Jet Airways 2.0 – Many challenges on the horizon still

For eight consecutive trading sessions including on Monday, the stock of Jet Airways hit the upper circuit (5 per cent) and now trades at about Rs 42 a piece. The market seems to have had a whiff of the impending end to the long-running corporate insolvency and resolution process (CIRP) that was underway at the airline for nearly 16 months with many ups and downs. The suspense ended last Saturday when the Kalrock Capital – Murari Lal Jalan combine was announced as the successful resolution applicant selected by the committee of creditors.

The market seems relieved that resolution and not liquidation has been chosen as the way out for the beleaguered airline. The bet, going by the upper circuits on the stock over the past few days, seems to that Jet Airways that shut operations in April 2019 will take to the skies again in the not-too-distant future. This, it is perhaps hoped, could lead to further upside in the stock that in its heyday in April 2005 had hit a lifetime high of Rs 1,375 before crashing to about Rs 14 earlier this year. Some in the social media have insinuated that the recent rally is due to insider trading by those privy to news of the impending closure of the CIRP. Whatever the reason, the stock has made a comeback of sorts. Now, whether the rally sustains or not will depend on whether the airline manages to fly again in the coming months. There are still hurdles to cross and challenges to overcome for Jet Airways 2.0.

To start with, regulatory approvals such as that from the NCLT and Ministry of Civil Aviation will be needed. That should hopefully come through without too much trouble.

The bigger challenge will be re-starting operations at a time when the entire Indian aviation industry (including stronger players such as IndiGo) is still reeling under the impact of the coronavirus pandemic. Truncated schedules, limited capacity deployments and continuing high costs have resulted in huge losses and severely damaged balance-sheets that could precipitate shake-outs in the sector.

Jet Airways has not declared its results for FY 2020 and the June 2019 quarter given that it had ceased operations and the CIRP was on. But its all-time high standalone loss of Rs 5,536 crore in FY 2019 and the negative net worth of about Rs 12,700 crore as of March 2019 are a reflection of a completely decimated balance-sheet and the struggle to start again from almost scratch. Jet Airways may still be a strong and loved brand but it will nevertheless be facing severe headwinds – even if it plans to start small on some domestic routes before ramping up gradually.

The details of the resolution plan are not public yet, but the reported initial planned investment of about Rs 1,000 crore may need quick and significant booster shoots for the airline to truly take off. Whether this will be forthcoming needs to be seen.

There are also many operational challenges such as getting back prized slots at key domestic and international airports that will be key to the airline’s revival. Most of these slots have been given, even if temporarily, to rival airlines that may not be keen to hand them back without demur. Expanding fleet size from just 12 currently, getting back the traffic rights to international destinations and revival of codeshare agreements will also be important in the medium term.

Then, there is the key question of settlement of dues of lenders, vendors and employees – to what extent and how? While announcing Jet’s FY 2019 results in July this year, it had been disclosed that as part of the CIRP, claims worth Rs 36,821 crore has been received from creditors, while claims worth Rs 15,664 crore had been admitted. How much this has changed with the final outcome of the process needs to be seen. In any case, lenders, vendors and employees can be expected to take significant haircuts as part of the resolution.

Reports suggest that lenders may get 9 per cent equity stake in Jet Airways as per the resolution plan. The promoter holding in the company, which was 51 per cent as of March 2019 fell to about 25 per cent as of June 2020, with lender Punjab National Bank (PNB) invoking the pledge on 26 per cent stake pledged by promoter Naresh Goyal.

Public shareholding as of June 2020 was about 75 per cent – including PNB’s 26 per cent, LIC’s 2 per cent, Etihad Airways’ 24 per cent and about 18 per cent held by retail shareholders. It is to be expected that all these existing shareholders could face severe equity dilution as part of the resolution. Even those investors/punters who have been betting on Jet Airways in the recent days will likely face huge dilution when the new promoters (Kalrock – Jalan combine) eventually move in. So, the bets now could be as risky as they come.