Jet Airways has been under financial trouble for some time and there have been few doubts about that. With rising ATF prices on one side and thinning margins on the other side, the price pressure has been taking its toll for quite some time. The problems came to force when Jet started delaying salaries, one of the first signals of a company facing a severe cash crunch. In fact, ICRA has estimated that the 3 listed aviation stocks; Jet Airways, Interglobe and Spice Jet could require a capital infusion of nearly Rs.35,000 crore over the next 3 years to be able to hold their heads above water. Under these circumstances what are the options in front of Jet Airways.
Getting a recast of the bank loans done
Jet Airways already has outstanding loans to the tune of Rs.9400 crore to the banks with SBI, Axis Bank and HSBC among the major lenders. With a cash pile of just around Rs.300 crore, the bankers may not be too keen to recast the loans. Normally, a recast is done when there is a future visibility of earnings for a company. In the case of Jet Airways, there is really no visibility of the company return to profits unless competitive pricing goes away or oil prices come down sharply. With the airline market already overcrowded, there does not seem to be any near-term possibility of the competitive pressures receding. Oil prices, while they are relatively down, may not still result in cost cuts unless the government really passes through such savings to the ATF prices. Banks may actually be looking at a sell out of Jet, which would at least enable them to recover part of their loans with a reasonable haircut. Any major recast of debt looks unlikely at this point of time.
Letting Etihad increase its stake in Jet Airways
This is the alternative that Jet Airways appears to be interested in. As per current regulations, foreign airlines can own only up to 49% in a domestic aviation company. Etihad currently owns 24% in Jet and Naresh Goyal is the majority owner of Jet, with the balance being held by retail investors and by institutional investors. One option would be for Goyal to dilute his stake in Jet and become a minority shareholder and let Etihad become the largest shareholder at 49%. Goyal is, apparently, open to this idea even if it means a dilution of his personal stake. However, Etihad has not had a very good experience after taking a stake in Jet the first time around and has actually lost market share to rival, Emirates, in the Gulf region. Whether Etihad is really willing to play ball remains to be seen.
Selling a stake to the Tata Group
While the Tata Group has done an initial due diligence on the Jet Airways financials, Goyal himself may not be too keen to sell his stake to the Tatas. Being an Indian company, the Tatas can effectively take full control of the airline, unlike Etihad which is limited by the FDI ceiling of 49%. Also experiences of earlier airlines that sold out were not too good as the acquirer made a complete attempt to erase the erstwhile brand. Jet, for example, totally erased the Sahara brand after acquisition while the Deccan brand was fully erased by Kingfisher. Jet would be wary that the Tatas too may prefer to make the Jet brand subservient to their principal brand, Vistaara.
Would the Tatas be really keen to take over Jet Airways?
As of now there is no clarity as to what would be the future of Jet Airways. It does appear that it may have to look at either the Tata option or the Etihad option to raise the much-needed funds to run the show. Banks are unlikely to recast their loans after the bitter experience with NPAs in the last few years. They would still prefer to take a haircut from the new buyer and get done with the loan book. But why Tatas should be interested.
Tatas realizes that building market share organically in the Indian market is not going to be easy. Indigo already enjoys a 41% market share and then the remaining market is split between Jet, Air India, Spice Jet and Go Air. While the other three have clear low-cost positioning, it is only Jet that is a full-service airline. That would fit perfectly with the long-term plans of Vistaara. How the actual game on Jet pans out, remains to be seen.