Is Jet Airways going down the Kingfisher's road?

Jet Airways : How not to take on debt?

JetAirways intro slide

"I feel guilty and embarrassed" - Naresh Goyal, Chairman Jet Airways

The CEO of Jet Airways on 10th August 2018 did not have much to say except that he was sorry people lost wealth on account of Jet's poor performance in the recent past. Shareholders had been baying for blood for quite some time now and it was understandable why Mr. Goyal would come out with a statement like this. But this wasn't supposed to happen. Jet had been on a turnaround path. It made good revenues and showed signs of profitability for most of 2017 and 2018. Shareholders had a renewed sense of hope, there was anticipation about the future. Jet was finally realizing its full potential and then out of nowhere Jet posted a momentous loss of 1036 Crores in the last quarter of Fiscal 2018. Everything changed after that. Analysts started dissecting the balance sheet. They found emptying cash reserves, large piles of debt and a company that was simply unable to control its spiraling expenses. The story of Jet's unwinding begins on May 24th 2018 during the analyst call after the Management had to explain why the losses were so steep.

"In the near term can there be some issues in terms of cash flow generation say for example this quarter Do we expect the debt levels to go up in the next two quarters or so?" - Analyst (Florintree Advisors)

When analysts during the conference call pointed to the CFO and asked him about the company's problems with cash and debt he had this to say- "May be as you said in this quarter or in a quarter or two, there could be a short-term blip in terms of increase in the debt, but overall our strategy continues to be reducing the debt on an ongoing basis."" Although the company has reduced their debt burden in the past year, the CFO admitted outright that the company would have problems with both cash and debt in the short term.

"We are lowering the credit ratings on Jet Airways' loan facilities" - ICRA

Immediately after the earnings call, ICRA, the credit ratings agency lowered credit ratings on Jet Airways' short-term and long-term loan facilities. In simple words, what ICRA wants to tell you is that Jet will now have to pay more interest if it plans to raise further debt as they are more likely to default. ICRA thinks Jet is in a spot of trouble and it rang the warning bells.

"You are asking me to cross the Laxman Rekha" - SBI Chairman

At this point, the whole investor community starts looking at SBI. SBI had given out loans worth ~ 2000 Cr. to Jet Airways and if there is anybody who could tell you about Jet's ability to meet its payment obligations it's SBI. SBI has previously burnt its fingers with Kingfisher and so it is well poised to comment on this matter. The SBI Chairman then revealed that loans offered to Jet Airways were under the stressed loan watch list. The chairman reluctantly stated that the company's loans are in the SMA 1 and SMA 2 category for the June Quarter explaining how he was crossing the Laxman Rekha by divulging in such information. SMA 1 list contains loans that are overdue 31-60 days and SMA2 lists loans are overdue 61-90 days. This is a dangerous list and once you stop making payments beyond 90 days the loan is classified as an NPA. The most feared word in the market these days. Nobody wants to be here.

"So far, we have not been able to pass on the increase in oil costs to passengers" - CEO, Spicejet

The situation further deteriorates if you consider the general scenario in the airlines industry. Fuel prices have been rising consistently over the past few months but airlines have refused to increase prices because nobody wants to lose market share. This has affected profitability of almost all the players in the Industry. Jet knew this already. It had already suffered losses in the previous quarter for the very same reasons. Yet there is something perplexing about the whole issue. The company constantly kept telling investors how their CASK (Cost per available seat kilometer) at Rs. 4.6 was increasing disproportionately because of rising fuel prices and their RASK (Revenue per available seat kilometer) at Rs. 4.12 continued to remain flat.

What is this Available Seat Kilometer you ask?

Imagine Jet operated a single flight with 100 seats and the flight travels a total distance of 100 kilometers. The total available seat kilometers is 10,000. Because jet operates multiple flights with multiple seats, you add up all the flights and the total distance each flight travels and you get the total available seat kilometers. Available seat kilometers is indicative of the total capacity and considering they are making a loss on every available seat kilometer, maybe it makes sense to stop adding capacity until you can figure out a way to reduce this loss. However, Jet continues to expand its fleet size and fly to more destinations. All this requires cash, cash that is quickly running out.

However, one question looms large. How do they reduce this loss?

If you asked me, I would tell you all they had to do was increase ticket prices. However, to be perfectly honest, this won't materialize any time soon. Jet has been losing market share fast. While once, it commanded a market share of 27% (in 2012) today its languishing at a mere 15% (2018). By increasing prices it will further alienate the middle class price conscious Indian consumer and this, the company knows is not a wise move until everybody in the industry decides to do so collectively.

Another simple approach is to reduce cost. Within its cost model, it cannot control fuel expenses because oil prices dance to their own tunes, but what it can control is its non-fuel CASK (Non-fuel cost per available seat kilometer) that includes things like maintenance and salaries. This number had marginally reduced last quarter giving the company some hope. However, even this hope vanished when Indigo, the star performer, reported a net profit of 117 crore during the quarter, down from 440 crore a year ago; bad performance for indigo meant Jet had to work a miracle in order to defy expectations.

"The audit committee did not recommend financial results to the board for its approval, pending closure of certain matters." - Jet Airways Spokesperson

From here on, everybody knew there was no way Jet was making a profit in the June quarter. Everybody knew debt levels were going to rise but nobody quite knew by how much and then the airline drops a bombshell. On Thursday, it informed stock exchanges that the audit committee had refused to approve the company's results. Considering the situation that Jet had found itself in, it was most definitely not the opportune moment to delay results but here we are, wondering where Jet goes next. Speculation is rife about why the results were delayed. One report in the economic times suggests that the auditors had raised concerns about Jet's ability to function as a "going concern" in the short term, which the airline has refuted.

"We are in deep dialogue with staff and will make the best decision in the best interest of the employees and company." - Vinay Dhube, CEO JetAirways

There is also speculation that Jet might want to raise cash by selling stake and that it's already in talks with investments banks to work out a deal. For its part, Jet has continued to maintain that the situation isn't as grim and there is a conscious effort to manage expenses and boost profitability. To this extent Economic Times reported, "Jet Airways has informed its employees that they will have to take up to 25% cut in their salaries as cost of operations for airlines is increasing on the back of rising crude and a falling rupee." Maybe they are working behind the scenes to make one final push, but with the amount of trouble that Jet had to endure during the recent past, we are not quite sure how Jet will work itself out of this mess.

We wish Jet Airways the best of luck in its future endeavor

We have an update on Jet Airways after their Q1FY19 results: Read here

Review & Analysis by Pawan, IIM Ahmedabad

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