviation-seat-kilometre’, which is the base to measure loss or profit. If an aircraft has 100 seats and it flies to a destination at 100 km, then 100x100=10,000 will be the aviation-seat-kilometre. Seat capacity has to be kept at an optimum level so that there is profit. Fifth, there should be a symbiotic correlation between these two important parameters for a healthy financial result. Sixth, it is the ever-rising airport cost which harms the profitability of the airlines. Seventh, the frequent intervention by the government also harms the airlines. It has been seen that governments interfere in the pricing of the tickets keeping the interest of the flying public in mind while overlooking the condition of the airlines.
One fact that cannot be denied is that despite the bad circumstances, some airlines do better than the others. Experts have identified some of the reasons. First, attracting customers better than others. This is normally done by promoting infrastructure convenience, and by satisfying flyers with good service and by keeping ticket price competitive. Satisfied customers of an airline add to the volume of the business by booking tickets in advance which can be treated as friendly interest-free advance. Second, managing the fleet goes a long way in keeping the airline company healthy. The fleet has to be operated in such a fashion that the perishable loss of empty seats is avoided and the load-factor is properly managed. Third, it is managing people which becomes very important. Productivity in airlines and yield per employee have to be looked into. One main reason for Air India’s state is the huge burden of an unproductive employee load. Fourth and very important is managing finance. Per unit cost and per unit revenue have always to be kept in mind by the management. Funding for growth is essential but the debt to asset ratio should never be lost sight of. Jet Airways suffered due to the high cost purchase of Air Sahara and since then it gradually went into a debt-trap. A strong management and a capable workforce are the two most important attributes for success, together with financial discipline. Inflight services too constitute a potent tool to attract customers. Non-stop flying curtails cost and successful airlines keep these things in mind.
The government, on the other hand, should take some steps to nurture the aviation sector. ATF should be brought under GST so as to reduce its cost caused by taxes. Secondly, the government should announce a clear aviation policy and stop meddling in the affairs of the airlines. The government should strictly focus on the security aspects only and not on aspects of operations and finance.
by S K Jha
