Jet Airways might need to raise money again

The company is not earning enough to pay for its aircraft lease rentals and interest payments

Jet Airways’ stocks saw some volatility after Bloomberg TV reported that Etihad, a 24 per cent partner in the company, has approached the Indian aviation ministry for permission to raise its stake. The report goes on to claim that the government is not keen on giving such an approval. The Etihad management has reportedly denied such a move. 

Irrespective of what has been reported and what Etihad says, Jet Airways is not yet out of the woods and will need to tap the financial muscle of Etihad, either in the form of equity or soft loans where the foreign partner uses its strong balance sheet to arrange funds. 

For the quarter ended March 2015, Jet Airways reported a loss of Rs 1,729 crore. Though the loss has been on account of an impairment charge of Rs 1,172 crore on its investment in JetLite, the details of other provisioning is disturbing. Jet Airways provided Rs 190 crore for a compounding fee on late payment of tax deducted at source (TDS), Rs 84.5 crore for salary arrears and Rs 198.4 crore for maintenance charges. If a company cannot pay its employee salary in full, there is reason for concern. 

HSBC in its report has mentioned that Jet Airways’ persistent lack of non-fuel cost control will slow the pace of earnings recovery even in a low fuel price environment. The research firm has downgraded the company to “Hold”. Jet Airways has a negative net worth of Rs 6,324.8 crore and borrowings of Rs 10,251.6 crore. The company made a loss of Rs 2,101.4 crore in FY15.

Jet Airways is rapidly losing ground in the domestic market. The combined market share of Jet Airways and JetLite has fallen from 24.1 per cent in January 2015 to 21.5 per cent in May 2015. Low cost carriers (LCC) like Indigo and SpiceJet have taken away Jet’s market share and now control 51 per cent between the two as compared to 45.8 per cent at the start of the year. LCCs now account for almost two-thirds of the domestic market which is only expected to increase going forward. 

SpiceJet with a change in management has already turned around. Indigo, SpiceJet and AirAsia are reasonably capitalised to fight the rate war in the Indian market. GoAir with its new fleet might face some pressure, but it will be Air India and Jet Airways which will be conceding market share to these LCCs. 

Etihad’s investment in Jet Airways has brought some operational benefit but this has been at the cost of market share, especially a deliberate move to reduce JetLite flights. Further, Etihad is keen on Jet Airways’ international operation rather than the domestic business. James Hogan, CEO of Etihad had said that one of the main reasons for the investment in Jet Airways is to corner a large share of 40 million Indians travelling abroad every year. Etihad is using Jet Airways to fill its own seats and has increased the frequency of its flights to India, while at the same time Jet Airways is picking up more passengers from new cities in India to Abu Dhabi, which is the transport hub for Etihad. 

Having tasted success, Etihad now needs Jet Airways more than it needed it earlier. But if the government is not keen on allowing Etihad to increase its stake, Jet Airways will have to approach the market unless it stops bleeding. The company is not earning enough to pay for its aircraft lease rentals, let alone its interest payment. In FY15 the company posted an operating profit of Rs 1,843 crore but its lease rentals (which is not included in operating expense) amounted to Rs 1,959 crore. Interest payment of Rs 884 crore was largely met thanks to a Rs 707.3 crore of other income. 

With the LCCs recapitalised and rejuvenated, a price war is imminent. Jet Airways will need money fast, if not from Etihad then from somewhere else.