“India's aviation market is cut-throat and it is survival of the fittest. One needs not only deep pockets but a deep threshold for pain,” said Shukor Yusof, the head of the aviation consultancy Endau Analytics.
17th April, 2019 saw the temporary stoppage of operations of the oldest private airline, Jet Airways. Financial concerns and a cash-strapped situation forced Jet Airways to suspend all international and domestic flights. It was a step taken to prevent any bankruptcy situation affecting the aircraft, assets and the staff to get stranded elsewhere.
But doesn't it sound very shocking to think that an airline of such high stature crashed this badly!
Let’s see the timeline below to understand the takeoff and rough landing of the company:
The start of Jet Airways: It began operations in 1992 and was founded as a public-private split between Naresh Goyal, Gulf Air, and Kuwait Airways. By 1996, the company gained a market share of 20% in India with possession of twelve aircraft, flying 83 daily flights across 23 destinations in India. However, all of this expansion was on the basis of foreign investment. When the government of India imposed no investment by foreign companies in the private airlines of India, Naresh Goyal purchased back the remaining 40% (the share of Gulf Air and Kuwait Airlines).
Jet goes public: Jet Airways listed itself on the stock exchange of India to raise funds for its expansion in 2003. 20% of the company was offered to investors and it was enough to raise funds.
A green signal from the government to let private airlines fly everywhere in the world except the Middle East made the company use the earned money to secure slots and flying services between London Heathrow and other places. Not just that, the company acquired Sahara Airlines in 2007 for a lump-sum of Rs. 1450 crores.
Airline Price War: Jet Airways' success was temporary and the airline industry saw other competitors. The demand was falling and price competition was increasing because of other players who lowered their prices. This was the start of the death of Jet Airways. The company took to taking more debts and used its cash reserve to stay in the competition.
The beginning of all financial problems: After 6 straight years of losses, Jet Airways finally struck profits in 2016. But, it was very short-lived. The company was surviving until its 25th anniversary in 2017 but saw a downward spiral encroaching at a rapid pace.
Let’s look at the major reasons which aggravated the situation for Jet Airways:
Expensive Purchase- The decision of Acquiring Sahara Airlines by Naresh Goyal for $500 million in cash was a push to the cash reserves back in 2006. The founder of the company went against the advice of the advisors and bought it for more than it was valued.
The entry of Budget Airlines- The entry of Indigo, Spicejet and other budget airlines made the airline's industry super competitive and affected the revenues of Jet Airways. To combat with low prices, Jet Airways had to push through by raising debt.
Poor Management- The management style of Mr. Naresh Goyal was being questioned a lot. It was seen that the company lacked transparency and it had no concrete business model and management practice. This made the investors lose interest and trust in the company. Accusations regarding bad investment choices have also been raised against the founder.
Fluctuating oil crisis- Dwindling oil crisis along with the inability to fix the balance sheet of the company intensified the situation. The attempt to reduce the costs of the company by laying off employees or cutting down services also failed. Eventually, in April 2019, Jet Airways’ fuel supplier cut off the fuel supply to the company until they had been paid.
Inability to attract investors- Aviation analysts claim that the founder’s failure to attract investors and find a suitable investor has led to keeping the company troubled. Tata Group and Etihad Airways have walked away and refused to get into any investment terms with Jet Airways. The consortium of lenders led by the State Bank of India came to a debt resolution deal to dismiss Naresh Goyal and thereby, find a buyer to relieve the troubled Jet Airways.
As of September 5th, 2019, creditors of Jet Airways are likely to recover less than 10% of the carrier's total outstanding dues in case of any liquidation situation if no investor succeeds in buying the airline. This announcement led to a slip of 2.14% at 38.80 in the BSE Sensex.
It is tough to make money by holding onto airline stocks, that too at the cost of your peace. Before investing, it's best to look at three things:
Generation of a lot of free cash flow
Consistent dividends to the shareholders
Only a buyer can save Jet Airways which is troubled with massive debts of $3 billion and no emergency funds. Aviation analysts say that anything can happen in the aviation industry and it will be a surprise to see Jet Airways’ flight to the sky once again.
To know more about investing and things to consider before investing, Click Here
You should definitely check out our investing blogs for the same.