Flying on empty

Reviving Jet Airways is a Herculean task

Jet Airways appears to have become a beneficiary of the election season. Common sense would have dictated that lenders should have taken the indebted airline through the insolvency and bankruptcy process and negotiated a deal with prospective bidders to recoup some of their loans. Instead, concern for the optics of having over 16,000 people looking for jobs just at the start of the seven-phase election, in which high unemployment is a major issue, has prompted the lenders’ consortium, comprising mainly government-owned banks, to opt for a sub-optimal resolution plan, which has seen many changes already. As a result, the airline is in a bizarre situation by any yardstick of standard business practice. It owes banks Rs 8,500 crore and vendors an unspecified amount. Only about seven planes of its original fleet of 120 are operational, most of the airline’s landing slots have been farmed out to other domestic airlines. Its West Asian partner, Etihad, is in the process of revoking the leases on the most valuable of them, at Heathrow, London. In other words, the airline is all but defunct. At this point, the costs of keeping it running probably outweigh the costs of closing it down. And yet, the lenders’ consortium, led by State Bank of India, is considering a proposal to infuse Rs 1,000 crore into the airline immediately to keep it afloat, despite a lack of consensus among banks on emergency funding. The redeeming feature, however, is that the funding will be done through long-term debt instruments, giving the assurance that it is not unaccounted money. But the question is whether lenders are under pressure from the government to keep the airline going. If so, aren’t we back to ‘phone banking’?

The lenders obviously lack confidence in the process, which explains why they disbursed only 5 per cent of the earlier Rs 1,500 crore agreed upon under the banks-led resolution plan announced on March 25. Even this was done only in small tranches, putting the survival of the airline in question. Lenders are now reportedly considering an option that suggests throwing good money after bad because they enjoy higher security on such credit; they get priority in any payout if the airline is revived or liquidated. This logic, however, appears specious because the airline has few assets that can be monetised, and the line-up of prospective bidders so far is unlikely to inspire confidence. At least two of them would have been ineligible under the bankruptcy process. One is promoter Naresh Goyal, who piloted the airline into this free fall and was forced to step down as chairman only last month. The other is Etihad, whose earlier bid includes a request to raise its stake to 49 per cent but without the requirement of an open offer. This is the same airline that drove two European airlines to bankruptcy in 2017: Air Berlin, once Germany’s second-largest operator, and Italy’s Alitalia.

The other major entity interested in the airline is the National Investment and Infrastructure Fund (NIIF), the Government of India’s vehicle to provide infrastructure funding. The airline business does qualify as “infrastructure”, a modification that enabled Vijay Mallya to raise large sums of debt for his defunct Kingfisher Airlines. As conventionally understood, however, the intention of the NIIF was to offer risk-free long-term capital for such critically needed infrastructure as roads and bridges, and so on. It is unclear why a taxpayer-funded institution should bid for a failing private enterprise in a business that caters for less than 1 per cent of the population. Indeed, taxpayers would be entitled to ask why the NIIF did not bid last year for ailing state-owned Air India, which, ceteris paribus, stands as much of a chance of surviving as Jet Airways. Political considerations aside, allowing Jet Airways to close would be a healthy signal to send to banking and promoter communities alike to discourage imprudent lending and management practices.