Last week, when rating agency ICRA downgraded Jet Airways’ loan facilities to ‘D’ (junk status) due to delays in debt servicing, the company’s rejoinder was quick and sharp. “It is very disappointing that the recently published ICRA downgrade is based on a historic delay in debt servicing, which occurred and was resolved in the previous financial year. Our recently published first quarter results show a positive trend in performance and that the airline’s three-year business plan is on track,” it shot back.
Jet’s angst seems understandable. ICRA’s action could make it tougher and costlier for the airline to refinance its formidable debt of about ₹9,800 crore (as on June 30). This could again put the company on the back foot – at a critical juncture when its performance has shown some tentative improvement and strategic roadmaps to turn the corner have been unveiled.
After the disastrous ₹2,154-crore loss in the March quarter – the airline’s largest ever—the June quarter results offered a sliver of hope. The loss of ₹218 crore, while still quite stiff, was lower than the loss in the year-ago period (₹355 crore).
How did the airline, known for its quality focus and market leadership less than a decade back, find itself in this situation? Besides high fuel and airport costs, changed industry dynamics that increased competition, especially from low-cost airlines, an acquisition which has hurt more than helped, and a suboptimal capacity expansion all contributed to the drag.
Says Kapil Kaul, CEO South Asia, The Centre for Asia Pacific Aviation: “The carrier lost focus in the domestic market after 2005-06 as it concentrated largely on international services, to become another Singapore Airlines. The company went in for 20 wide body aircraft for international operations. Its expansion happened without an adequate capital base. The 2006 Air Sahara acquisition, which to me was a big mistake, blocked precious capital at a very crucial phase of Jet’s international programme.”
The numbers bear out Kaul. In 2005, the airline’s profit was ₹392 crore, while its debt was less than ₹3,000 crore. In 2008, by when Air Sahara had bought into its fold, Jet’s consolidated loss was ₹654 crore and its debt had ballooned to about ₹12,600 crore.
Air Sahara (renamed JetLite) has been consistently making losses. In the recent March quarter, Jet took a write-down of ₹700 crore on its investment in JetLite – one reason for the record loss in the period.
Fighting back But then, Jet is no babe in the woods. In 2011-12, the airline sold the development rights of its leasehold property at Bandra-Kurla Complex in Mumbai to Godrej Properties for ₹500 crore.
And in a landmark deal in April last year, Jet sold a 24 per cent stake to the UAE-based Etihad Airways for ₹2,058 crore. The pricing of ₹754.7 a share was a steep 31.5 per cent premium to the Jet stock’s then market price of ₹574 (the current price is ₹223 a share).
Etihad also paid Jet ₹859 crore for a 50.1 per cent stake in its frequent flyer programme and ₹380 crore for the latter’s slots at London’s Heathrow airport. The tie-up has helped in other ways, too. Etihad stood guarantee for a $150 million (about ₹850 crore) relatively cheaper external commercial borrowing (ECB) by Jet in the March quarter.
The Etihad deal helped repair Jet’s balance sheet to a good extent. From more than ₹13,000 crore as on March 2012, Jet’s consolidated debt moderated to about ₹10,600 crore by March 2014 and further to ₹9,800 crore by June. Says Amber Dubey, Partner and Head-Aerospace and Defence at KPMG India: “ECBs and funding support from Etihad have helped Jet. The Etihad connect also brings in synergy benefits in terms of network planning, procurement of goods and services, and loyalty programmes. All this will help Jet improve its financial position.”
On its plans to reduce the debt burden over the next six months, a spokesperson of Jet said: “Jet Airways has obtained $150 million in foreign currency denominated debt at competitive cost of borrowing under the ECB route. This would have a very positive impact on the debt landscape of the airline.” The airline also plans to clean up the balance sheet and write down overvalued non-cash assets.
Turnaround plan On the operational front, the three-year turnaround plan includes long-term network, fleet and product developments to optimise the airline’s domestic and international operations. Jet has gone for rationalisation of routes, aircraft and airport slots, said Dubey. In 2013-14, it stopped operating in 18 domestic routes. But this has taken a toll on its market share in the Indian skies – Jet is now in the third spot behind IndiGo and SpiceJet.
The airline is instead increasing focus on the profitable international business using the tie-up with Etihad. Jet hopes to increase the share of international operations to total revenue from 45 per cent last year to 63 per cent by 2015.
This may be a good strategy, given that the Indian skies are set for intense competition and attendant consequences. The company is also enhancing its frequent flyer programme, which is now housed in a separate entity with Etihad as the major partner. The airline is also taking a long, hard look at costs.
Through renegotiation of contracts, it hopes to achieve major cost savings of over $100 million (about ₹600 crore). Jet is also continuing to pursue opportunities to sell and lease back aircraft. It doesn’t have idle aircraft on the ground at present, as was the case last year.
Says Kapil Kaul: “Jet is better placed after its stake sale to Etihad. The carrier is expected to further reduce debt in fiscal 2015. However, the key, going forward, would be the pace at which Jet manages to turn around, given that India is at the cusp of another phase of massive competition. While Jet’s international model has changed completely and will be tested, its strategy of becoming a full service carrier in the domestic skies will bring more challenges.”
It helps that crude oil price has moderated in recent months and the rupee has remained stable after appreciating from the lows of August last year – this has meant lower fuel costs. If the domestic economy improves, more passengers, including those preferring full service carriers, could take to the skies. That will bode well for Jet.
(This is part of a series on how companies are managing debt to gear up for better times.)