Downfall of Jet Airways: Govt can mount Satyam-type rescue on cash-strapped airline and make money on it as a smart investor

Editor’s note: This is part of a multi-article series on the downfall of Jet Airways and the path ahead for the cash-strapped airline. It is a familiar theme by now. An airline company runs out of funds. Everybody suddenly realises banks—state-owned, had lent more money than its balance sheets would justify in a financially risky sector. Its founder talks big and gets rich. Things drag on. Bankers want their money back. Then the airline needs some money of its own because the show must go on. The tap runs dry. Nobody knows where to get the money. Services stop. Employees cry foul. Everybody discovers the government runs many things: The bank that lends, the aviation rules that offer slots like manna, an airline of its own to which it is generous in granting funds while holding forth against anti-poverty programmes. It is Kingfisher Airways all over again as Jet Airways gets grounded , but then, Jet Airways founder Naresh Goyal is not half as flamboyant as Vijay Mallya, and let us admit it, has not really done anything to flee the country. The bankers are out to get him. Not the cops. Not yet. In fact, not even the bankruptcy courts. But then, that is a technicality. It is clear that Jet Airways has become a test case in India with many dimensions involving lenders, vendors, employees, policy-makers and would-be partners or investors having varying interests and approaches. What we need is an ability to navigate the complex landscape that requires looking at the issue from various perspectives. About 16,000 employees have their handkerchiefs and megaphones ready. The country is in the thick of an election season amid a jobs crisis that the Opposition says is the biggest issue facing the country.

This is not a pretty picture for Prime Minister Narendra Modi’s government. It is not clear who will come to power next month, but whoever it is would do well to realise a basic truth: India is not exactly a land for unbridled shareholder capitalism, nor can it easily afford (as the Modi government seems to have thought) Western-style philosophy of letting ailing companies die.

Change is painful everywhere, and more so in India where a shortage of jobs, the sacredness of employment and a legacy of Nehruvian socialism will ensure that questions will be asked: In the media, in front of increasingly populist TV news cameras and then in the hallowed chambers of legislature. Policy-makers need to have a bailout policy to deal with companies going belly-up, or close to getting there. The Modi government may pat itself on the back for setting up a system through the Insolvency and Bankruptcy Code (IBC) to deal with failing companies, but scratch the surface and you will find that we have only replaced a slothful administrative bureaucracy with a judicial bureaucracy. The political interference is less, but that could be more of a problem than a solution. At some point, a hands-off government that claims to be clean is not going to cut much ice with people seeking jobs and critics asking who took the money away from State Bank of India—Jet’s main lender and now its shadow owner—unless there is a white knight flying in somewhere from the general direction of the Arabian Sea to rescue the airline and throw a helpline to its staff. [caption id=“attachment_94955” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] There’s too much bleeding out there. Do we really fancy a surgery? It is time for policy-makers to make a template for rescue of companies like Jet Airways, and the clue lies in what the government did with Satyam Computer Services that was hit by India’s biggest accounting fraud scandal. That company went though a painful transition as well, but the then government had its cue in the company law that enabled the state to intervene. When a generally ailing company goes through a similar case, the ghosts of nationalisation loom, and a benign act of rescue may be seen as an act of nose-poking. But then, SBI’s money is as good as the government’s, and therefore the public’s. Jet Airways is a premium brand and let us face it, in an industry that has become budget-oriented over the past decade, there is always room at the top. So why can’t the government behave like a turnaround fund? It gets tricky here, but the way out might lie in choosing management control in partnership with bidders for the rescue rather than go for a big, simple haircut to hand over the cockpit to a new buyer—which is a write-off indirectly done by the taxpayer anyway. With Jet Airways owing about $1.2 billion to lenders and prospects seeking a 60-80 percent haircut (roughly equivalent to a write-off worth nearly a billion dollars on the higher side!), the state has the right to seek something in return. Given that India is a high-growth economy despite its hiccups, the point to remember is that the market always prices the future. If Air India along with the government as an investor through one of its arms (the National Investment and Infrastructure Fund is already a bidder) and prospective buyers get into negotiations, some of that write-off/haircut can be treated as an equity investment by the government. If smartly played, both Air India and Jet Airways can be turned around together and Air India effectively privatised in the future. What this requires is some savvy for financial engineering and structured solutions, the kind of which seasoned investment bankers and hedge funds are known to do. The one good thing in the current atmosphere despite a jobs crisis in the country is that there is a demand for skilled workers. With aviation schemes schemes like UDAAN, and India as an international hotspot, surely human capital is an asset? What this means is that the government can turn some of that write-off into patient capital and hopefully turn a profit along with some public sector turnaround at a future date. It is also useful to remember that the government is also a customer for airline services. Some hints may lie there. Satyam became Mahindra Satyam in a state-managed rescue act that saw the Mahindras taking control of the erstwhile Satyam. There is a case to take that as a precedent but this time with the government not as a rescuer per se but as a smart investor. All it needs is some accounting jugglery and a shedding of an ideological fetish—along with some sound knowledge on how valuations work and how to time the market. (The writer is a senior journalist and commentator. He tweets as @madversity)