Why Jet is flying low, facing questions from Sebi over results deferment

Jet Airways is facing questions from the Securities and Exchange Board of India for delaying its first quarter results. Aneesh Phadnis looks at the problems plaguing the airline.

The airline was making regular profits and then made Rs 10.4 billion losses in Q4 FY18. What went wrong?

Jet Airways made a net profit of Rs 12.12 billion in FY16, its first annual profit in eight years. A large part of the gains over the last several quarters were driven by non-operational items such as profit from sale and lease of planes, and gains from sale of real estate and a surplus from the spin-off of its loyalty programme.

Its profits started declining as costs began to spike and the contribution from sale and lease-back transactions and real estate development began to diminish. Other income accounted for Rs 6.6 billion in FY18, down from Rs 14.8 billion the previous year. In the fourth quarter of FY18, other income fell 84 per cent to Rs 1.3 billion as the contribution from sale and lease-back and real estate gains was nil.

Rising fuel prices and a weak rupee are pinching all airlines. Why does Jet Airways appear to be suffering more than the others?

Jet’s unit cost (that is, cost incurred for flying a passenger/kilometre) is higher than its listed peers. With industrywide fares (even those close to travel date) remaining low, Jet’s bottom line has been hit more than the others.

Part of the problem that the airline is facing can be traced to legacy issues that go back a decade. This includes the failed acquisition of Air Sahara. Fleet complexity is another challenge. Jet operates a mixed fleet of Boeing 737s, ATR-72s, Airbus A330s and Boeing 777s. (GoAir, Vistara and AirAsia operate single-type fleet while IndiGo and SpiceJet operate two types of planes.) The airline has done a sale and lease-back of its Boeing 737s (and used the profit from those transactions to retire debt) and is now in finalising the lease of its ATRs. But sale and lease-back of 10-12-year-old A330 or Boeing 777 planes it flies to Europe are not easy. A reconfiguration of Boeing 777 planes has been proposed. But such cabin changes cost a lot of money and it is not known whether the airline will pursue it immediately. 

The Air Sahara problem lingers. While it was rebranded JetLite it rarely made a profit, forcing Jet to write off its entire Rs 18 billion equity investment in the airline. There is no cross utilisation of fleet, crew and engineers between Jet and JetLite. Separate ticketing transactions and billings for the two airlines add to backend complexities.

Will Jet run out of cash in 60 days?

The airline management has denied that the airline would shut shop in two months. Chairman Naresh Goyal said the airline would continue to strengthen partnerships, focus on marketing and improve corporate governance. That said, the financial situation remains grim. The airline is said to be losing Rs 50-100 million in operations every day. Banks have so far not agreed to lend more money or reschedule due dates. It has to make repayment of over Rs 30 billion this fiscal year. Default fears loom large. 

Jet has deferred its first-quarter results claiming the management needs more time to finalise accounts. Auditors wanted to make a qualification in the going concern aspect in the accounts but the airline has said the information about auditors pressing the going concern qualification is incorrect.

What is the road ahead?

For now, the airline is trying to renegotiate with its lenders and vendors to reduce its operating cost and finance charges. The top management has taken a 5-25 per cent pay cut. A similar proposal to reduce salaries of pilots and engineers has been put on hold because of resistance and the management is looking at ways to improve productivity. The airline has sought $150 million in debt from Etihad Airways and is said to be planning the sale of its loyalty programme, which it co-owns that airline. Experts believe the airline will have to look at a mix of stake sale, asset sale and sale and lease-back transactions to raise liquidity.