Et Tu, Etihad? As Former White Knight Exits, Jet Has One Foot In Bankruptcy Court

First, the Tatas bailed out. And now, Etihad, Jet Airways’ 24 per cent equity partner, wants to take the parachute mid-air during a financial rescue operation. With pilots demanding to be paid before resuming work on 1 April, and with aircraft lessors seizing planes for non-payment of lease rentals, Jet is well and truly in crash mode.

The problem for the lenders is simple: is it double or quits? Should they send the airline to the bankruptcy court, or inject more money into an airline whose promoter has lost touch with reality? The markets too seem to be living in lala-land, giving the negative net worth airline a current valuation of around Rs 2,490 crore (around 11.15 am, 20 March).

While putting in a goodbye note, Etihad has offered to sell its equity stake (currently valued at around Rs 400 crore, according to The Economic Times) to the banks and also its 51 per cent stake in Jet Privilege, the frequent flyer programme. It additionally wants the bankers to relieve it of the Rs 1,000 crore loan guarantee given to HSBC Dubai when flying conditions were better.

However, if Etihad wants out, it clearly must pay the price. The real equity value of its holding is not Rs 400 crore, but Re 1, given Jet’s Rs 8,000 crore loan outstandings and accumulated losses. The real equity value of its majority holding in Jet Privilege is also far below its previous market value, for this value depends on when (and whether) Jet flies again, and how much of the market share it can recapture after losing it over the last few months to rivals.

As for the HSBC loan exposure, one wonders why Indian bankers ought to help Etihad with a guarantee it unwisely entered on behalf of promoter Naresh Goyal some time ago. A fairer ask would be to exchange the stake in Jet Privilege for being allowed to exit from the loan guarantee.

Etihad’s real exit pickings will be far lower than what its current valuation of shares and holdings in Jet Privilege indicate. It should be happy to get whatever money it can and run.

The two real villains of the piece are promoter Naresh Goyal, who has been clinging on to a dying airline as a mother clings to a sick child. The latter is understandable, but businessmen cannot allow emotion to cloud their judgements. Goyal’s endless efforts to retain a foothold in Jet is one of the prime reasons for the airline’s current plight.

Jet’s bankers, including the State Bank of India, are the other villains. They seem to have learned nothing from the Kingfisher episode, and failed to pull the plug on Jet a year ago, when the writing on the wall was clear after Jet lost market share and plunged headlong into losses. The value salvageable then would have been far higher than it is now, when Jet is a basket case.

Together, promoter pig-headedness and banker myopia are responsible for Jet’s current fall from grace. Etihad, as Jet’s white knight of a few years back, got valuable flying rights out of India, and has been benefited at least a bit from the Jet investment, even though it may now have to exit with serious losses.

The lessons for India Inc are three: promoters cannot expect to run businesses without adequate equity and skin in the game; banks should not be lending endlessly on the basis of a promoter’s ability to swing political support; and when the going is tough, the tough should taking tough calls — whether it is to sell to a stronger party or send a company to the bankruptcy courts.

Both Goyal and his bankers have failed these tests. As for Etihad, it can hold out for a better exit price from the bankers, but its choices are hard too. It can either hope to parachute safely with a lighter cash suitcase, or risk losing the parachute itself.