The Picasso connection to the Jet Airways crisis

The cubist movement in the early 20^th century focused on representing the same subject through different perspectives at a point of time and also across time. The most famous artist who embodied this was Picasso. In cubism, objects are depicted from multiple viewpoints at the same time. The objects are abstracted and this not only forces the viewer to think but also forces the viewer understand the context in much greater detail. It may be just the kind of thinking required for the Jet Airways situation.

With the banks failing to agree on a Rs 1,500-crore cash infusion into Jet Airways, the airline is staring at an imminent shutdown. Multiple stakeholders are bound to be impacted but there is no consensus. This stems from the fact that each side has a unique viewpoint of the situation. Unfortunately, there doesn’t seem to be any party that can synthesize these contrasting and contradictory viewpoints and guide the situation towards an outcome. What are these viewpoints?

In a situation similar to the one faced by Jet Airways, it is crucial for banks to collateralise their loans. But the existing debt levels which are now estimated well in excess of the Rs 8,000 crore and growing, and fledgeling cash-flows make collateralisation very difficult.

For banks, this poses a unique problem. Because in such a situation, failing a turnaround or sale of the business, the bank loses all capital on such loans. A debt to equity conversion only delivers returns if the equity stake can be diluted at a value that at the very least recovers the entire debt given by the banks. In the current situation, this seems a distant dream.

Were the banks to go ahead and make the loans anyway, it would have the unintended consequence that they are extending credit to a weak firm at a cost of borrowing that is lower than that extended to the strong firms. Effects on valuation, capital deployment and recapitalisation are negative as most of the capital will be used toward continuing operations and not growth.

With the airline kept afloat this way, there are impacts to pricing power, capacity utilisation and borrowing rates – which in turn affect the ability of the airline to generate sufficient cash flows to service the very debt that was provided.

And thus the reluctance of the banks to lend.

Jet Airways is flying a skeletal fleet of 7 aircraft, down from 119 just a few months ago. Several lessors have asked the aircraft to be de-registered.

The immediate challenge for Jet Airways is to generate cash. And this is done mainly via “forward bookings”. That is, tickets that are purchased in advance by passengers. As the bookings come in, the airline receives cash and the “service” of flying a passenger from one city to another is rendered at a later date (think of the last time you flew and how many days beforehand the tickets were purchased). This flow of advance bookings is critical to the working capital of the airline.

With only 7 planes flying, even if the airline flies each aircraft at 100 percent occupancy and prices in line with the market (or even higher), the cash flow is not enough to sustain the entire operation (including mounting payables). Thus, the airline absolutely needs a cash-infusion to sustain operations.

To be fair, Jet has indeed looked at any and all methods of conserving cash. The delayed payment to lessors, delayed payment to banks and even delayed payment to staff are proof of the same. Yet, what may have started as “managed measures” are now outright defaults. And ironically the measures on cash-conservation, which would be key to convincing lenders have had the direct opposite effect. Perhaps best summed up in this quote by Venture Capitalist Peter Theil who says:

For banks to lend and invest in the airline, there must be clarity that the airline will be in a state where it is generating cash to repay the loans with interest. As of now, there is no clarity on the plan and thus the SBI insistence of wanting to wait until a bidder is shortlisted from the EOI stage.

The 16,000+ employees at Jet Airways have had salaries pending in various degrees (ranging from a few weeks to a few months). Yet in a testament to their dedication and also the narrative that funding was imminent they have continued to show-up to work. The pilots union did call for a walk-out on April 15 but that didn’t quite have the desired impact. The walk-out was called off.

Employee protests are growing, answers are being demanded and letters have even been written to the Prime Minister’s office asking for intervention. And if this wasn’t bad enough, the memory of the failure of Kingfisher Airlines and parallels of pending salaries which were never paid are exacerbating the situation.

If the funding is to come through, it is likely that the bank will give it in tranches. A figure of Rs 20 crore was floating around but even if one doubles or triples, it is being assumed that the first claim on cash-flow will be the salaries. This may not quite be the case.

For banks, any fund infusion would likely have qualifiers around the uses of funds. It is also the case that drip feeding the fund-infusion will not help, yet if the entire amount is given in one-go, the airline will be faced with a challenging situation on prioritizing payables and where salaries rank in that structure. And with information flow coupled with the power of social media, management will be stuck between a rock and a hard place.

The employees’ situation requires intense engagement and communication which in the current scenario may at best quell the anger and distrust for a very short time.

– Barack ObamaFor the policymakers, the situation at Jet poses a unique challenge. If policymakers intervene, they not only risk the ire of bankers, industrialists and competitor airlines but also set a precedent for intervention in such situations. And to be sure there are other airlines that are facing challenges. In the backdrop, there is also the failed privatization bid for Air India and the decision on the future of the national carrier. Add to that the ongoing election where any decision to intervene can be used to shape the narrative in a very different form than the intention of saving jobs and curbing the systemic impacts to the entire aviation sector.

On the other hand, if policymakers don’t intervene and let the market decide, it is likely that the airline will shut down and the loss of 16,000+ jobs will be remembered for years to come. The 8000+ crores of debt will be written off and lending to the sector will completely dry up (lending to airlines is significantly constrained at the current time). Investors are already wary of the Indian airlines and an airline shutdown only makes this worse.

Additionally, any nudge to the banks towards making the loans and one immediately faces criticism on interfering with the autonomy of banks. Funding the airline via any other method will immediately give rise to a host of questions and accusations. And with the election on-going and the 24-hour news cycle hungry for content, answering such accusations is akin to attempting to fix the fire-truck on the way to fight the fire.

And thus the endless meetings with very few direct engagements and assurances of folks being “directed” and of steps being taken to “assure” the flying public.

A most challenging situation from a policymaker's perspective.

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When one looks at a Picasso painting for the first time, the first reaction is always one of shock and astonishment. Yet in a strange way, one is drawn back to the art-work. The multiple perspectives that are abstracted in time and across time are tough to comprehend. But it has the exact impact that art is meant to have: it forces one to think, to contextualize, to understand. And therein lies the beauty of the artform.

With five EOIs submitted and being evaluated, even once a bidder is shortlisted, all stakeholders will essentially have to come together to agree on a way forward. Drawing from Picasso, there is an urgent need for all stakeholders to see the situation from multiple perspectives. And to think, to contextualize, to understand and to make mutually agreed concessions.

That, in the end, may be the only way to save the airline.