Editorial

A wobbly Jet

| Updated on January 07, 2019 Published on January 07, 2019

Even if the airline goes into bankruptcy, the Centre should allow due process to unfold

The beleaguered Jet Airways’ woes got much worse last week, with the cash-strapped airline defaulting on its loan repayments to a consortium of Indian banks led by the State Bank of India. ICRA slashed the rating on the company’s debt to default grade D from C, and the stock tanked on the bourses. This debt default, the airline’s first, marks a serious deterioration in its troubled state of affairs that has seen it delaying salaries and aircraft lease payments, and its accounts being subject to a forensic audit. Lenders, edgy at the financial stress at the loss-making airline, will now likely start breathing down its neck. It doesn’t help that Jet Airways has debt repayments running into thousands of crores of rupees due in the near to medium term. The banking sector, reeling under a mountain of bad loans, is unlikely to be lenient. With frantic efforts over the past few months to rope in a new partner in the Tatas, or get more funds from its existing partner Etihad Airways, not yet bearing fruit, Jet Airways faces perhaps its most critical moment in its 25-year history.

Unless the airline quickly comes up with a workable plan, through asset sales or equity infusion or both, it could find itself being dragged over the coals under the Insolvency and Bankruptcy Code (IBC). A possible resolution to the crisis could require promoter Naresh Goyal diluting stake significantly and giving up control over the airline he founded, something he is said to be loath to. A silver lining is the recent sharp dip in the fuel cost of airlines following the rout of crude oil. If efforts at salvage fail and the airline goes into restructuring or liquidation, the resultant upheaval could mean major pain for many. Lenders and vendors will likely have to take big haircuts on their dues and equity shareholders may see the value of their already diminished holdings all but vanish. Also, passengers could see a sharp rise in airfares, reminiscent of the times when Jet Airways’ rival Kingfisher Airlines crumpled under its own debt burden. With about 14 per cent market share, Jet is the second largest player in the domestic skies, and its shrinkage or closure, if it happens, will remove significant capacity from the market. This will further entrench the dominance of market leader IndiGo Airlines.

The Centre should resist the urge to interfere with the creative destruction cycle in business, and not try to prop up an ailing airline by forcing the hand of state-owned lenders. The bitter experience with state-owned Air India is cautionary enough. India need not be an exception to the regular shake-outs that happen in the global aviation industry. However, a social safety net for employees must be put in place, as in other parts of the world. Businesses should strive to pull themselves out of their debt mess, failing which institutional mechanisms such as the IBC should kick in.

Published on January 07, 2019
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