Let Jet Airways recover on its own

Airline failures are messy. Creditors are out crores of rupees with few hopes of recovering what is owed. Unpaid employees are forced to borrow to keep their families fed. Passengers are inconvenienced when confirmed flights are cancelled. Business meetings, family reunions, and vacations are disrupted.

The diminishing inventory of seats which results when airlines are in trouble — such as when the DGCA refused to schedule slots to Jet Airways for the busy summer season — provides incentives for competitors to raise prices.

We have seen this movie before with Kingfisher and SpiceJet. Jet Airways is simply suffering from a malaise that corporations in a market economy face: it is not generating sufficient cash to repay its debts and obligations.

But stark though these conditions are, they don’t merit the use of public funds to provide short-term — or even longer-term — assistance to the company in trouble.

This is true even if the State Bank of India finds itself yet again as a key creditor with the possibility of having to write off hundreds of crores in bad, unrecoverable debt.

The only solution, therefore, is for Jet Airways to be forced into insolvency protection.

The IBC

When the Modi government ushered in the new Insolvency and Bankruptcy Code (IBC) in May 2016, India, as the only large country without established bankruptcy laws, seemed to be finally waking up to the demands of the global economy.

In a bankruptcy filing, the claims of all creditors, employees, vendors and other stakeholders are heard by an apolitical and neutral bankruptcy tribunal, the National Company Law Tribunal (NCLT). Meanwhile, the 10-member Insolvency and Bankruptcy Board of India is the nodal agency.

Any creditor who is owed at least ₹1 lakh can file a complaint. The IBC is designed to be swift and efficient. By law, a resolution must be reached within 180 days.

Everyone involved takes a painful haircut — but not the taxpayer.

Companies that emerge from bankruptcy do so having shed their debt but they could become healthy, ongoing concerns.

The US experience

Airlines are particularly vulnerable to failures. Of the top 10 US air carriers, eight of them have declared bankruptcy, some multiple times. In reorganising after bankruptcy, they have often merged to come out stronger. Delta merged with Northwest; US Airways with American Airlines; Continental with United Airlines. Jet could consider this course.

In every case, creditors were forced to forgive debt in court but no taxpayer money was used. No government agency forgave amounts due to it. That is, those involved bore the brunt of the burden but the public was rightfully spared. The first US Airways bankruptcy lasted just about a year; the huge American Airlines bankruptcy about two years. Companies file for relief under Chapter 11, a code which provides for them to reorganise. They offer to cut costs, eliminate unprofitable product lines and offer up employee concessions. Creditors reluctantly agree to write off debt.

Running an airline is not easy. Airplanes need fuel, the price of which is set by global, volatile oil markets. Hedging is expensive and can work against you in a time of falling oil prices. The capital-expenditure ratio is one of the highest amongst service industries as airlines have to borrow billions of dollars to buy or lease planes.

Labour costs are high and every aspect of the airline’s operations is overseen by some government agency, raising compliance costs. Governments regard airlines as cash cows and hit them for landing fees and ticket taxes. Insurance is expensive. An airline seat is perishable inventory. If a seat is not sold by the time the aircraft’s door is closed, revenue from that seat is lost forever.

And the competition is high. Jet Airways, the last legacy full-service carrier, has had to compete with many no-frills competitors during the last 15 years, including IndiGo, GoAir, AirAsia India and SpiceJet. Worse, Jet Airways has to compete with Air India, a carrier remarkably still owned by the government. (Why the government of India should still be in the business of air transportation is a puzzle.)

As the aviation market has turned to rewarding efficiency, low-cost point-to-point flights and quick turnarounds at airports, IndiGo Airlines has emerged as the country’s leading carrie. Jet Airways’ management has itself to blame for not recognising these market shifts — and for not adapting.

When people, banks and other companies invested in Jet Airways, they all knew the risks (and rewards) going in. The best place for all these parties to convene is in front of the NCLT.

Perhaps Jet Airways wants to emerge as a going concern after shedding its debts. Or it wants to liquidate its assets in a fire sale to more healthy competitors and exit the business forever. Whatever may be the outcome, these deliberations should not involve the Indian taxpayer.

Because if Jet Airways had been profitable today, its investors would not be sharing their windfall dividends with the taxpayer.

The writer is Managing Director, Rao Advisors LLC, US

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