Jet’s Goyal Has To Choose: Let Go And Let Company Survive, Or Sink With It

Will airline promoters never learn? Jet Airways, once a market leader in Indian aviation, has never been in rude good health for the last couple of years, and promoter Naresh Goyal ought to have sold his controlling stake a long time ago, when his shares were worth much more than today’s Rs 3,000-and-odd crore. Even this may be an over-valuation.

Today, as his auditors (BSR) reportedly hesitate to declare Jet as a “going concern”, Goyal has deferred the release of his first quarter results, and is thrashing about to raise more equity from investors or cash from asset sales. The auditor may well quit if it is pressured to say that Jet can still stay afloat.

Jet is in deep waters, and an unlikely candidate for survival without a transfer of ownership to stronger hands. A report in The Economic Times notes that the airline has to repay Rs 6,000 crore debts in 2018-19, when its daily losses are around Rs 10 crore and net worth negative at just under Rs 5,000 crore. Its shares should be valued at nothing, and the market capitalisation of over Rs 3,000 crore (around noon on 13 August) represents a triumph of hope rather than reality.

There is talk of Jet raising some money by selling its share of its frequent flyer programme, but the valuation of over Rs 7,000 crore seems too optimistic when the seller is in deep straits. Distress sales fetch distress prices.

The point that promoters of airlines never seem to get is this simple one: given the wafer-thin margins in the business, apart from having a really low-cost model, only those with deep pockets and the willingness to put in additional capital whenever the chips are down, can succeed.

The airline business is easy to get into with minimal initial capital, for you can lease aircraft, hire pilots and ground crew, and pay the landing charges from initial cash flows. As long as cash flows from ticket sales cover your variable costs, you can easily stay afloat. For a while. But the real test comes when fuel costs soar, and the whole cash-flow situation tanks where fares can’t be easily raised. In this scenario, the only promoters who can handle the rough weather are those with deep access to capital. Goyal is not one of them.

This is what happened with Kingfisher, which relied on bank loans to stay afloat when what it needed was more equity. These loans, probably extended unwillingly by some public sector banks under political pressure, worsened Kingfisher’s operating losses as it was not earning enough to cover its interest and variable costs. And when the going got tough on repayments, Vijay Mallya had to flee the country.

For Vijay Mallya, Kingfisher was like a trophy spouse, that went with his flashy lifestyle. He invested in sinking Air Deccan on the assumption that scale will give his viability. It did not.

Goyal did not make the same mistake, of treating Jet like a trophy spouse to flaunt at parties, but his business model was simply not good enough, and his ability to raise capital was weak given his decision to keep controlling interest when Etihad picked up a minority stake after giving him life-saving capital some years ago.

He ought to have given up control in 2015; now he will be compelled to let go of his baby on worse terms. He has two options: hang on and let his airline sink further, or give up control and save it. He owns just over half the equity right now, and if he offers 49 per cent to a foreign partner and effective control, he can still salvage Jet. He simply cannot expect to run Jet with the kind of equity he can pump in on his own. He has to depend on others, and this means he has to let go.

He only has to look at Mallya’s plight and decide.