Government initiates backdoor nationalisation of Jet Airways

With Jet agreeing to give lenders the majority stake by converting part of its debt to equity as the beleaguered airline battles a cash crunch, the lenders, most of whom are government-owned, are now the owners of the airline. And all this has been done at Re 1.

The question remains whether this is a bailout or backdoor nationalisation. After all, government-owned entities - banks and DFIs - are prima facie the new owners of the airline. 

In a move reminiscent of Kingfisher Airlines, which subsequently went belly up in 2014, lenders including SBI converted existing debt into the loss-making company’s shares in 2011.

The Jet board, as part of a provisional resolution plan, agreed to allot 11.4 crore shares at an aggregate value of Re 1 to the lenders’ consortium led by State Bank of India, according to the airline’s stock exchange filing.

Through the conversion, the board of Jet Airways Ltd has approved an action plan by its lenders to resolve a near Rs 8,500 crore ($1.19 billion) funding gap, which will make them the largest shareholders of India’s biggest full-service carrier.

Do the lenders have the wherewithal and expertise to run a full-face airline with so many imponderables strewn in its path? Or will they try and stabilise the operations only to sell it or merge it later with another domestic carrier? For the moment, the government is saddled with two debt-laden carriers - Air India and now Jet Airways.

Through the conversion, the lenders will end up owning 50.1 per cent in the full-service carrier. That will bring down Naresh Goyal and Etihad Airways’ stake by half to 25 per cent and 12 per cent, respectively, according to back-of-the-envelope calculations.

Jet, saddled with over $1 billion in debt, had a turbulent 2018 as competition intensified in the Indian airline market, the rupee depreciated and high oil prices squeezed margins. 

The rescue deal by Jet’s lenders, led by State Bank of India, includes funding through a mix of equity infusion, debt restructuring and sale or leaseback of aircraft.

Jet will seek approval from its shareholders at a meeting on February 21 for conversion of its debt into 114 million shares. It currently has 113.6 million shares on issue. The plan gives lenders the ability to appoint nominees to the airline’s board.

Jet said after its approval, the plan will be presented back to the lenders as well as to an overseeing committee of the Indian Bankers’ Association, the board of shareholder Etihad Airways and Jet’s founder and chairman Naresh Goyal.

Abu Dhabi’s Etihad, which owns 24 per cent of Jet, bailed out the Indian airline in 2013, paying $600 million for a 24 per cent stake in Jet, three take-offs and landing slots in London Heathrow and a majority share in Jet’s frequent flyer programme.

Jet Airways reported Rs 587.7 cr standalone net loss for Q3 ended Dec 31, 2018. It had reported a net profit of Rs 165.25 cr during the year-ago period. “Despite improvement in RASK (revenue per available seat km), which grew 2.6 per cent over Q3FY18 due to seasonal, demand-led strengthening of fares, higher costs because of the price of Brent crude (up 29 per cent year-on-year) and the depreciated Indian rupee impacted the airline’s overall business performance,” the company said in a statement. “These factors ensured that the sequential reduction in non-fuel CASK (cost per available seat kilometre) over the last few quarters could not be sustained. For Q3FY19, Jet Airways’ non-fuel CASK increased by 13.7 per cent on a year-on-year basis to Rs 3.43 cr. Excluding forex impact, non-fuel CASK increased 7.5 per cent,” it said. On a consolidated basis, the airline’s net loss stood at Rs 732 cr for Q3FY19, against a net profit of Rs 186 cr in the year-ago quarter. The company said it has restructured its network during the quarter, moving capacity away from unviable to profitable routes.