Amid a desperate scramble for cash, Jet Airways is banking on promoter Naresh Goyal's ability to save the day

Aviation legend has it that Naresh Goyal, the enigmatic promoter of Jet Airways, has almost always been able to pull a rabbit out of his hat, to save his beloved airline whenever trouble knocked on his door. Jet, like almost all other airlines operating in India, has faced headwinds in the past too. It has faced intense scrutiny for the source of promoter funds but almost always, it has managed to stave off a detailed investigation in this matter. Then, Jet’s business model has been investigated in detail when it signed up Etihad Airways to get much needed funds some years back. This scrutiny came about as the government of the day had then simultaneously offered a huge increase in weekly seat entitlements to Abu Dhabi and many alleged the two developments were related. But the allegations were never proved and Jet not only got lifeline funds but went on to forge alliances with several other airlines as well. A few months back, when reports appeared of Jet’s bid to offload promoter stake to Delta Airlines and then these were followed by reports that the stake sale had been stymied due to reported differences in valuation, the airline continued to function as before, not a wrinkle on the forehead of its top executives. [caption id=“attachment_812067” align=“alignleft” width=“380”] A file photo of Jet Airways’ promoter Naresh Goyal. AFP[/caption] Jet has weathered many a storm in the past. The question now: Is there a rabbit left for Goyal to pull out this time? Can he manage to get urgent cash infusion without diluting his own stake, without letting the airline renege on payments and still appear smiling at the end of the current quarter? Can he, if no cash is forthcoming, get lenders to extend more loans so that Jet continues to operate? On the face of it, Jet seems to be suffering from the pain all other airlines are also witnessing and as long as it manages to get urgent cash, things will go back to normal. But this time, Jet’s and by extension Goyal’s troubles may be far more deep seated than what appears on the surface. The airline has been denying any move to either sell a stake to get cash while insisting that it is current with all its payments. This was borne out by SBI Chairman Rajnish Kumar on Tuesday, who parried reporters’ questions on the airline by saying that the “Jet account is standard”. That’s banking parlance for saying the airline has not fallen back on its repayments yet. So what is the trouble at Jet? One, its profitability was affected in the March quarter. As per Jet’s annual report, in the fourth-quarter of fiscal 2017-18 it posted a net loss of Rs 1,036 crore against a net profit of Rs 602 crore in the fourth-quarter of the previous fiscal. There is reason to believe that profitability continues to worsen in the current quarter as costs (fuel and ex-fuel) continue to rise without commensurate rise in revenues. Two, Jet asked pilots and some other categories of employees to take salary cuts of 15-25 percent because of the precarious cash position earlier this month. These reports were later denied by the airline and pilots and engineers also refused to take any salary cuts. Three, reports suggest that fresh attempts by the airline to raise loans have met with resistance from lenders, who want it to raise money by selling equity first. Four, when results of Q1 of fiscal 2018-19 scheduled for 10 August were deferred after the management failed to present the accounts to the audit committee in time for the board meeting, the stock exchanges and proxy investment firms began raising more questions on the airline’s solvency. As this piece points out, on 31 March, Jet’s free cash flow on revenue of Rs 23,958 crore was barely Rs 321 crore. And continued high aviation fuel prices have worsened its finances since then. In May 2018, ratings agency ICRA lowered credit ratings on its short-term and long-term loans due to weakening finances. “The company has large debt repayments due over FY 2019 (Rs 3,120.3 crore), FY 2020 (Rs 2,444.5 crore) and FY 2021 (Rs 2,167.9 crore),” ICRA had said. Continued support from Etihad Airways is fundamental towards turning Jet Airways around and improving its liquidity profile, ICRA had added. A debt overhang As per Jet’s Q4 concall with analysts, the net debt as on 31 March stood at Rs 8,150 crore, an increase of about Rs 224 crore over December 2017 which means within just three months.  Responding to a question on whether a negative cash flow in the fourth-quarter will lead to increasing debt, CFO Amit Agarwal said “primarily our focus will be maybe a quarter or two you will see slightly the debt going up; however, our journey as we have demonstrated over the last two and a half years of deleveraging the company, we have shown that Rs 3,000 crore of debt reduction has happened. Our journey would continue. May be as you said in this quarter or in a quarter or two, there could be a short-term blip in terms of increase in the debt, but overall our strategy continues to be reducing the debt on an ongoing basis”. Hostile cost environment Jet’s troubles seem to have compounded in the current quarter because of a hostile cost environment with fuel prices having risen by more than 40 percent in Q4 and the rupee depreciating sharply. Myriad costs such as expat pilot salaries, maintenance and lease payments are made in dollars. The airline has set itself a target of reducing ex-fuel costs by 12-15 percent over the next several months and seems well on its way to achieve that, despite having one of the highest cost structures in the industry. But fuel costs and currency fluctuation remain a cause for concern. Revenue per passenger Jet has been unable to raise fares as intense competition in the domestic market has actually taken fares south. Analysts say seats are currently being sold below cost by all airlines. So we have a situation where Indian aviation market has seen 50 months of uninterrupted double digit passenger growth but airlines’ profitability has nosedived nevertheless. Jet’s yields (revenue per passenger) were the lowest in the fourth-quarter for eight consecutive quarters. Jet needs money for the short term, besides a benign external cost environment. As the government seems wary of helping out Goyal in such trying times, he has no option but to pull out another rabbit to keep his beloved airline in the air.