Naresh Goyal’s Departure From Jet Airways—Necessary But Not Sufficient

Twenty-five years after he founded Jet Airways, debt troubles have forced Naresh Goyal to step down as chairman and relinquish his seat on the board. His wife Anita has also resigned from directorship. Their shareholding, once a controlling 51 percent stake, stands diluted at 25.5 percent due to conversion of debt to equity. With the Goyals gone, lenders are hopeful they will find a buyer/investor who can revive the airline. But that’s easier said than done.

This is Jet’s second rescue. The first was in 2013, when laden with Rs 9,000 crore of debt, the airline sought and found a new investor in Etihad Airways. The infusion of Rs 3,600 crore gave the airline relief, aided by reduced operating losses. It managed to break-even on cost till the third quarter of financial year 2016-17, according to the data compiled by BloombergQuint. But it’s been on a downhill slide thereafter due to inefficient operations, higher fuel costs, a weaker rupee and, most importantly, intense competition.

The problem lies in Jet’s cost structure. At Rs 4.92, its cost per seat kilometer is on average 20 percent higher compared to its peers—IndiGo and SpiceJet.

To be sure, Jet is a full-service carrier and the other two are low-cost airlines. But that's just one reason why Jet is burdened with high costs.

Aging Fleet

The airline flies an aging fleet. That makes for higher maintenance costs and lower fuel efficiency. It doesn’t help that Indian states charge as much as 30 percent in sales tax on aviation turbine fuel, on top of a 11 percent excise duty, making it the costliest in Asia. But that hurts all airlines.

Jet’s fuel cost per seat kilometer is on an average three percent higher compared to its larger peers—InterGlobe Aviation Ltd. and SpiceJet Ltd. This despite 60 percent of its capacity being deployed on international routes that enjoy the benefit of lower taxes.

Though the airline has placed orders for over 150 new aircraft, their delivery will take time and require funds.

Over Staffed

As a full-service carrier, the beleaguered airline has more employees than its leaner competitors—Jet has 22,000 employees versus Indigo’s 18,000+ and SpiceJet’s 8,500+. Consequently, its employee costs are 35 percent more than peers.

This didn’t hurt as long as it was able to charge higher fares. But over the last year or so India’s largest airline—IndiGo—increased its capacity by more than 30 percent. This expansion sparked a market share and price war. As fares headed south, Jet ended up paying customers to fly them.

Other Costs

Premium airport slots, passenger lounges, higher administration and selling costs – Jet pays more for all this. Add that to higher aircraft maintenance costs (aging fleet) and on average, Jet’s other costs are 65 percent higher than SpiceJet’s and double that of Indigo.

Currently, many lounges are shut but that’s not going to amount to substantial savings.

Finance Costs

To sustain this expensive, inefficient operation Jet kept loading up on debt. It owes lenders close to Rs 8,500 crore which is nearly seven times more than SpiceJet. IndiGo is debt free. Hence, its finance cost tops the combined finance costs of the other two.

A falling credit rating will only add to the expense. Besides, banks have decided to loan it another Rs 1,500 crore to keep going till a resolution if found.

With Goyals gone, lenders will hand management charge to an interim management committee that will be supported by consulting firm McKinsey & Co. and supervised by the board.

The temporary cash infusion plus lower fuel prices and higher ticket prices could help Jet Airways report lower losses. But much more needs to be done to turn a profit. Fleet replacement, workforce rationalisation, deep cost control are not the stuff interim committees can deliver. A new owner may have the deep pockets and gumption—if one is found. Otherwise Jet might land in the same spot—this time in less than five years.