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Published on 10/01/2019 8:43:27 AM | Source: HT Media

Jet Airways needs an overhaul, not just debt restructuring

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Lenders have proposed a turnaround plan for Jet Airways (India) Ltd, news reports suggest. According to a Mint report, local lenders to the troubled airline have proposed a $900 million resolution plan, comprising fresh equity infusion and restructuring of $450 million of its loans. Business Standard reported that State Bank of India Ltd could possibly consider converting its debt into equity.

Sure, conversion of debt to equity will bring some relief on interest costs, although it remains to be seen how much equity dilution that may entail. While interest costs stood at a substantial ₹480 crore for the half-year ended September, the airline’s pre-tax loss came in at ₹2,620 crore.

Clearly, these measures are no panacea and appear more like a temporary fix. Jet Airways requires a major overhaul. It needs a deep-pocketed strategic investor to turn it around. The resolution plan will only make sense if it helps dress up the airline for an eventual sale. In that regard, talks of reducing the stake and control of existing promoters may help, since any strategic investor would want a say in the management of the airline.

The developments come at a time when even the best airlines are choking. Jet Airways, of course, is relatively in a more delicate situation, made worse by its stretched balance sheet. As on 30 September, its negative net worth had increased further and its net debt stood at ₹8,052 crore.

The outlook on yields (or pricing) is bleak given the capacity coming on stream, which needs to be filled. Therefore, pricing pressures are likely to continue.

Sure, lower ATF (aviation turbine fuel) prices will help. But who’s to say low fuel price conditions will last, especially when crude oil prices are notoriously unpredictable. In any case, for Jet Airways, the current oil prices aren’t enough to bring it back to profitability.

According to Indian Oil Corp. Ltd’s website, starting this month, ATF prices in the four metros will average at ₹59.66 a litre, a 20% cut from the December quarter. ATF prices were at similar levels (₹61.75 a litre) in the quarter ended March 2018. It’s worth noting here that Jet Airways’ spreads (RASK less CASK) stood at a negative ₹0.51 in the March 2018 quarter.

RASK is revenue per available seat km, and CASK is costs per available seat km. Both are unit measurements for airlines.

In short, there is little relief in sight for Jet Airways’ investors in the near future unless, as mentioned earlier, a strategic buyer with deep pockets emerges and saves the day.