Jet's new flight path

Banks gave too long a rope to promoters

Lenders to Jet Airways have finally decided to act tough by asking promoter Naresh Goyal and three of his nominees to step down from the board immediately so that they have no role in running the airline. The lenders have agreed to put in Rs 1,200 crore of interim financing, which would make them the majority equity holder after Etihad decided to pull out. The move by lenders is in tune with a framework outlined by the Reserve Bank of India (RBI) last year. The procedure, applicable for companies with a negative net worth, is called bank-led provisional resolution plan. The only other option the lenders had was to take Jet to the National Company Law Tribunal, but it was obvious that they wanted to avoid that route, as Jet's failure meant that banks would have to take a full hit on their loans as the liquidation value might not be much, unless a very high value is attached to the brand. It would have been bad optics too because of the potential job losses and possible surge in air fares, giving an opportunity to a vocal opposition to attack the government for another failure after the Air India privatisation fiasco.

But there is no doubt that the lenders gave too long a rope to Mr Goyal, as the writing on the wall was clear for the past 12-18 months. The airline was in the news for the last several months for all the wrong reasons: A cash crunch, mounting losses, unpaid salaries, diminishing market share, and governance issues. Jet needed urgent recapitalisation to survive and the promoters just did not have the money. It was also open knowledge that Etihad and the promoters were not seeing eye to eye after Mr Goyal tied up with KLM and Air France to create an alternative alliance for Europe, which conflicted with Etihad. The foreign carrier gave enough indication that it would not put any more cash or pledge its shares to bail out the airline until Mr Goyal was out of the cockpit. Finally, Mr Goyal’s refusal to limit his holding in Jet Airways to 22 per cent and exit active management reportedly scuppered the deal with Etihad. Lenders, it seems, preferred to live on hope for a long time.

Now that the promoters are set to be on their way out, lenders have their task cut out. They neither have the expertise to run the airline, nor can they own a majority stake for any length of time in a company that operates in a profoundly risky sector such as aviation. That means banks will have to appoint a new board, which will oversee the interim phase of keeping the airline flying and look for a new strategic investor who has the cash and the management depth to turn around Jet. That itself is a tremendous task as the aviation industry is facing turbulent weather. With hyper competition between six players and growing capacity additions (IndiGo is adding nine planes a month and all airlines will add 90 more planes in FY20), yields are getting severely dented. According to CAPA, while passenger growth will be robust at 14-16 per cent (because of low average fares) in FY20, the consolidated losses of the airlines are expected to increase. Banks have to act before time runs out.