Cash-strapped Jet Airways likely to gain from JetPrivilege's success

Its annual revenue is merely the equivalent of about 10 days’ income of Jet, but JetPrivilege, the associate firm which runs the frequent flier programme, has emerged as a trusty steed in this time of crisis.

Cash-strapped Jet is finalising a memorandum of understanding with joint venture partner Etihad. According to the deal, Jet is pledging its entire shareholding of 49.9 per cent in JetPrivilege to raise a loan for multiple urgent needs.

The airline has to pay off its lessors (59 planes are grounded due to non-payment), employee salaries, and vendors to stop being grounded. Under the terms of the MoU, the airline is pledging 34.9 per cent of its shares in JetPrivilege to secure an interim loan from bank lenders and from Etihad of Rs 1,500 crore. It is offering the remaining 15 per cent as security for a loan of $140 million from HSBC which should have been paid in full by the end of this month but which looks as though it might be defaulted.  

So why is JetPrivilege so valuable? In 2017-18, the company clocked up revenues of Rs 622 crore but made a net profit of Rs 106 crore. In the same period, Jet made revenues of Rs 24,000 crore but slumped into the red with a stand-alone loss of Rs 768 crore in FY18 after a profit of Rs 1,482 crore in FY17.

The contrast in status can be seen in how the two are valued by investors. Jet, for instance, currently has a market cap of merely Rs 2,679 crore which has been eroding fast. 

JetPrivilege, which is not listed, has received some awesome valuations: in 2017, Onpoint, a global agency that ranks airline loyalty programmes, valued JetPrivilege at $1.1 billion and ranked it 31 in the most valuable airline loyalty programmes globally. Etihad’s loyal programme was ranked 38 with a valuation of only $765 million. 

In October 2018, private equity funds such as TPG and Blackstone which were looking at buying Jet’s stake in JetPrivilege, after an offer from the airline, valued the company at around $900 million — a slight erosion which indicated the seeds of the financial crisis now engulfing Jet. Analysts peg the valuation currently at around Rs 5,000 crore.

Despite the bumpy journey of the airline, JetPrivilege has been cruising smoothly. Set up in 2012 as a fully owned subsidiary of Jet, it first came to rescue of the airline in 2014 when founder-chairman Naresh Goyal decided to rope in Etihad as a partner to ease his financial stress. 

Etihad pumped in $600 million to take a 24 per cent stake in Jet and a 50.1 per cent stake in JetPrivilege at a value of $150 million. An abortive attempt to sell off part of Etihad’s equity was made last year but shelved. Instead, Jet dug into JetPrivilege to raise Rs 250 crore from advance sale of redemption miles to the associate company.

While Jet pays JetPrivilege for accrual of the miles, JetPrivilege pays Jet when they are redeemed. The loyalty programme has soared from 2.6 million members and 72 programme partners in 2013 to over 9.5 million members and more than 144 programme partners by the beginning of 2019. In just one year, through an aggressive campaign, JetPrivilege won over two million new members.

The airline, in its analyst call for the Q3 of FY19, said that membership has been growing at 26 per cent. The number is significant as there are over 300 million active airline loyalty members globally, according to estimates.