As the Expression of Interest (EOI) deadline for Jet Airways approaches, rumors are abuzz about renewed interest in the airline. Several stakeholders are still hopeful that a bid comes through.
The Synergy Group and the Hindujas, among others, have shown an interest in buying the airline. Jet Airways, after all, was a prized asset and an airline that flew the Indian skies for over 25 years. It shut down after running out of cash. But what exactly does a buyer get?
A valuable slot and traffic rights portfolio
Any potential bid is essentially built towards capturing the enviable pool of landing and parking slots, and bilateral flying rights Jet Airways has built over the years. These are Jet’s most prized assets and include various prime slots at domestic as well as international airports. These assets have been “temporarily leased” to other airlines through October 2020. A successful bid will ensure these revert back to Jet Airways – at least on paper. But the point remains that the value of these assets accrues from usage and not from grant. Consequently, while these can be leveraged towards rebuilding a market position, especially on the international routes, a deliberate and structured fleet plan is essential.
Two separate AOCs but a fleet of only 12 aircraft
Currently, the fleet size is reduced to 12 aircraft. These include six Boeing 777 on finance lease with one impounded in Amsterdam; 3 Airbus 330 on financial lease; and three owned 737s. Any new buyer has a variety of options to address fleet requirements. Which involves re-inducting grounded aircraft, and sourcing new aircraft to ramp up to flying a much-expanded schedule. The re-inductions may actually be the easier item because, given the 737Max challenge, narrow-body aircraft have seen upward pressure on lease premiums. Sourcing the aircraft from the secondary market also means that the assets cannot be monetised as well.
To regain and retain key prime-time slots at the over-congested metro airports, and valuable bilateral rights to prime destinations such as London, Amsterdam, Paris, Dubai, etc. a minimum fleet requirement has to be funded. Because, without a network and connectivity across it, slots don't quite work.
Interestingly, a buyer also gets two Air Operator Certificates (one for Jet Airways and one for JetLite) and this presents additional opportunities to create value. Via operation and/or sale.
Contingent liabilities where ring-fencing is unclear
The challenge for any buyer taking over Jet includes the contingent liabilities. The airline has dues of more than Rs 8,500 crore to multiple banks not to mention contingent claims of Rs 26,000 crore of which only a third have been admitted. Yet, many a time it is the smaller claims that can end up in court and unless a buyer is indemnified from the airline's legal liabilities, the challenges remain.
Even in the case of indemnification, public interest litigations (PILs) or other proceedings that delay a restart or re-sale of the assets have to be mitigated. This is an environment of constrained liquidity, an overall slowdown in economic growth and consumption, and at a time when the sale of Air India gives the buyer a second option.
The contingent liabilities may indeed be the decisive factor for any potential buyers.
A dedicated workforce and a trusted brand
In addition to a valuable brand, a strong frequent flyer programme and institutional knowledge, one of Jet’s assets that has not quite found the recognition it deserves is its employee base. Jet perhaps has the destination of being one of the few airlines where talent would leave and then return only to be welcomed back. And on the front-lines, in spite of the challenges, ex-employees continue to reminisce about the airline with much pride.
Any new buyer essentially has an advantage in leveraging this aspect. Because there are still many dedicated Jet hands who will rejoin at the first instance.
Further, Jet Airways in its heyday was the first choice for the “high yield” business passenger. While the crisis dented the Jet brand, ironically it still commands the confidence of this category of passengers. Add to it the airline’s frequent flier programme which by the last count had over 200,000 Platinum category members. This status was earned by flyers who had a minimum of 60 flight segments a year to qualify. Jet Airways still owns 49.9 percent of this programme. As such it can be a source of sizeable revenue.
That said, premium travellers demand frequency, schedules and product. Jet delivered on the first two but faltered on the third. In re-starting the airline, investment in product and differentiation of product will be essential. Under new leadership, Jet will have to re-build passengers’ confidence across product, network and service.
Control of board seats and strategy – but clarity required
Finally, any new buyer will also require clarity on the issue of control. This earlier was a stumbling block in Jet Airways’ ability to raise cash. While the promoter stake has been pledged and diluted, the fact remains that currently, Etihad retains a 25 percent stake in Jet Airways, and the erstwhile promoter also retains 24.99 percent of which 20.77 percent has been pledged.
Any new buyer is likely to want control over the strategic direction of the airline and as such the control of board seats and strategy must be clear and unambiguous. Because with any acquisition what the buyer wants is future claims on cash-flow on future claims on traffic. Without clarity on control neither can materialise.
Stakeholders continue to hope that a bidder emerges and Jet Airways once again takes to the skies. But, as speculation abounds and as macro-economic headwinds gain strength, the challenge of attracting a bidder will hinge on the clarity of communication from both ends.
Satyendra Pandey is the former head of strategy at a fast-growing airline. Previously, he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds.
Read his columns here.
First Published: Jan 7, 2020 2:37 PM IST
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