Adverse market circumstances mean that further equity infusion will be important for Jet to secure funding in the short-term, and also bolster its balance sheet to placate shareholders.
In its attempt to clean up its books, Jet Airways has initiated a formal stake-sale process to raise nearly $400 million from private equity (PE) firms. The airline has fallen on bad times, with mounting bad debt forcing the company to defer its quarterly earnings announcement. According to a report in The Economic Times, TPG, Blackstone, and Indigo Capital Partners have been sounded out over a potential stake sale.
Jet's founding chairman Naresh Goyal has reportedly roped in a global investment bank to oversee the fundraising. Besides raising capital from investors, the cash-strapped airline is also trying to leverage its frequent-flyer programme, co-owned by partner Etihad Airways. The joint-venture is valued at $1.1 billion (Rs 7,601 crore).
The aviation industry has seen a steep increase in input costs, with global crude prices shooting up. This has been compounded by a weaker rupee, pushing up dollar-denominated expenses on distribution, maintenance, salary, and parking fees.
Jet Airways has also approached counterparts like Delta Airlines for funds. Etihad, which acquired a 24 percent stake in 2012, is allegedly disinclined to pump in more money into the airline. The UAE-based airline took on a part of the company’s debt burden at the time of investment, and is now cautious about further funding.
Jet’s management is also mulling the issue of new shares to inject capital. The proposal involves raising primary equity capital, which may not spell good news for existing shareholders as their stakes will see a significant dilution. The market capitalization of Jet Airways was Rs 3,139.83 crore ($450 million) at close of trade on Friday.
The $1.1 billion valuation of Jet’s frequent flier programme ranked its Jet Privilege operation at 31, ahead of Etihad in 38th position. The rankings were published by management consultancy firm On Point. In 2014, Etihad bought 50.1 percent stake in Jet Privilege, then valued at $300 million.
Revenue grew 25 percent in the past financial year. Memberships have risen from 2.8 million to 8.5 million. Jet’s frequent flier programme remains profitable.
US-based ‘distressed investing’ firm Cerberus Capital Management has also been approached. The American firm vied with Tata Group for buying out Jaguar Land Rover almost a decade ago. Cerberus recently entered the Indian market after acquiring majority stake in Abraaj’s PE business.
Among the institutional investors touted to hold an interest in Jet, TPG and Blackstone are no strangers to the aviation industry, having global investments in the sector. Indigo Partners is a PE firm specializing in budget airlines, having a controlling stake in American Frontier Airlines, Mexican budget airline Volaris, European budget carrier Wizz Air, and Chilean aviation start-up JetSmart.
However, a deal needs to be ironed out quickly as Jet’s funding requirement of $500 million (Rs 3,400) is immediate. Profitability remains a concern in attracting interest. Analysts estimate that on an average, Jet sells passengers tickets and cargo space worth Rs 66 crore every day, but loses Rs 10 crore. Its aggregate debt at the end March 2018 stood at Rs 8,150 crore.
The airline’s total debt amounts to Rs 6,000 crore, including lease rentals, principal, interest, and taxes. It also has the unflattering distinction of being the airline with the highest negative net worth among listed carriers.
Jet’s high cost of operation continues to impair progress at paring debt. The airline’s employee costs remain the highest in the industry. The recent downgrade by ratings agency ICRA could impede the airline’s attempt at arranging liquidity. Jet Airways celebrated its silver jubilee last year.
The company’s shares tanked earlier this month as news broke out that the management had given employees an ultimatum to take pay cuts if the airline were to remain operational after 60 days. Shares plunged to a year-long low. Jet denied setting such a deadline.
After the airline came out with a late-night statement that it would defer announcing its quarterly results, shares fell to a three-year low, closing 8.39 percent down at Rs 276.4 on the BSE on Friday. The audit committee was yet to submit the company’s financials to the board.
The airline also played down State Bank of India (SBI) chairman Rajnish Kumar’s statement that Jet was on its watch list for a potential default. Adverse market circumstances mean that further equity infusion will be important for Jet to secure funding in the short-term, and also bolster its balance sheet to placate shareholders.Decision-making at the country’s second-largest airline has also come under the scanner. The airline expanded capacity without witnessing a corresponding increase in profitability or cash flows. It has also started taking deliveries of Boeing’s 737 Max aircraft, adding to the pressure on liquidity. Jet has placed an order for 225 aircraft of Boeing’s fuel efficient 737 Max aircraft.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.