The merger of loss-making JetLite with Jet Airways is part of the airline’s game plan to exit the low-cost segment. The merger would lead to operational synergies and focused operations. The airline’s board had approved the merger on Wednesday.
“Jet exited low-cost segment some months ago and this merger fits in with that strategy,” says Dhiraj Mathur, partner (aerospace and defence) at PwC India.
Jet acquired Air Sahara in 2007 and re-branded it as JetLite to compete with low-cost airlines. The subsidiary airline underwent re-branding once again in 2012 and was renamed Jet Konnect. However, these changes did not improve the company’s performance. JetLite made a loss of Rs 287 crore in FY15. For the past two years, Jet has had to write off Rs 1,872 crore, which included the value of its equity investment in JetLite (Rs 1,645 crore) and Rs 227 crore write-off towards loans granted to the subsidiary. Jet aims to turn profitable by FY17.
Source: Jet Airways, DGCA
The merger will result in more focused operational efforts realising synergies in terms of compliance, governance, administration and cost, a Jet spokesperson added. The merger will further strengthen Jet’s efforts in providing a consistent, single brand product and service offering across the network, it said.
While the airline says it will continue to hold two operating permits even after the merger, it might not be able to routinely cross-utilise its fleet along with pilots and crew for operations without securing approvals.
JetLite has eight leased Boeing 737s, which are flown on domestic routes, compared with 19 planes three years ago. Its market share, too, has dipped to three per cent.
The airline is entirely dependent on Jet for funding and in the FY15 audit report, auditors observed that the “going concern assumption for the company (JetLite) is dependent on the ability of the holding company (Jet) to raise adequate funds.” As on March-end, Jet had extended loans of Rs 2,300 crore to JetLite and repayable by March 2020.
“The merger was long overdue. JetLite’s acquisition has been the biggest strategic mistake by Jet promoter Naresh Goyal and it has hurt the group significantly, especially on financial reasons. Jet has never recovered after this acquisition. I do not rule out the possibility of JetLite permit being used for a stand-alone low-cost airline in future if such a need arises. Jet’ domestic operations remain challenged and is hurting overall turnaround. I do not see turnaround feasible without a viable domestic business,” stated Kapil Kaul of Centre for Asia Pacific Aviation.
The airline had hoped the re-branding of JetLite as Konnect would help improve its yields and attract a pie of premium traffic. Along with rebranding, the airline reconfigured JetLite planes to add eight business class seats. However, the exercise did not prove successful and last year, the airline rolled out a single Jet brand across both the fleets.
Sources say the management has been mulling over a merger for the past few years but was unable to take a decision because of issues pertaining to seniority of pilots in a merged airline and continued litigation with the Sahara group over the acquisition price. The matter is still pending in the Supreme Court.