Opinion | Naresh Goyal running out of options to keep Jet Airways flying

The damage to Jet’s financial numbers seems to be severe. For instance, there were reports that pilots may have to take a pay cut but after a meeting with Goyal it was decided that no cuts would be announced.

Now, Jet Privilege is the last card that Goyal is holding. Jet Airways owns a 49.9 percent in the loyalty programme. At its expected value of Rs 3,000 to 4,000 crore, Jet Privilege accounts for close to half the Rs 3,500-crore market capitalisation of Jet Airways.

Etihad Airways has a 50.1 percent in Jet Privilege but holds only 24 percent stake in Jet Airways. A smaller stake in Jet Airways may well be because of Indian government policy of capping stakes for foreign airlines. But the fact that Etihad insisted on a higher stake in Jet Privilege implies the importance of the company.

The 2017-18 annual report of Jet Airways points out that Jet Privilege membership has grown by 30 percent to 8 million. Its financial results are also robust. Jet Airways posted a consolidated profit of Rs 1,499 crore in FY17 and a loss of Rs 636.45 crore in FY18. Jet Privilege, on the other hand, posted a profit of Rs 106.63 crore in FY17 and a profit of Rs 177.35 crore in FY18. While Jet Airways posted a flat topline, Jet Privileges saw its income grow at nearly 16 percent to Rs 622.24 crore.

The numbers show that Jet Privilege is sheltered from the volatilities of the airline industry which is exposed to the fluctuations of oil prices and exchange rates. The very nature of this business provides the shelter.

Through the loyalty programme, frequent flyers acquire what is called air miles within Jet Airways or other partner airlines. Apart from flying, there is another way of acquiring these points/miles and that is through transacting with co-branded credit cards. The main partners of such programmes are banks, credit cards providers, car rental companies, hotels, and retailers. The air miles so accumulated can be exchanged for an air ticket or any other goods that can be bought using the credit card.

Using loyalty programmes is fast becoming an important source of revenue for airline companies globally. According to an E&Y report, such programmes allow an airline’s commercial partners to collect data on customers at reduced marketing costs, allowing them to optimize their marketing campaigns.

Loyalty programmes have a variety of cash flows. One is from the gross margin on points redeemed which is the spread between the cost of points and the price for which they are sold to commercial partners. Secondly, they offer working capital benefits from interest earned on the cash received  from the sale of points (an average of 10 months to 2.2 years before redemption of points). And finally, there is revenue from the breakage which is the expiration of unused points (which usually takes place 6 to 36 months after issue) which results in no reward on these points and no associated costs.

In a price competitive market like India, these loyal customers are willing to let go of a cheaper airline ticket in order to accumulate more air miles in their frequent flier card. It is this loyalty that companies like to keep close to their chest.

If the deal to sell a stake in Jet Privilege goes through, Jet Airways will get a lease of life for a few more months till it hits the next hurdle. What’s worse is that Jet Airways shareholders will have a lower stake in the cash cow business of the airline.

The bigger problem is that Goyal is running out of options with fewer things to sell if the airline falls in trouble again. Even if Blackstone picks up a stake in Jet Privilege it will only act as an oxygen cylinder for a person on the ventilator.