Over the last few months, Jet Airways has been in the news for all the wrong reasons. It has been forced to return aircraft to leasing companies as it has not been able to pay lease rentals, cancel flights, and see over 150 of its pilots leave the airline.
So serious is the airline’s financial state that, on February 14, its board approved a a bank-led Provisional Resolution Plan for converting the lenders’ debt into equity shares, as a result of which the lenders will become the largest shareholders in the company.
The conversion of lenders’ debt to the company’s equity shares will be made at a consideration of ₹1.
Though the situation has become so dire now, a study of the airline’s history since it listed on the bourses 14 years ago shows that signs of poor financials have been around for at least a decade.
Jet’s stock, issued at ₹1,100 a piece in its IPO, closed its first trading day at ₹1,304 and about a month later, on April 26, 2005, it hit its lifetime high of ₹1,375.
Today, the stock quotes at ₹235, almost 80 per cent lower than its issue price. From ₹79 billion or ₹7,900 crore at issue, the stock’s market capitalisation is now only about ₹27 billion or ₹2,700 crore. This massive fall over the years has relegated a large-cap stock to micro-cap status.
Net worth – from positive to negative
The sharp decline in the stock’s fortunes reflects that of a once-promising airline.
Consider this: As of March 2005, Jet Airways’ net worth was a healthy ₹2,000 crore.
But by March 2018, it had deteriorated to a negative ₹7,000 crore or so. Net worth is the shareholders’ equity that comprises share capital and accumulated reserves, profits and surplus.
During this time, the airline took several steps that were considered path-breaking, including becoming the first airline to open a hub in Brussels in 2007 and later shifting it to Amsterdam in 2016.
It wasn’t always bleak. In fact, in its initial years since listing, the airline’s net worth doubled to more than ₹4,000 crore as of March 2008. This was the time when Jet enjoyed the advantage of being an established brand even as the other players were trying to expand and establish their presence. For example, Kingfisher started in 2005 with four aircraft while Jet’s fleet and the routes that it flew on were much larger.
But then onwards, for more than a decade, it was downhill for Jet. Its net worth turned red first in FY2012, with a negative ₹10 crore as of March 2012, and has consistently worsened since then.
Bottom line knocked off
This dismal picture of its net worth is primarily the result of huge losses that it suffered in most of the years since its listing. On a consolidated level, Jet Airways has posted losses in 9 out of the 14 fiscal years so far since listing — FY2014 being the worst, with a loss of more than ₹4,000 crore.
However, FY2019 could be even worse — the airline has posted consolidated losses of ₹3,300 crore in the nine months ended December 2018.
After listing, Jet Airways was profitable until FY2007. But then, for eight years — from FY2008 till FY2015 — it posted losses. The airline was back in the black in FY2016 and FY2017 only to again slip into losses in FY2018.
Merger gone wrong
Among the many reasons for this state of affairs is the airline’s dispute-ridden acquisition of Air Sahara in April 2007 for ₹1,450 crore. Air Sahara was later renamed JetLite and positioned as a low-cost carrier. It is noteworthy that Jet’s woes with the bottom line started in FY2008, the year of the Air Sahara buy.
The expensive acquisition, made in the hope of increasing its domestic market share, backfired. JetLite consistently made losses and in the March 2014 quarter, Jet took a write-down of ₹700 crore on its investment in JetLite — one reason for the record loss in the period.
Ballooning debt
Then, Jet’s own aggressive debt-fuelled expansion plans also resulted in a sharp jump in its debt levels. In 2005, the airline’s debt was less than ₹3,000 crore. By March 2008, its consolidated debt had ballooned to more than ₹12,000 crore; this rose to about ₹16,600 crore by March 2009. While the debt levels moderated over the years, they still remain significantly high (₹7,600 crore as of December 2018). With net worth (equity value) being negative for a long time, the airline’s leverage ratio (debt-to-equity) was off the charts.
While its financials were shaky for quite some time, the airline’s inability to repay loans in the December 2018 quarter triggered the ongoing fight for its survival.
Cost pressures and competition
Rising debt levels also brought a sharp increase in the airline’s interest costs. From about ₹250 crore in FY2005, interest costs more than doubled to over ₹500 crore in FY2008 and then again doubled to over ₹1,000 crore in FY2010. After peaking at about ₹1,200 crore in FY 2013, these have hovered in the range of ₹850-1,000 crore a year since then. But the biggest cost pressure came from fuel, the largest expense for airlines in India. Jet’s fuel costs shot up from about ₹1,000 crore in FY2005 to around ₹8,000 crore in FY2013 and FY2014 and could breach these levels in FY2019. While the airline’s expanded operations contributed to its increasing fuel costs, the increase was also a result of sharp spikes in global oil prices and the consequent increase in aviation turbine fuel (ATF) costs in India. The rupee weakening didn’t help either as this added to the fuel costs. The airline’s financials wouldn’t have turned so dire if it had been able to pass on the cost increases. But a massive increase in competitive pressure — primarily led by low-cost carrier and market leader IndiGo that infused huge capacity in the market — resulted in a huge loss of pricing power for all airlines, including Jet.
Stake sale that didn’t help
When the government allowed foreign airlines to invest in India, Jet’s founder and promoter Naresh Goyal was first off the block and sold 24 per cent stake in the airline to the UAE-based Etihad Airways in April 2013 for ₹2,058 crore. The pricing of ₹754.7 a share for this deal was a steep 31.5 per cent premium to Jet stock’s then market price of ₹574.
But this relief was short-lived. The partnership unravelled in less than six years with Etihad now refusing to play ball without significant concessions. This has brought Jet to a situation where it is seeking a loan-to-equity conversion at ₹1 that will reduce the stake of both Naresh Goyal and Etihad by half or more.