Jet In 2018 Is No Better Than Kingfisher In 2011; Writing On The Wall For Naresh Goyal Is Clear

With every passing day, Jet Airways’ ability to remain in the Indian airline industry as a standalone entity diminishes. Naresh Goyal, who is majority owner of the airline right now, should focus on exiting the business, or merging it with a stronger entity, rather than trying to rescue it.

The airline, which has suffered two massive and consecutive quarterly losses of Rs 1,036 crore and Rs 1,323 crore in the March and June quarters of this calendar, had promised to raise money by selling its 49 per cent stake in its loyalty programme, Jet Privilege, raising a potential $400 million. But so far there is no whiff of the money.

The Jet privilege loyalty programme was valued at around $900 million some time ago, and Goyal’s 49 per cent stake in it should theoretically be valued at just under half that. But valuations do not turn into reality if you are a desperate seller; and moreover, they may be worth even less if buyers doubt your ability to remain in the business. If Jet goes under, its loyalty programme is worth almost nothing.

An airline’s loyalty list derives its valuation from two basic sources: one is the value embedded in the data itself, which gives you access to high-value customers; the bigger store of value is the likelihood that those in the loyalty programme yield higher margins (read here for some insights). Since you earn higher loyalty points from paying higher fares (and not discounted fares), loyalty customers are essentially suckers who pay more for tickets, and the miles redeemed are also at higher than discounted prices. Usually, these programmes work best when you travel on corporate account, and the company pays for the tickets and you get the free flying miles. Companies sometimes don’t mind indulging their best employees by paying slightly higher fares, and letting the latter benefit from the free tickets that follow after a certain number of miles are accumulated.

It is interesting that IndiGo, the only clearly viable airline in India today, offers no loyalty programme, and its fares are not any lower than those of Jet or Air India or Go Air or SpiceJet. Today, most airline tickets are bought online, and here price is the overwhelming factor after time and date.

If IndiGo can engender loyalty from customers merely by staying reasonably punctual most of the time, and its margins are best due to its extreme focus on costs – fuel-efficient aircraft, high aircraft utilisation time, etc – one wonders how a Jet can be competitive. It wasn’t particularly competitive even in 2011, when Kingfisher was going down the tubes.

A Mint story yesterday (10 October) notes that even though the Jet Privilege stake sale has been bandied about for more than a month-and-a-half now, neither of the two potential buyers – Blackstone or TPG Group – is ready to make a final offer and infuse funds into Jet.

The reason is obviously their worry about whether Jet will remain airworthy in future, even after the loyalty stake sale. Goyal promised Rs 2,000 crore in cost cuts after announcing his June quarter quarterly losses, but cost-cutting, even though vital for cash flows in the short run, can never a viable strategy in the medium term. For a turnaround, the basic business needs to be able to generate enough margins for a ploughback to grow the business. In this context, a Goyal thrashing about in the private equity market to sell his loyalty programme merely to keep paying his lenders does not inspire confidence. There is no talk of a net increase in investment in the business, and as long as this element in the turnaround is missing, we can assume the Jet is sinking deeper into trouble.

As at the end of June 2018, Jet’s borrowings are in excess of Rs 9,430 crore, according to a report in The Times of India, and this means Jet is today almost exactly where Kingfisher was in 2011. Actually, it is in a worse situation for at that time IndiGo wasn’t skimming the scream of the business and eating everybody’s lunch.

Jet Airways net worth stands fully eroded, which means Goyal might be better off selling his airline for Re 1 (or whatever anybody is willing to pay for it) than trying to save it. In fact, if he is a smart businessman, he should sell the airline and keep the Jet Privilege stake intact.

Recent market share numbers indicate that the Indian aviation sector has become a monopoly of IndiGo, with six other players, Jet included, left struggling for viable market shares.

In July 2018, IndiGo’s market share went up from 38.7 per cent to 42.1 per cent, while its three main competitors – Jet, SpiceJet and Air India – lost shares. Jet crashed from 18.2 per cent to 15.1 per cent, Air India from 13.5 per cent to 12.4 per cent and SpiceJet from 14.2 per cent to 12.3 per cent. The two small gainers were GoAir (up from 7.8 per cent to 8.9 per cent) and the two Tata joint ventures (AirAsia and Vistara) combined, which rose from 7.2 per cent to 8.7 per cent. In November 2011, as Kingfisher was cutting costs and services to stay afloat, it slipped from No 3 to No 5, with market share dipping to 14 per cent - not very far from where Jet is today.

Just as the entry of Reliance Jio saw the rapid exit of five major players (Tata Tele, Reliance Communications, Aircel, Telenor, and Idea, which merged into Vodafone) in less than two years, the Indian airline industry is badly in need of consolidation.

At least three of the seven players need to exit the business, and Jet should be candidate No 1. Its chances of survival as a standalone entity are not any better than Kingfisher’s in 2011.

Time for Goyal to bite the bullet.