Failures of two major airlines in less than a decade ( Kingfisher in 2012), and now Jet at the brink of failure, will certainly make the entry of new players difficult, if not impossible.
Jet Airways is in the news for the last couple of months for all the wrong reasons: a cash crunch, mounting losses, unpaid salaries, diminishing market share, governance issues and finally something which no promoter wants to hear - either lose control or let the company die.
In normal course, except direct stakeholders, no one should bother if any company is facing death unless it is too big to fail, or if its failure causes tremors in the financial markets. Jet doesn't qualify for that category. That said, Jet could be classified in a category we can term "too important to fail".
First, Jet is part of the country's air transport infrastructure with a significant 14 percent market share as on November 2018. Second, it has almost 21,000 permanent and temporary employees. Third, it still owes Rs 6000 crore to creditors per its balance sheet as on 31 March 2018. Jet's failure means that these creditors will have to take a full hit on that amount as the liquidation value may not be much, unless a very high value is attached to brand.
If Jet stops flying, it will immediately cause a reduction in market capacity. It will create a capacity constraint, lead to a spurt in fares and hurt consumer interests. Yes, eventually capacity will be raised by the remaining players to meet demand, but that will take time. Till that time passengers will have to pay through their nose.
Even this short term impact may not be a compulsive reason for not allowing Jet to be grounded. However, it is the long term impact, which is scary and must force all the decision makers to take note and act. Failures of two major airlines in less than a decade (Kingfisher in 2012), and now Jet at the brink of failure, will certainly make the entry of new players difficult, if not impossible.
And if no new player enters the market, the market share of Jet will get divided amongst existing players. Assuming Jet's market share gets divided in proportion to their existing market share, IndiGo which has 43 percent market share will hog an additional 7 percent (14 percent allocated on balance 86 percent). That will take its share to 50 percent. A single player commanding such a high market share in a sensitive sector is not good from a consumer interest and competition perspective. Further, with Air India continuing to lose its market share, the chances of the state-owned company grabbing Jet’s market share looks remote. In that case, IndiGo's market share may cross 50 percent, giving it huge pricing power besides making it really too big to fail. Therefore, Jet is too important to fail, if one doesn't want to create an entity which is too big to fail.
Thus it stands to reason that Jet must continue to operate. A holistic solution involving all the agencies must be found. Before a solution is found, it is important to look at the causes of failure.
The root cause is management failure. The ground was slipping, yet the management was sleeping and allowed Indigo to hog an unbeatable market share. Even collaboration with Etihad did not bring any change. While Indigo has professionals on its board, Jet chose stars. Shah Rukh Khan adorned the board for a few years, Javed Akhtar, the poet, graced the board for 24 years, and Yash Raj Chopra illuminated the board for 6 years till his death. Not only that, Akhtar (8 years) and Chopra (5 years) were members of the audit committee.
An analysis of Jet’s operating parameters shows that on almost all yardsticks, it is behind Indigo. Shareholders should have distributed a copy of the book "Who moved my Cheese" to board members about a decade back to avoid such a situation. Else, how can one explain that Jet has reported a loss in 8 out of the last 10 years while new comer Indigo has reported a profit in all 8 years since inception. What is it that we are missing?
This very clearly indicates that there is a need for a management overhaul. A revival package need not include the conditional Rs 700 crore from Naresh Goyal and family. The airline needs a new promoter. It is for banks to decide who it should be.
The issue of how a revival package should be structured is best left to experts. But one point merits mention: All such restructuring proposals are a mix of sacrifices and incentives. Any rigidity on part of any one stakeholder may sink all.
Already questions are being raised on SEBI giving exemptions on an open offer and pricing to new promoters although as on date there is no deal on the table. Voices are being raised that an exemption to the new promoter from open offer and pricing restrictions will be against the interest of minority investors. Contrary to general belief, whenever and wherever SEBI decides to give any exemption, it will be in the interest of the public and minority investors – the raison d’etre for the regulator's existence.
Any new promoter coming with financial commitment to invest in a company which is going downhill takes more risks and must have a commensurate reward. If SEBI, or for that matter any regulator makes conditions difficult, no new suitor may agree. In that case the company will go down and investors will have nothing left. However, that also does not mean that SEBI can use its discretion indiscriminately. A fine balance has to be achieved.
In this case, any deal must necessarily include the ouster of Goyal and family for inefficient management. All approvals must be simultaneous and fast.
Lastly, Jet must serve a lesson for lenders to ask probing questions from borrowing companies in future. Indigo’s passenger to employee ratio is twice compared to Jet. And this is just one indicator. And one must not look at the star or VIP value of a board but people who know how to handle business.(The author is the co-founder and managing director of Stakeholder Empowerment Services, a proxy advisory firm. Views are personal)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.