The American morbid fascination for monetising just about everything is perhaps the zenith of financial engineering. Mortgage companies sell off their receivables maturing over a leisurely period spanning on an average 15 to 20 years to a Special Purpose Vehicle (SPV) at a discount so it can issue bonds on the strength of such post-dated receivables.
Unlocking the value of illiquid or dormant assets is the pithy description given for such transactions with the title for the entire convoluted process being securitisation. The 2008 financial crisis having its epicenter in the US mortgage market for securitisation that rocked the entire world for a very long time with its aftershocks still being heard has had something to do with this brinkmanship.
The lengths to which the securitisation process goes is amazing and mind-numbing. A power producer can securitise all its future earnings spanning, say 30 years and raise enough money. There is a leap of faith in this—the power company will operate at full capacity for all times to come, technological obsolescence would not touch this power company and coal (if it is a coal-fired power generator) would be available for all times to come and so forth.
Something similar is talked about in awed tones in the financial circles in India. Jet Privileges Private Limited (JPPL) is the SPV in this context. It was carved out of Jet Airways Ltd first as a unit in 2012 and then demerged or carved out as a separate standalone company in 2014 in which Etihad has 50.1 percent stake.
In fact, Etihad made this a prior condition in 2013 when it arrived on the horizon — it will invest $600 million in Jet Airways only if Jet Privileges was created. Thus, Etihad is the major investor in JPPL with an investment of $150 million that is a part of its overall investment of $600 million in Jet Airways.
What is the role of this SPV JPPL? Well, it was created as a crown jewel away from the glare of the humdrum of airline’s routine operations. It can be likened to promoters of cutting-edge technology companies parking their patents in a closely-held company so that the manufacturing/service company does not lay claim to the technology and that the inventor can earn a tidy royalty from the manufacturing/service company year after year.
To be fair, JPPL—though also a closely held company, exists and ensures for all the shareholders being its 100 percent subsidiary.
And how does the financial world expect JPPL to bail out Jet Airways? Well, JPPL is the custodian of Jet Airways’ loyalty programme which is nothing but frequent flier-cum-high class flier programme. Point Loyalty, a global management consultancy focused on airline loyalty programmes, had valued JPPL at $1.131 billion (about Rs 7,300 crore) last year based on the average rupee exchange rate in November.
A back-of-the-envelope calculation showed that the reward-point sales totaling 35 billion JPMiles can be redeemed to buy around 4.2 lakh round-trip flights to London or around 3 lakh round-trip flights to New York, Chicago or Canada. If paid in cash, the flights to Europe would cost Rs 3,000-5,000 crore, and those to US-Canada would cost Rs 6,000-7,000 crore in the current season, considering the range of air fares offered by various airlines during the April-May period.
According to JPPL’s reward scheme design, a one-way flight from India to Europe costs 42,000 JPMiles and a flight to New York, Chicago or Toronto costs 60,000 JPMiles. JPPL has split the global air-map into 13 different zones and from any airport in one zone to another zone costs a specific number of JPMiles.
Jet Privilege has partnerships with 25 foreign carriers and any member can choose a carrier of choice to fly abroad by redeeming their JPMiles, although taxes need to be paid separately for such flights.
Can JPPL salvage the sagging fortunes of Jet Airways as State Bank of India (SBI) and other banks have exposure to the tune of massive Rs 8,500 crore? It is contended rather ambitiously that JPPL has attracted several private equity firms. May be. But investors pay for what is brought to the table.
Can JPPL securitise the entire expected revenue of Rs 7,300 crore or so from its privilege programmes which in turn can be handed over to its parent Jet Airways so that it can emerge from its long financial crisis with its head held high? Investors are intelligent enough to read through the privilege programme and its financial implications.
The entire Rs 7,300 crore of possible revenue is not profit; there are operating costs for any airline plus overheads so much so that the entire airline industry the world over is mired in losses barring a few like Lufthansa. The cost of a share is supposed to be the present value of future dividend streams.
SBI and other banks are now neck-deep into Jet Airways with board room and promoter status. They would clutch at anything. JPPL may be the island of excellence but would it be the saviour of both Jet Airways and the banks that now have to sink or swim with Jet Airways? That is the question.
(The writer is a senior columnist and tweets @smurlidharan)
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Updated Date: Apr 08, 2019 14:05:13 IST