The crash of Jet Airways shares on Thursday, 18 April, by 33 per cent, from Rs 241 to Rs 163 (or thereabouts), is one small signal that investors are finally seeing reality. But they must still be smoking some strong stuff, for even this valuation for an airline that suspended operations this week, and where new buyers are talking of an 80 per cent haircut for banks, is simply way too high.

For a comparison, consider where SpiceJet’s shares were quoting in 2014, when the airline hit the skids. The share prices hit lows of around Rs 12, and it was only after the airline scripted a turnaround under Ajay Singh that the shares started really reviving. And remember, SpiceJet was still flying then while Jet today is not.

So, what explains the high prices for a non-operational airline, when there is not a snowball’s chance in hell that is can be revived quickly?

Two reasons explain this reluctance of Jet’s shareholders to let go.

Until the airline suspended operations on the midnight of Wednesday-Thursday, its investors were expecting Naresh Goyal to spring a surprise (or expected a miracle) by getting banks to somehow fund the bankrupt airline. They probably based their hopes on Goyal’s past ability to swing political support behind him, either by blocking potential competitors, or by getting bankers to agree to an ill-deserved bailout. But this is not politically feasible anymore, and bankers are not willing to throw good money after bad. The Narendra Modi blow to cronyism may still not be complete, but political pull does not influence aviation policy any more. If lenders have still not pulled the plug on Jet, it’s merely because the government does not want Jet to formally close down in the midst of an election campaign.

The second reason is plain and simple loss aversion. Psychology studies tell us that human beings are more keen to avert losses than making gains. So, if selling Jet shares entailed a huge loss for investors, they simply failed to sell. Booking an actual loss seems worse than incurring an even greater loss later. They failed to see a simple reality, that an airline with negative net worth is not going to be comfortably funded by banks again without shareholders taking a huge haircut themselves.

The only thing for shareholders to do is sell before the share price crashes out further. It is worth noting that under a bank rescue plan that was being discussed before Jet suspended operations, the lenders were to become majority owners by converting some of their debt to equity at a nominal share price of Re 1.

Jet investors should get out while they still can. No new buyer is going to pay a premium for rescuing Jet. Nor will the buyers have any need to mollify minority shareholders.

Aviation Policy

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