Pricing uptick, fund infusion to keep Jet Airways flying for six months

According to Jet Airways, the macro situation is turning in its favour both on the cost and yield fronts

Interim credit facilities as part of the Rs 8,500 crore bank-led provisional resolution plan for Jet Airways are expected to help the airline pay its creditors and keep it operational for six months.

Analysts say the company needs to clear its payables, pegged at Rs 2,000-2,500 crore, including those to aircraft lessors, oil companies, airports, salaries, and near-term debt.

Once that is done, with additional credit they will have a lifeline for six months, says an analyst at a domestic brokerage.

The airline, which posted losses for the fourth consecutive quarter, is burning cash at Rs 500-600 crore per quarter. If the December quarter cash burn is taken as a benchmark, the airline will need more than Rs 2,000 crore annually. The positive from the airline point of view is that the macro situation is turning in its favour both on the cost and yield fronts. 

“Yields are expected to increase 15 per cent in February and March. Jet Airways has rationalised capacity and IndiGo is cancelling flights because of pilot shortage. The runway closure in Mumbai too has led to an increase in fares,” said an aviation industry source. Network restructuring, including closing unprofitable routes and redeploying capacity in Mumbai and Delhi, is expected to yield gains. 

However, the airline will continue to face challenges on West Asian routes, where demand has slowed and rivals IndiGo and SpiceJet are adding flights. If the positive domestic trends sustain, Jet will break even by the end of FY20 on the outside, says an analyst.

Jet posted a consolidated loss of Rs 732 crore in Q3 FY19 while on a nine-month basis it made a loss of Rs 3,208 crore and has a negative net worth of Rs 10,370 crore. The reason it needs additional infusion is not just the cash burn but also market share loss to peers such as IndiGo and SpiceJet, which are expanding.

In the December quarter, the airline’s capacity declined 2.6 per cent and passengers flown reduced 6.9 per cent on a year-on-year basis in Q3 FY19. This led to a 13.4 per cent increase in unit cost because the airline had to meet fixed costs like lease rent and staff salaries while it grounded planes and reduced flights.

The airline was forced to ground four planes earlier this month because it defaulted on lease payments. Faced with a cash crunch it is returning eight of its Boeing 737 planes to lessor GECAS ahead of lease expiry and new deliveries have been put on hold. Jet had ordered 225 Boeing 737s and has inducted five of them. Last October it had indicated it would induct six more planes by March this year. The airline was expected to receive two of them by December but inductions have been delayed.

The airline has 123 planes, 17 of which are owned. Deputy Chief Financial Officer Amit Agarwal on Friday said the airline had found potential buyers for sale and sale leaseback of the planes to raise cash.

The airline plans to raise Rs 2,500 crore through share sale while lenders plan to convert Rs 800-1,000 crore of its debt into equity. As of the end of December, Jet had a gross debt of Rs 7,654 crore, including an aircraft loan of Rs 1,700 crore. The airline is discussing restructuring a portion of debt, which would result in lower interest rates and an extended tenure.

In its post-result conference call on Friday, the airline management said it had not curtailed growth ambitions or given up a single airport slot. Capacity expansion will, however, depend upon a timely infusion of funds.

REVIVAL STRATEGY

• Jet Airways seeks to bridge funding gap of Rs 8,500 crore through equity infusion, debt and sale and sale and lease back of planes
• The airline requires immediate funding of Rs 500-1,000 crore, which will be raised via bank debt
• Higher fares and network restructuring to boost financial results
• Jet owns 17 planes, and aircraft loans account for Rs 1,700 crore. Firm says it has found potential buyers for planes