Jet Airways – When hope transformed into wishful thinking!

It was on April 17, 2019 that the last Jet Airways flight was flown between Amritsar and Mumbai.

April 17, 2020 10:12 IST | India Infoline News Service
On April 17, 2020, Jet Airways completed exactly 1 year of being grounded. It was on April 17, 2019 that the last Jet Airways flight was flown between Amritsar and Mumbai. The irony is that the stock is still traded in the market. But the real challenge is that after a year of Jet Airways ceasing operations in India, the resolution process has not even taken off. Even the potential bidders that had shown some interest in Jet Airways appear to be backing out after due diligence. As of date, Jet Airways resolution professionals have admitted claims to the tune of Rs16,000cr from a combination of financial and operational creditors. For these creditors, the hope of recovering anything substantive appears to be waning. Rather, the hope of recovery appears to be transforming into wishful thinking. Here is why.

COVID-19 could be the new game spoiler
Even in the aftermath of the 9/11 crisis, the aircraft were not kept grounded for so long. Aircraft across some of the busiest airports in the world  are seeing their expensive aircraft idle. Each day these aircraft remains parked, is a loss in terms of billions of dollars of potential revenue. The global aviation industry is estimating overall losses to the aviation sector at $300 billion conservatively and close to $500 billion if the incidental impact is factored in. Governments are likely to intervene and bail out these airlines in most countries. The point is that it would be too optimistic to expect that buyers for Jet Airways could emerge in these tough times. That would surely be wishful thinking.

Jet’s Aircraft fleet has depleted sharply
Insolvency cases in the past have been relatively successful when there have still been physical assets in the books of the defaulting company. That partially explains why the recovery rate was relatively high in the case of companies like Essar Steel. In the case of Jet Airways most of the assets were essentially intangible and the aircraft assets were anyways pledged to the lessor. Consider these numbers. Out of the total fleet of 115 aircraft with Jet in December 2018, only 12 still remain with Jet Airways. The rest of the aircraft have already been repossessed by the lessors. Most of the aircraft lease transactions are governed by international legal contracts and would be outside the purview of the Indian IBC Act. It is really anybody’s guess what the 12 aircraft with Jet Airways can really fetch in terms of defraying the total debt of Rs.16,000 crore that has been admitted.

Reviving operations could be Catch-22 for Jet Airways
The paradox of the IBC has been that it has accorded preference to financial creditors over the operational creditors. For example, a bank that gives a secured loan to the airline will have a natural priority over a company like Hindustan Petroleum that supplies Aviation Turbine Fuel (ATF) to the airline. Clearly, there is no incentive for any ATF supplier to bail out the airline unless the airline agrees to a cash-and-carry model. So we have a Catch-22 situation here. Bidders would come in if there is visibility on operations and operational creditors would be loath to giving further credit without clarity on previous debts. It is this practically difficulty in reviving operations that has kept a number of bidders sceptical about the entire process.

Jet was a great brand, but is it still a brand?
Brands can be notoriously ephemeral. In the services business “out of sight is out of mind”. In the current situation, reclaiming mind space for Jet Airways in the future is going to be extremely tough. With even a little sense of history, most investors would recollect what happened to Kingfisher Airways back in 2012. Once the last operational flight was grounded, the brand just diminished. Of course, some of the banks to whom these brands were pledged ended up sitting on virtually unsecured loans. One of the reasons bidders have been dropping out of the IBC process is that there is a lack of clarity on three fronts; what the buyer gets, where is the value and who bears the cross?

Exactly a year after Jet Airways was grounded, the Jet brand and the creditors appear to be staring at a bleak future. The way a string of bidders have walked in and out of the process with alarming consistency, it surely looks like hope has been transformed into wishful thinking. One can only hope that a clearer and more positive picture emerges after the COVID-19 has been effectively brought under control!

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