Jet Airways proposes to cut staff salaries to continue operations; who will blink first?

New Delhi: Cost cutting is never a pleasant exercise for any business but when it comes down to employees facing a salary cut, the situation turns from bad to worse. This is precisely what has been happening at India’s second largest airline by passengers, Jet Airways. It is painful for any employee to agree to a salary cut in any company but they need to remember that cost rationalisation is imperative to the very survival of the company which pays them their wages.

Two things should be mentioned upfront here: First, Jet is a full service carrier (FSC) with cost heads vastly different and inflated compared to the LCCs like market leader IndiGo and SpiceJet. The other FSCs – Air India and Vistara – are also in continuous efforts to trim costs and raise revenue.

Air India has sought yet another equity infusion from the government recently. And it must be clear that its inflated employee base was one of the reasons cited by potential bidders for not coming forward in the failed disinvestment exercise conducted recently. Vistara has just announced a category of fares which exclude complimentary meals – something seen as a necessity in FSC model - to boost revenues.

Second, Jet has anyways been on a cost rationalisation drive (costs other than jet fuel, which is out of its control) for several quarters now. If all areas of the airline’s operations are being squeezed, how can employees remain untouched?

The latest round of trouble started when the management, lead by Chairman Naresh Goyal, informed pilots earlier in the week that they should agree to a 15 percent salary cut for the next 24 months or be prepared to work for a company that is “left with revenue to run for maximum 60 days more”.

There was a mention of significant impact on the on-time performance of the airline, ‘mismanagement’ by the airline management and the possibility of “lots of ground staff and cabin crew” losing jobs.

High fuel prices, major market share gain by a rival airline and no expansion in the last six years were other reasons provided for the current mess, according to sources at this meeting.

Of course, some of what the pilots were told is true and needs urgent attention. Jet Airways, like all other airlines operating in India, has being facing headwinds due to high fuel prices coupled with high incidence of taxation on jet fuel, airlines’ inability to raise fares and depreciation of the rupee. So, assertions of the airline having enough cash to run for merely two months, which have since been denied by the Jet management, should be viewed in the context of a tough operating environment for all airlines.

Jet is not alone in feeling the squeeze. India’s biggest airline by passengers, IndiGo, just reported a shock decline in its profitability for the June quarter – its steepest such decline since listing on the bourses.

The cash crunch at Jet is what all other airlines are also facing, in varying degrees. But having said that, there is also the little problem of this particular airline’s staff costs, its indebtedness and the stated objective of reducing costs other than fuel.

As this piece  from _MoneyContro_l points out, Jet has the biggest wage bill in the industry. Its wage bill was Rs 2,801 crore in FY18 compared to Rs 2,366 crore of IndiGo when the latter accounted for almost 40 percent of the domestic market. Jet was way behind at just 16.7 percent share along with JetLite. The point here is that though Jet is paying more in wages to its employees, it has less than half the share of the market IndiGo has and certainly needs to trim the wage bill. Jet employed 16,558 permanent employees on its rolls as on March 31 this year while IndiGo had just 18,060 people. The annual report of Jet mentions that permanent employees increased from 16,015 an year ago.

Now, let us come to the avowed goal of Jet’s management to trim non-fuel costs. CEO Vinay Dube told analysts after the FY18 results in May that “our focus continues to be on the non-fuel CASK (cost per available seat kilometer). We are on target to deliver the 12 percent to 15 percent non-fuel CASK reduction”.

A reduction of 15 percent in non-fuel costs, if the Jet management is seriously pursuing this goal, cannot come about by protecting salaries of the highly paid section of pilots.

But the sources quoted earlier said several questions were raised by the pilots at the meeting with Goyal and other top management executives, when the salary cuts and their inevitability was mentioned. These included reasons for the airline shutting down profitable routes, under-utilisation of JetLite pilots, losses being incurred by running JetLite as a separate company and improper coordination between various airline departments. Whether any answers were forthcoming is not known.

Another source said that Goyal has always “pampered” pilots, but this time his hands may be tied as the cost rationalisation exercise must touch every department. A section of employees cannot remain unaffected by the difficulties being faced by the company, this person said, asking not to be named. He also said there have been intermittent reports of Goyal wanting to trim his stake in the airline but no such decision has been implemented till now.

On its part, Jet issued a statement after its scrip tumbled on the bourses through the day yesterday. It said “recent media reports about the sustainability of the airline are not only factually incorrect, but also malicious. The airline would also like to deny any conjecture of a stake sale. Indian aviation is experiencing strong growth and Jet Airways is well-placed to be a part of this growth story.

The company is committed to create a growth-oriented, sustainable future and a revitalised experience armed with the addition of 225 B737-MAX fuel efficient aircraft, which will be inducted in its fleet over the next decade, with 11 being inducted this fiscal. This envisioned growth will in fact, require additional human capital.”

In the coming days, it will of course become clear whether the pilots blink first or the airline management does. Or if there will be more hiring than firing. But whatever happens hereon, the employees of the airline must be prepared for some tough times ahead as cost cutting reaches a fever pitch.