Jet Airways: No wind beneath its wings

While the cleansing of Jet Airways' balance sheet may be over, it is unlikely that the company's turning profitable anytime soon

To get an idea of how big the loss posted by Jet Airways is, consider this: a consolidated loss of Rs 4,130 crore in FY14 is almost the same as the losses posted by the company over the last six years. For seven straight years and five quarters in a row, Jet Airways has been posting losses. But the March 2014 quarter was way beyond the wildest dream of the few analysts still covering the company. 

A Bloomberg survey had estimated the company to post a loss of Rs 150 crore in Q4 against which the company declared a loss of Rs 2,153 crore. The March quarter's loss was more than the money invested by Etihad (Rs 2,058 crore) to pick up a 24 per cent stake in the company.

To be fair to Jet Airways most of the losses during the March quarter were on account of cleaning up its books. The company provided Rs 700 crore for a fall in value of JetLite and a one-time maintenance write-off of Rs 783.10 crore. Despite these write-offs a loss of Rs 670 crore for the March quarter is much higher than the Rs 150 crore that analysts had expected.

The March quarter which is generally a lean quarter for the sector saw heavy discounts offered by various players in the sector. To make matters worse, aviation turbine fuel prices increased by over 10 per cent.

Etihad's entry in the company both as a financial and strategic partner has done little to change the ground realities. A report says that Jet Airways employees are upset over the delay in payment of salaries. Bankers continue to remain a worried lot as operating losses are more than twice the interest outgo. Infusion of capital from Etihad and a cheaper line of credit has failed to bring down the company's debt level substantially, which during the quarter has in fact gone up.

A failing business model needs a surgical fix, which seems to be what Jet Airways claims to be doing. In a press note the company has said that it has approved a three-year business plan which would implement 'major restructuring' of its business. The airline said it would reconfigure its Boeing fleet and optimise seat count on wide-body planes. But it would be some time before the company is back in black. Chairman Naresh Goyal in a statement said, "There can be no short-term solutions. The changes required will take time to implement."

But from a shareholder's point of view, this restructuring is of prime importance. Jet Airways, after a gap of five months, has appointed a chief executive Cramer Ball who was responsible for the turnaround of Air Seychelles, another company where Etihad has invested. By this appointment Etihad will now have a firm hold on the operations of the company. Jet Airways has already seen the exit of five senior employees after Etihad picked up stake in the company.

While Ball is a highly respected aviation professional, his mandate is to protect Etihad's interest in the company. The transformation in Jet Airways has come at a time when the company was going through what can be called as an identity crisis. The company is in a conflict of whether to feed its own network or funnel traffic into Etihad’s network. Jet has already cut nearly 400 flights and diverted it to feed Etihad's flights.

Kapil Kaul, CEO of CAPA Centre for Aviation, has been quoted in an article in Forbes saying that Etihad's investment is surely not about turning around Jet Airways. CAPA, according to the article, describes Etihad's model as an "Egocentric Radial" alliance - “egocentric” because it is driven by the individual airline for strategic reasons and “radial” because one airline is at the hub of the traffic, being fed by a number of other carriers represented as tubes carrying passengers to the hub. It's like a hub and spoke model, where various strategic alliances serve only one purpose, feeding traffic to the mother airline.

Bharat Bhise, president and CEO of New York based Bravia Capital Partners, a global investor in the transportation industry, has also been quoted in the Forbes article as saying "Etihad's focus is entirely on the India-Abu Dhabi sectors and picking up connecting passengers for their network. They probably wouldn't care if Jet is profitable as long as they don't have to fund ongoing cash losses."

That being the case, the restructuring is likely to tilt towards diverting more traffic to feed Etihad. Rather than flying on profitable routes to the US and Europe (Jet makes more money on these routes), the company may end up sending flights to Abu Dhabi from where Etihad will take charge. Importantly, these changes will be carried out at a time when competition is expected to intensify further with two new airlines lining up to take off.

While the cleansing of Jet Airways' balance sheet may be over, and the company might not post such huge losses, it is unlikely that it’s turning profitable anytime soon.