Executive Courses

Airline loses Airtime!

“You will never appreciate the value of financial literacy until the price of ignorance overwhelms you.”

– Mac Duke

Lack of proper financial planning has grounded many large businesses in India and the world. The latest entrant to this infamous club is Jet Airways, one of India’s best international private airline. This will be the second major Indian airline after Kingfisher which suspended its operations due to financial difficulties. Kingfisher Airlines grounded all its flights in October 2012 after running out of money to pay its creditors, employees and to keep its operations running. The shocking question for industry analysts is how did an established airline such as Jet Airways join this dubious list?

The endgame of Jet Airways was much faster than expected by most industry analyst and experts. There was always a doubt about the airline folding up due to the confidence the markets had in its charismatic founder Mr. Naresh Goyal. The underlying assumption was that India is one of the fastest growing aviation market of the world and having Naresh Goyal at the helm, Jet would find a way out of its current mess.

The latest numbers show that India has had double-digit growth in domestic air passenger traffic for 54 consecutive months. So what could be the reason for this catastrophe? Was Jet a victim of bad governance or any other deeper structural issue responsible for India’s oldest private airline to come crashing down?

Jet’s troubles are said to have begun with the acquisition of Air Sahara in January 2006 for a staggering $500 million. The airline was purchased in haste, without proper due diligence, with the aim of keeping billionaire Vijay Mallya’s Kingfisher Airlines at bay. It was speculated that Mallya planned to buy Air Sahara in order to get its routes and market share. In an attempt to keep him at bay, Jet purchased Air Sahara at a very high valuation, along with the debt that came with it.

The airline sector in the world is internationally divided between no-fuss, low-cost airlines and full-service airlines. India also has a similar classification where full-service airlines compete against low-cost airlines to attract the same passengers.

The Chairman and Managing Director (CMD) of Air India, Mr. Ashwin Lohani shared an interesting observation in a social media post to highlight the reasons for airline failures. Airlines globally and especially in India have been known to offer ridiculously low ticket prices to undercut competitors and gain customers. This is a strategy that starts hurting the entire industry immediately – especially when volatile oil and Dollar valuations, hurt their balance sheets.

By selling tickets at cost or below cost prices, airlines have to depend on debt to stay afloat – which is in itself not a sound financial strategy.

For domestic flights and in shorter routes, where the average journey time is between 60-120 minutes, very few passengers are interested in being served food and they would happily sacrifice it for a lower fare in exchange. This makes it tough for a full service carrier like Jet Airways to compete with low cost airlines like Spice Jet or Indigo Airlines.

For long haul flights, Jet Airways would have first class seats on its planes – a practice not followed by many full service carriers. While other full service carriers would fly 400 passengers/carrier, Jet would fly only 308, .i.e. just 75% of the total capacity as first class seats are much larger than normal seats and they take up a lot more space and weight. Another disadvantage of this strategy was an increase in fuel consumption due to the heavier seats, which hurt profitability per flight.

Their situation became worse when their competition expanded with the entry of low-cost airlines such as SpiceJet and IndiGo. That’s when the management of Jet realized the only way towards faster growth is by renting their aircraft to these low-cost airlines.

A major reason for the downfall is the use of many types of aircrafts, which increased to the cost of operations. Low-cost airlines like Spice Jet preferred only one type of aircraft (the Boeing 737) before it added Bombardier to its fleet. Whereas, Jet Airways has Boeing planes and Airbus aircrafts, which increased their cost of personnel significantly.

India imposes the highest rate of taxation on fuel and other airport facilities. India is become one of the most expensive places to operate an airline. With volatile oil prices and foreign currency fluctuations, the cost of running an airline, is extremely high, with little or no profits.

Although all lenders have converted some part of their debt into equity, a halt in operations complicates things. With the airline trying to sell off equity, it’s quite an uphill task to expect an investor to invest in an airline that is currently not operational. Without any business operations, how does one get their money back?

The biggest losers in this case will be the Indian taxpayers, .i.e. the actual owners of PSBs who have lent to Jet Airways. The key takeaway here is that banks have been raising an alarm about Jet’s finances for over 9 months. The bankers actually foresaw this situation, but the management did not take the necessary steps needed to ward off the crisis.

Financial planning and risk management are necessary for every sector, especially the ones with numerous variables. Taking calculative risks can help one generate high profits, but people need to be excellent at executing their vision in order to thrive and not just survive.

BSE Institute Limited, a 100% subsidiary of BSE India helps professionals and students gain information on topics related to finance by offering a wide variety of courses in an easy to learn atmosphere. It provides an Executive Program for Risk Management which helps one mitigate risks by sound capital allocation and sensible financial planning.

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