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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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PSU Banks Rescue Jet Airways

Few would have thought that India’s pioneering private airline would end up as a de facto nationalised airline, its future in the hands of PSU banks

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Instead of privatising Air India, the country’s white elephant, we are about to witness the quasi-nationalisation of Jet Airways, one of India’s best – but most indebted – private airlines. 

Under the Bank-Led Provisional Resolution Plan (BLPRP), a consortium of public sector banks and other institutional lenders will control 51 per cent of Jet Airways’ equity. Chairman and founder Naresh Goyal will step down. His shareholding will drop significantly. Etihad Airways’ equity of 24 per cent could rise marginally. The balance will be widely held by the public. 

Can a consortium of PSU banks run an airline? State Bank of India (SBI), which leads the bail-out consortium, is trying to protect its stressed loans in Jet Airways by converting them into equity in the hope that the revived airline will enable it to eventually offload its shareholding at a reasonable price to a new buyer, recovering some if not all of its debt. 

It is, alas, classic debt-to-equity wishful thinking that lenders are often compelled to indulge in. Jet Airways faces not only a cash crunch but falling market share in an increasingly competitive aviation industry. To keep Jet flying, the banks, as the airline’s majority shareholders, will need to pump in significant new funds just as the government is doing in Air India. 

Few would have thought that India’s pioneering private airline would end up as a de facto nationalised airline, its future in the hands of PSU banks. Only two PSU banks in the consortium (SBI and Punjab National Bank – PNB) have so far backed the rescue plan.  SBI and PNB are prepared to buy other banks’ exposure to Jet Airways and provide emergency funding. Several of Jet’s aircraft are either grounded or have been re-possessed by lessors because lease payments haven’t been made. A shortage of pilots, both generic to the aviation industry and specific to Jet which hasn’t paid salaries for months, has worsened the situation. Jet’s market capitalisation has collapsed to Rs. 2,700 crore, less than the valuation of some one-year-old startups. 

Jet Airways’ fate was sealed when talks with the Tatas stalled before even taking off. Etihad had seemed a white knight for a while but relations have reportedly soured. Etihad refused to give Jet a Rs. 750 crore bridge loan and imposed stiff conditions for increasing its stake from 24 per cent to 49 per cent. SEBI’s recent regulatory order disallowing entities like airlines from receiving exemptions from making an open public offer has closed the Etihad option. 

Faced with the prospect of liquidation, Goyal turned, as most Indian promoters do, to the saviour of last resort: PSU banks. Even if the PSU bank lenders – who are owed over Rs. 6,000 crore of Jet’s total debt of Rs. 8,411 crore – finally approve the debt-equity bail-out proposal, a professional CEO will have to run the airline. The current management could well stay on with the majority bank shareholders playing a supervisory board role to protect their financial interest. 

It is unlikely to work. Jet Airways is a chronic loss-maker. With crude oil prices firming up to over $65 a barrel, the airline will gobble even more money from the PSU banks’ public coffers. This could end badly. PSU banks are gradually emerging from the NPA crisis. Incremental growth of NPAs is now falling due to the Insolvency and Bankruptcy Code (IBC). But with Jet Airways, good money will need to be poured into what could prove a bottomless pit. By trying to protect their debt in money guzzling Jet, the PSU banks could end up falling deeper into debt. Goyal has meanwhile pledged Jet’s Rs. 1,500 crore fixed deposit to secure a loan of Rs. 250 crore in emergency bank funding. With the airline losing over Rs. 200 crore a month, Goyal is betting this will see Jet through till the PSU bank funds arrive.

The travails of Jet Airways reflect the dichotomous problem the aviation industry faces. The sector is booming. India will be the world’s third largest aviation market after China and the United States within a decade. But will infrastructure keep up with this rapid growth? Airports are already stretched to full capacity. Mumbai airport, India’s second busiest after Delhi, is in particularly dire straits. Its two intersecting runways have been closed for six hours every alternate day for repairs and maintenance. This will continue till March 31. Flying to and from Mumbai is now a harrowing experience, with long queues and delayed or cancelled flights. 

The city’s second airport in Navi Mumbai has been delayed due to problems with land acquisition. When it is finally ready, possibly in 2022-23, the two Mumbai airports will have a combined capacity of handling over 100 million passengers a year, more than London Heathrow. Fortunately, the government has recognised the need to upgrade aviation infrastructure through privatisaiton of airports in medium-sized cities as well. In the recent auction the Adani group won six key airports including Chandigarh, Lucknow, Ahmedabad, Thiruvanathapuram and Guwahati. Currently operated by the Airports Authority of India (AAI), these airports are rudimentary. Privatisation and modernisation will encourage more international airlines to fly to them, especially to key cities like Ahmadabad, Thiruvanathapuram and Chandigarh, easing the passenger traffic load on metro airports. 

While airports are being privatised, it is ironic that Jet Airways is being quasi-nationalised. In effect, we are creating another Air India though with a professional foreign CEO rather than an IAS officer who runs Air India. Airlines like Vistara and Air India recently snapped their inter-lining arrangements with Jet Airways due to Jet mis-invoicing them for carrying passengers booked on cancelled Jet flights. Lessors are meanwhile taking their planes back. Jet owns only a few of its 124-aircraft fleet, making it vulnerable to aircraft shortages.

When it started operations in 1993, Jet was a breath of fresh air for passengers used to indifferent service on Air India and Indian Airlines (the two were still independent entities then before a disastrous merger crippled Air India). Twenty-six years later, Jet Airways faces a future not unlike benighted Kingfisher Airlines which stalled on debt and hubris. 

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