Jet Airways’ revival plan is facing heavy headwinds. But the real turbulence will start once airborne. – The Economic Times

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SynopsisDespite all the hurdles it faces, an airline with a cleaned-up balance sheet will be more attractive to foreign investors in the short-term over the likes of SpiceJet. Once it takes off, Jet Airways also has the potential to give more competition to an already-dominant IndiGo . But first, much depends on how its incoming promoters manage to wade through the current proceedings.

“It’s better to be on the ground wishing you were in the air than be in the air wishing you were on the ground — unknown.

The above saying, quite popular in aviation circles, encapsulates the plight of those trying to revive dead airlines. It’s the same story that plays over again and again, irrespective of the place and time. It’s a story about birth, death, and the hope for resurrection.

The year was 2001.

Five years since the grounding of ModiLuft, London-based non-resident Indian businessman Bhulo Kansagra had cobbled together INR125 crore to infuse a fresh lease of life into the Delhi-based airline that was a joint venture between industrialist SK Modi and Lufthansa.

It was a tall order.

The list of creditors to be paid off was a long one while the grounded airline’s slots had been taken over by rivals such as Jet AirwaysAir India, and Air Sahara. Aircraft lessors had confiscated ModiLuft’s planes and there were many lawsuits against the airline. Any measure to revive it required the consent of the majority of its employees.

And as Kansagra and his team started trying to open the knots one by one, they only grew in complexity. For example, while Indian Oil Corporation Ltd and Hindustan Petroleum Corporation Ltd agreed to settle the fuel bill overdue for INR15 crore in early 2001, Bharat Petroleum Corporation Ltd (BPCL) declined the INR6 crore offered to it.

“Some BPCL officials were raided and interrogated by the Central Bureau of Investigations as the cheques given by ModiLuft had bounced and reporting them took time in those days. So they [BPCL] were adamant and wanted to see ModiLuft officials behind the bars,” a person who was part of the resolution process recalls.

An airline needs a no-objection certificate from all its key creditors, in the absence of which it will not get the Air Operator’s Permit (AOP) from the aviation regulator, the Directorate General of Civil Aviation (DGCA).

“One day, it looked very bright, and the other, very gloomy. It was very, very frustrating,” the official adds.

Then came the final blow in the form of the 9/11 terrorist attacks in the US, following which air travel demand dipped for months due to fear. Consequently, the hope that ModiLuft would take off began to die down while the funds raised by Kansagra slowly started burning without yielding any results.

Almost a decade later, a similar story is playing out in India’s aviation industry. It once again proves that reviving a dead airline is like giving wings to an elephant and expecting it to fly — ask the folks at Jet Airways who are toiling to get the grounded airline back in the skies.

While the proceedings under the new bankruptcy laws have already overshot the prescribed timelines, conversations with more than a dozen executives and government officials reveal that Jet’s rivals, badly bruised by the pandemic shock, may be doing everything to delay the defunct airline’s take-off. According to them, even if the airline manages to go airborne, the tough competition will create high turbulence in Jet’s second innings.

The indefinite delay in take-off
A resolution plan submitted in 2020 by London-based Kalrock Capital and Dubai-based businessman Murari Lal Jalan that entails pumping in around INR866 crore into the airline was approved by Jet’s lenders in October 2020. However, approval of the same from the National Company Law Tribunal (NCLT) has been awaited since then.

While the law mandates that the corporate insolvency resolution process (CIRP) should be completed within 330 days of its commencement, in the case of Jet Airways, the process has already crossed 530 days and there was no further hearing at the NCLT between October last year and early February 2021. This is despite the tribunal itself classifying Jet’s case as one of national importance.

“What we have seen is that there has been at least some engagement in other cases of importance, but here it keeps getting adjourned,” says a person who tracks the airline closely, but did not want to be named. “The first hearing finally happened on February 10, 2021. But that was to consider allowing access to Jet’s employees to review the resolution plan. The resolution plan approval is expected to be heard by the NCLT for the first time on February 22,” he adds. Even on February 10,2021, Jet’s case was listed way lower (at number 25) at the NCLT, making several of its remaining 4,000 employees extremely anxious.

Interestingly, this delay is happening at a time when the aviation ministry is trying to sell state-owned Air India, for which at least three players including the Tata Group, an Air India employee consortium, and Ruia Group have expressed interest. According to a former airline CEO who wished not to be named, Jet’s revival could hinder the sale of its arch-rival Air India, which the government is keen to project as its achievement alongside its drive to privatise state-owned banks and the stake sale in the Life Insurance Corporation of India.

Value buy or a falling knife?
The situation was different in October 2020, when Jet Airways’ resolution professional from Grant Thornton, Ashish Chhawchharia, had appeared on various television channels painting a rosy picture of the airline’s revival process and projecting its potential take-off in four-six months.

Indeed, the airline did not fly but its stock has been soaring.

In just one year, Jet’s stock galloped from around INR25 to INR165 as on January 11, 2021, generating a whopping 560% return to investors. But since then, it has fallen 37% to INR104.25 as of Thursday’s close on the BSE. Jet’s stock has been highly volatile, gaining around 5% for several consecutive trading sessions before correcting at the same pace.
Moreover, it has been losing sheen among foreign portfolio investors (FPIs). At the end of the calendar year 2018, 37 FPIs collectively held a 3.19% stake in the company. Two years down the line, as of December 2020, only six FPIs held the stock with a cumulative 0.19% stake in the airline. On the other hand, retail investors, who owned a 9.96% stake at the end of 2018, now hold a 17.45% stake in the company.

“Retail investors have the tendency to flock to stocks whose value erodes quickly, and they become a penny stock or close to one. While there have been a few success stories, it remains to be seen what Jet Airways’ stock has in store,” ‎ says Ajay Bodke, a Mumbai-based independent stock market analyst.

Ambareesh Baliga, another independent analyst, is also cautious. “The stock price had just rallied on speculation. I don’t understand how existing shareholders are expecting incoming investors to give them the same value. There has to be a major write-off,” he says.

In comparison, during the one-year period ended December 2020, IndiGo shares logged a 21.5% gain from INR 1,471 to hit a 52-week high of INR 1,787. Since then, they have shed 11% and closed at INR 1,591.40 on Thursday.

SpiceJet shares rose 29% from INR84 a year ago to a 52-week high of INR108 in December 2020. Since then, they have seen an 18% erosion in value, closing Thursday’s trading session at INR88.20.

Jet’s potential revival could hurt the valuations of GoAir, which is planning an initial public offering soon. It could also have a negative impact on SpiceJet’s valuations.
Lobbying for slots
The first battle between the incumbent airlines and Jet Airways will be on flight slots, parking bays, and international flying rights. Hundreds of Jet’s slots have been taken over by rivals who may not want to part with them.

Prime slots like those for morning and evening flights, which are usually preferred by business travellers, can bring in a 15%-20% premium for airlines or around INR60,000 and INR1.2 lakh per flight.

“In my opinion, if the DGCA or the MoCA fails to return the prime slots to Jet Airways, the same will be a subject of challenge and appeal before the NCLAT and the Supreme Court.”

— Zulfiquar Memon, managing partner, MZM Legal.Back in 2019, airlines were largely dismissive of Jet’s revival prospects. But a year later, as domestic aviation was gradually reopened after the pandemic had brought the aviation industry to a standstill, the industry view was that Jet could use the vacant non-prime slots as only fewer flights were operating. With the industry-wide capacity touching 70% of the pre-Covid-19 levels, this view is changing once again.

“Why should we give up the slots… tomorrow, someone can ask us to give Kingfisher slots as well? There’s no question of giving up slots,” a senior official at a rival airline tells ET Prime, requesting anonymity.

Flight slots are given to airlines before the beginning of the winter and summer every year based on the number of planes airlines project in their fleet. Jet can ask for the slots it wants for the number of planes it wants to fly once it is ready to take off, according to a senior government official.

“Slots are perishable. If at 9 am your flight does not leave, it’s a loss to the airport,” he says, adding that the international bilateral rights are only given once you have crossed a 20-aircraft fleet.

A year after Vijay Mallya’s Kingfisher Airlines went belly-up in 2012, the aviation ministry came up with a revised policy on airport slots. And even though the ministry has used the word “temporary” in the allocation of Jet Airways’ slots to other airlines, this may be at odds with its own policy reviewed by ET Prime.

The rules say the slots can only be held “by an airline with a valid operating licence” and if an airline ceases to hold a valid operating licence, then the slots will go back to the slot pool. In case of bankruptcy (or similar proceedings) “the slots may be reserved by the (airline) coordinator for one month pending reinstatement of the airlines operating licence of a formal takeover of the airlines’ activities”.

The rule also adds that “if there is no legal protection linked to bankruptcy, then the coordinator should reallocate the slots” and “historic precedence remains with the original slot holder provided that the airline applies for its historic slots in the next equivalent season.” Jet has already crossed four seasons of no flying.

“The way the ministry has granted Jet’s slots is in itself questionable. Other government arms are just following their orders,” says the government official quoted above, referring to the DGCA, AAI, and the absence of the word “temporary” in the slot guidelines of 2013. Some airlines have therefore already started taking legal guidance on the subject.

AAI (which oversees the slots meetings) and even airlines, are likely to say that Jet’s slots cannot be restored because airlines have already bought “an asset” to use those slots, says another official aware of the thinking of AAI, requesting anonymity. “An asset” in this case means a plane like the Airbus A320neo or Boeing 737 MAX that costs around INR300 crore apiece with a lease rental per month of around INR 2.6 crore. They may also argue that many such planes are already manufactured and are ready for delivery from Toulouse in France and Renton in the US.

An aviation ministry spokesman declined to comment on whether its handing out of Jet’s slots was at variance with its own 2013 policy.

So, will this tussle end up in court?

“When the Jet’s slots being used by another airline are thrown back into the slot pool to be given back to Jet Airways, I am sure a legal option will be considered,” the first airline official quoted above says.

But what happens if NCLT, which also provides protection on lawsuits to new owners, orders restoration of slots. Will it overrule everything else?

“Airlines can still file a case against the AAI, DGCA, and the Ministry of Civil Aviation (MoCA) and can go after them,” says the first official quoted, who tracks Jet closely.

When it comes to insolvency proceedings, the issue of granting of slots, international flight rights, and its ownership has a striking resemblance with the telecom spectrum allocated by the government to telecom companies. For example, the ongoing insolvency proceeding of Anil Ambani’s Reliance Communications is much akin to the Jet Airways’ saga.

The right to use the spectrum airwaves owned by bankrupt Aircel, which forms a vital part of the resolution plan, is highly contested by the Department of Telecom, says Zulfiquar Memon, managing partner at Mumbai-based law firm MZM Legal. Although the resolution plan for Reliance Communications has been approved by the NCLT, the decision on the sale or transfer of the right to use spectrum airwaves was withheld and finally remanded by the Supreme Court to the National Company Law Appellate Tribunal (NCLAT). Without the transfer of the right to utilise the airwaves under the resolution plan, it cannot become effective.

“Therefore, in my opinion, if the DGCA or the MoCA fails to return the prime slots to Jet Airways, the same will be a subject of challenge and appeal before the NCLAT and the Supreme Court,” Memon says.

The NCLAT and the Supreme Court interventions could only delay the revival of the airline which was expected to start flying again from April 2021.

Laying the ground for take-off
Once the legal hurdles are cleared, Jet’s revival process will move to the next stage that begins at the DGCA office in the capital that the airline’s resolution professional Chhawchharia often visits seeking support as Jet’s licence is suspended for now.

“Jet stopped operations in April 2019. So, it may have to go through complete recertification for the issue of AOP. The wording of the clause leaves it to the determination of the DGCA — whether partial or complete,” says Shakti Lumba, former vice president of operations at IndiGo, adding that “The full license procedure took nine months for IndiGo”.

According to a second government official who deals with the subject, Jet’s licence will go only through a “restoration process” and “it would not be a problem”. But he declines to elaborate on what this “restoration” process would mean or give a timeline for the same. And like him, nobody in the industry seems to have an idea.

For example, Jet paid INR100 crore to the Export-Import Bank of the United States (EXIM) to take ownership of six Boeing 777 planes from an ongoing finance plan. It had then paid INR1 crore to the government for the registration of these planes on its licence in September last year, but despite repeated back-and-forth communication, they have not been registered by the DGCA.

“Everyone wants to play safe,” says the first government official, “Will the NCLT rules be applicable to foreign lenders? What happens to IDERA (Irrevocable De-Registration and Export Request Authorisation) rules on foreign-leased aircraft? If someone reaches out to say our money has not been paid, then how will the DGCA approve the schedule? It’s not a simple case.”

Even then, it is not clear what business model Jet Airways, a full-service airline since its inception, will eventually adopt.

“If it follows the old model with a bias for international operations, then it wouldn’t be sound considering the current situation. If it decides to become a low-cost airline, its again difficult considering IndiGo has more than half the share of the market and with its fleet expansion in place it would hardly welcome a new entrant to have a foothold in the Indian market,” says author and former Air India director Jitender Bhargava. “Whatever permutations and combinations you consider, the market is extremely difficult for Jet Airways.”

Bhargava has a valid point. Delta Air Lines CEO Ed Bastian said last month that their customer surveys forecast that around 70% of pre-pandemic corporate travel will resume only by 2023, including international trips. Passenger volume had not risen to pre-9/11 highs in the US till 2005.

A detailed query e-mailed to Kalrock Capital did not elicit any response.

Taking off into a fare war
When Jet finally takes off, it may not get the same premium on airfares that it commanded earlier. With a business-class cabin, a frequent-flier programme, and a dominant position in Mumbai, the airline used to charge a 30% premium on tickets over low-cost carriers.

The industry dynamics, too, have changed in the last two years. Vistara, a small player when Jet was grounded, has scaled up its fleet to 45 and will cross 50 planes soon, and is expected to give Jet a taste of its own medicine.

“What Jet did to Vistara when it was launched, Vistara will do to Jet now,” says another airline official who did not want to be named, adding that Jet will have to undercut Vistara’s fares by 15% to fill its planes.

Airlines such as IndiGo with metro flights by the hour, besides SpiceJet, GoAir, and AirAsia, too, may slash fares, making Jet’s comeback even more difficult. This means the Kalrock-Jalan consortium may need to bring in more funds as a chunk of the existing pool of INR866 will go towards paying off existing commitments. A back-of-the-envelope calculation suggests Jet will need to keep aside INR5 crore-INR8 crore towards monthly loss per plane to operate the airline for the initial few years. In other words, even if Jet operates a small 10-plane fleet, that could translate into losses of INR600 crore-INR900 crore in the first year itself.

These numbers may not be far off the mark. Vistara, with around 40 planes (as of last year), has incurred a total loss of INR4,000 crore in the last five years since its launch, with annual losses widening from INR400 crore in the first year to INR1,800 crore in 2019-2020. The 2019-2020 loss came in a year when Jet closed migrating many of its premium business-class travellers to Vistara. This loss still doesn’t include the ongoing fiscal that was hit by complete demand destruction on account of the lockdown and could mean a doubling of losses to over INR3,000 crore, taking the total loss in the six-year period to over INR7,000 crore.

The bottom line
Despite all the hurdles and the tough competition it faces, an airline with a cleaned-up balance sheet and a scaled-up fleet (say 40 planes in the case of Jet Airways) may be more attractive to foreign investors in the short-term, over a SpiceJet which has legacy issues such as debt overhangs, says an analyst who also did not want to be named. Once it takes off, Jet Airways also has the potential to give more competition to an already-dominant IndiGo.

But first, much depends on how its incoming promoters manage to wade through the current proceedings and manage to refute allegations that they may have links with the airline’s former promoter Naresh Goyal, which could scuttle their plans as it is not permitted under the insolvency rules.

As for erstwhile ModiLuft, even BPCL finally agreed to accept the settlement for fuel a year later in 2002 after its legal team advised that the delay was only harming the oil company.

“The last clearance we got was from the customs in 2004,” the first executive quoted above recalls.

ModiLuft resumed its operations in 2005 — nine years after it was grounded — resurrected as SpiceJet.

(Graphics by Mohammad Arshad)

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