Ever since the news of Jet Airways’ resuming operations broke, Jet Airways share price has remained locked in a 5% upper circuit for four successive sessions. Upper circuit implies ‘only buyers, no sellers’. That is every investor, especially the retail investor, seems very keen to buy Jet Airways.
Once upon a time, India’s biggest private air carrier – Jet Airways – used to maintain a fleet of more than 120 Boeing aeroplanes connecting several domestic destinations and international hubs such as London, Singapore, and Dubai. In April 2019, Jet Airways was forced to ground all flights. It was crippled by losses, a pile of debt and owed billions to its lenders. It put at risk its aircraft lessors, suppliers, lenders besides rendering more than 8,500 employees jobless. In addition, the company has to refund huge sums collected through advance bookings on cancelled flights to its customers. Jet Airways share price then dipped to historic lows.
The Irony – Non-functional Jet Airways stock is trading more than a functional Spicejet
Though Jet Airways failed due to bad management and its inability to adapt to market changes, the common excuse made was – ’emergence of low-cost airlines.’
After several rounds of the search for a willing investor, one UAE businessman Murari Lal Jalan, lead member of London-based Kalrock Capital emerged with a passionate vision to turn Jet Airways around. In 2020, the consortium agreed to invest Rs 10 billion as working capital and to give funds to the lenders of Jet. It is a different matter, though, that neither Murari Lal Jalan nor Kalrock Capital has any experience in the aviation business.
In October 2020, Jet Airways’ financial creditors approved the revival plan submitted by the consortium.
In June 2021, the National Companies Law Tribunal (NCLT) approved Jet Airways’ revival plan.
Revival of Jet Airways
September 13, 2021. The media reported that Jet Airways is set to become operational. In six to nine months time, Jet Airways would resume domestic and international operations. The new administration has proposed to put Rs 6000 million in the initial two years of assuming control over Jet Airways to reimburse banks and secure an 89.79% stake in the organization. The mere news triggered a refreshing lease of life to the Jet Airways share price but not to the company which still has far to go. The company management should be ready for the long stretch before they consider hitting profits.
Aviation analysts have raised questions about whether this is the proper time to commence for Jet Airways. The concerns hinge around market conditions. At present, apart from the usual problems, there are two main factors that are obstructing the growth of aviation. One, covid related restriction. The fear of deadly Covid waves still persists. There has been a 66% YoY reduction in the number of air passengers. Two, steep hike in ATF prices. It has increased from about Rs 50 per litre in January to Rs 66.52 per litre on September 1, 2021- a jump of 32%.
The aviation consultancy and research firm, Centre for Asia-Pacific Aviation (CAPA) has already predicted a loss of $3.9 billion for the airlines in India in FY22.
The rating agency ICRA has also stated that the overall cash loss for the aviation sector would be nearly Rs 35,000 million in FY2021
No wonder then, existing airlines continue to suffer huge losses and are forced to operate with a reduced staff strength while resorting to austere measures. As everybody knows, flying is a charming area, however, history has shown that most organizations have been fruitless in it.
Jet Airways Faces Obstacles
In the case of Jet Airways restart, the country’s second-largest state lender, Punjab National Bank (PNB) has objected to Jet’s revival plans alleging irregularities therein. The PNB, which had earlier given the loan to Jet Airways, has appealed against the consortium in the tribunal. The PNB has argued that a reduction of nearly ₹ 10,000 million ($137 million) from the airline’s backers by ₹ 2000 million was arbitrary and illegal.
Thus, the company will face many problems before starting its operations. Apart from the PNB, former employees have also appealed in NCLAT. When Jet Airways ceased operations in 2019, hundreds of employees working at that time have outstanding dues ranging from Rs 0.03 million to Rs 8.5 million, but in its revival plan, the consortium has made a settlement offer of Rs 23,000 for each employee. This is not acceptable by most of the employees. Altogether the employees owe the company Rs 12,650 million, but the consortium wants to settle this for Rs 520 million.
Along with this, the company will also need some aircraft and a few prime slots to start its operations, which were given to other companies after the company was grounded in 2019. However, due to the aviation sector being affected due to Corona, the company may get some of these lost slots.
Jyotiraditya Scindia, the Union civil aviation minister, has recently disclosed a 100-day ambitious program to bring significant reforms in the aviation industry. This includes:
- operationalising five airports, six heliports and
- 50 new routes under the regional connectivity UDAN scheme
- A number of airports will come up in:-
- Keshod (Gujarat),
- Deogarh (Jharkhand),
- Sindhudurg(Maharashtra), and
- Kushinagar(Uttar Pradesh).
- Heliports (in hilly terrain) are to be made operational in:
- Sase (Manali),
- Mandi, Baddi (Himachal Pradesh) and
- Haldwani, Almora (Uttarakhand)
While new airports at Jewar Airport in Greater Noida and Bihta will come up within three years, existing airports at Patna, Dehradun and Agartala will expand further. The new airport at Darbhanga has already surpassed expectations in terms of footfalls even with limited amenities.
In addition, the Union Ministry of Civil Aviation has to request the states to rationalise Value Added Tax (VAT) on ATF but there is still a massive disparity between States in terms of VAT being levied on ATF. When the Kerala government reduced VAT on ATF from 25% to 1%, the number of aircraft movements at Thiruvananthapuram airport saw an increase of 2050. Similarly, Hyderabad saw a rise of 9888 aircraft movements after the reduction of VAT on ATF from 16% to 1% in a span of half a year. Other states, like Chattisgarh, Andhra Pradesh, Orissa, Nagaland, Punjab and Sikkim see the significance of Kerala’s VAT on ATF policy.
Opportunities for new comers
New entrants in India’s civil aviation such as Rakesh Jhunjhunwala and Kalrock Capital must see viable business opportunities here while setting up their bases or office headquarters. While it may be true that such Tier II or Tier III cities do not attract huge passenger numbers as Delhi or Mumbai, but the cost of setting up a base here is at least 50% cheap which nullifies this apparent disadvantage. This could be a welcome factor from the airline’s perspective.
Given the fact that airports in Delhi and Mumbai are already operating at full capacities, given the fact that real estate prices in Delhi NCR or Mumbai are abnormally high, it makes prudent business sense for a start-up airline to stay away from the metros. While computing operating profits, an airline also has to see the landing and parking charges, maintenance and ground handling charge apart from expenses related to office overheads. Thus choosing a Darbhanga Airport over Delhi or Mumbai will result in getting twice the space at half the price! Moreover, the break-even point may come close to manageable limits.