Flights operated by Jet Airways India Ltd. at Chhatrapati Shivaji International Airport in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Jet Airways’ Turnaround Is Feasible, Says CAPA India’s Kapil Kaul

Jet Airways (India) Ltd.’s bank-led turnaround is feasible and it could happen in the next 12 to 24 months, according to Center for Asia Pacific Aviation.

The board of debt-laden carrier on Thursday agreed to give lenders a majority stake as part of a provisional resolution plan. “The expectation that it would be a bank-led restructuring was perhaps the only option. I don’t think there was any other option at this stage,” Kapil Kaul, chief executive officer of the Indian Subcontinent and Middle East at CAPA India told BloombergQuint in an interaction. “The bank-led restructuring would give Jet Airways time to look for a change of board or governance and to add more people to the top.”

I believe they [Jet Airways] have the ability to restructure their cost significantly and there is a possibility of improved revenues as well. 
Kapil Kaul, CEO-Indian Subcontinent and Middle East, CAPA India

Kaul, however, expects the proposed resolution plan to be an interim one. “Our expectation is that the lead taken by the banks is limited. We don’t see them holding the airline for long,” he said, adding it is an interim arrangement before a new ownership order emerges. “For the interim, it is the best rescue package that could have been structured.”

The cash-strapped full-service airline, which reported a loss for the fourth straight quarter yesterday, approved a bank-led provisional resolution programme by State Bank of India, its biggest lender. The plan estimates a funding gap of roughly Rs 8,500 crore, which is to be met by an “appropriate mix of equity infusion, debt restructuring, sale, lease back or refinancing of aircraft, among other options.”

“If the funding of about Rs 8,500 crore is realised, it will give them an opportunity to turnaround...and a about couple of years to move ahead,” Kaul said.

Watch the full interaction here:

Read the edited excerpts from the interview here:

What are your thoughts on the broad resolution for Jet Airways announced yesterday? Is it as expected?

Yes, as per expected. The expectation that it would be a bank-led restructuring perhaps to me was the only option. I don’t think there was any other option at this stage. The bank led restructuring will give time to the airlines, subject to change of the board, governance and possibly bringing more people at the top. It will give them a time to restructure.

Most importantly, I believe they have the ability to restructure their cost significantly and there is a possibility of improved revenues as well. Jet Airways’ turnaround is feasible and it could possible happen in 12 to 18 months or 18 to 24 months. The other aspects for the banks to realise is that there is a strong brand equity in the company, great customer loyalty, significant brand and when you get deeper into their business plan, there is  so much of cost saving feasible and the revenue improvement possible. I think their confidence is more about the business, subject to improvement of governance and that is which has led to this plan. I think that there is no other option. Banks had to take that lead and our expectation is that the lead taken by the banks is limited. We don’t see them holding the airline for long. It is an interim arrangement before a new ownership order emerges. But for the interim, this is the best rescue package that could have been structured.

This reminds us of Kingfisher Airlines, when banks came in to convert debt to equity. Does this solve Jet Airways’ immediate problem and where will the money come from?

Kingfisher’s restructuring with banks was at a time the aviation sector was going through a very tough period—oil, demand, various other infrastructure and  regulatory issues. It was a period where outcome couldn’t have been anything else than what had happened.

But in this case, I think the airline industry has significantly changed. The dynamics from ground will relate to this transaction led by banks is much better.

Second, as per the funding shortfall of about Rs 8,500 crore—it had to be met with a fresh equity. Our understanding was that they need about $500-600 million of equity. They would monetise some of the aircraft assets they have. Recent assessment that we have done says there is about $350-400 million of leaseback opportunities available. It may not happen immediately, but over a period of time monetisation could happen. And of course the banks will have to convert significant portion of the debt into  equity. So I think there would be ways and means to address the funding gap. What’s important is that they have actually looked at the business possibly little more deeply and the funding gap would take them. If the funding of about Rs 8,500 crore is realised, it will give them an opportunity to turnaround, giving them about couple of years to move ahead. But there are other major variables with Jet Airways — as I said equity infusion — we could see a number of Indian partners coming in. We are already hearing who could be a financial institution, who will come in, and the banks will convert that into equity and some of these fleets would be monetised so it’s all doable. Jet Airways’ turnaround is doable and I am glad that the banks have taken lead, realised that such a large enterprise with so many people, critical to economy, should be saved and I think this is a right decision.

Do you think there is a possibility that apart from either Naresh Goyal or Etihad there would be other investors who would be willing to buy this equity of banks, because all of us are wondering whether the banks are making a mistake by converting and holding almost 50 percent in an airline with no clarity who will come in and subsequently buy this equity?

My understanding is that the banks will hold 51 percent along with another, possibly a government-led financial institution. This is my understanding. More clarity will emerge maybe by this evening or tomorrow or possibly next week. And the 51 percent they are going to hold is not going to be held for long. It may be pretty soon that at a certain point of time, the banks get out of that and the new investor comes on board. I think this is an interim arrangement. I don’t see bank holding Jet Airways for long and they shouldn’t hold Jet Airways for long. The circumstances dictated that they lead this restructuring. They have done it and I am glad that they did, but circumstances also necessitates that they create a good governance structure and the board quality or board of directors create a very strong governance architecture—maybe some changes in management and create an oversight, which can then lead them very quickly to get a new owner on board. I would see that in the next about 12 to 18 months, Jet Airways’ ownership would be very different from what it is now.

From what you have seen of Jet Airways’ financials, what to your mind is the sustainable portion of the existing debt? How much debt should get converted into equity for Jet Airways to be in a position to regularly service the remaining debt?

If we are looking at Rs 8,500-crore funding gap, assuming the monetisation of fleet will happen over a period of time, I am looking at roughly about Rs 3,000-crore plus of the current debt getting converted. Rs 2,500-Rs 3.000 crore is my estimate, because I see an equity infusion of roughly $500 million coming in and rest would come through monetisation of the current fleet.

We are seeing Air India in trouble, IndiGo having problems in expansion, and Jet Airways in financial trouble. At what point is this industry going to mature?

We’ve been trying to find this for 15 years. Sometimes things improve and then we get back to the downside. But there are two critical things that are likely to happen and that could be a turning point for the industry. One is that there is a rapid re-fleeting that the airlines are doing, so that could deliver almost 10 percent of operating cost benefits. We are also hoping that aviation turbine fuel gets included in the goods and services tax. Once that’s done, that gets another 10 percent. A combination of re-fleeting  and inclusuion of ATF in the GST would roughly give them 20 percent operating cost benefit. I think that would be the biggest inter-cyclical structure that’d be created for airlines. And if they improve utilisation, improve productivity, get some technology, digitalisation for the back-end where I see lots of finance cost and back-office cost can be reduced. We could be looking at , if not in financial year 2019, in FY20-FY21—we could look at structurally positive direction for the industry which is fundamentally solid. There is an opportunity that would present itself that airlines can fix their core, if not all of them but some of them. We see that if not from FY20, but from FY21 that may happen.