The stakes are high for Modi in Jet Airways crisis

India's second-largest airline has racked up $1.2 billion in debt and defaulted this month on payments, hurting one of the key sectors in the country

Jet Airways aircraft on the tarmac in Mumbai. Reuters

Jet Airways, India's second-largest airline, is struggling against the headwinds of a challenging operating environment for aviation in the country, and Prime Minister Narendra Modi's populist government hopes the airline's financial crisis can be resolved before the national elections in May.
Fierce competition between airlines in India leading to discounted fares, a weak rupee and spike in oil prices last year, are weighing heavily on the sector and have pushed Jet Airways to the brink of collapse, analysts said.
"Operationally it is an inefficient airline relative to others," said Abhimanyu Sofat, the vice president of research at IIFL, a financial services company in Mumbai. "It has a higher number of employees relative to the number of planes it has, and it's a full-service airline."

The 25-year-old airline has racked up $1.2 billion (Dh4.40bn) in debt and defaulted this month on payments to a consortium of Indian banks led by the country's largest lender State Bank of India. Jet's financial difficulties have also left the airline unable to pay pilots and aircraft lessors. The company employs about 23,000 people.

Jet chairman Naresh Goyal was last year in talks with Indian conglomerate Tata Group to sell off a stake, but nothing came to fruition from that. Etihad Airways, which owns a 24 per cent stake in the airline, is reportedly a potential option for a deal to shore up the airline. Under India's foreign direct investment rules, the Abu Dhabi airline would be permitted to hold a stake of up to 49 per cent in Jet.

With a general election due by May in the country, observers say Jet's predicament is of paramount importance to the Bharatiya Janata Party Mr Modi's government, which came to power in 2014 on promises of creating jobs. With aviation being a key sector, Mr Modi's government has focused on making flying more accessible to people. Only a single-digit percentage of India's 1.3 billion population travel by air.

“Things look tough... a significant downsizing” of Jet as result of its difficulties is expected, said Mr Sofat. “Consolidation is the name of the game in the industry... at some point, calls need to be taken for companies like Air India as well because they also continue to reel under a lot of debt burden and pressure, despite crude prices being quite benign.”

That mess is largely because costs have risen for airlines, but yields have decreased due to downward pressure on air fares, Mr Sofat said.

There are seven major airlines in the country, including the debt-laden state-owned Air India, which the government unsuccessfully tried to sell last year, and budget carriers SpiceJet and IndiGo. It is a highly competitive market where the prices of full-service airlines Jet and Air India, which have higher outgoings, are often on par or lower than the price offered by the no-frills brands. This means that budget airlines are faring better in terms of profitability. A large amount of an airlines' expenditure, including fuel and aircraft parts, is in dollars, so the weak rupee, which is trading down by more than 10 per cent from a year ago, raises these expenses.

The challenges that Jet faces highlight some of the broader problems in the sector, said Mark Martin, founder and chief executive of Martin Consulting, an aviation consultancy.

“The government has made it hard to sustain the business,” said Mr Martin. “They have imposed a duty on jet fuel. They're not doing anything to correct the currency.”

The situation does not reflect well on the Modi government, he said.

It is highly unlikely Jet will collapse, Mr Martin said. Such a “doomsday” scenario would have huge consequences for the industry, including a spike in air fares because of a reduced numbers of flights and an impact on the investment risk climate for India's aviation sector, he said.

“Mr Goyal [the chairman] had a good six months to get the airline back on track ... but he was playing the ego battle and just refused to let go of the control he has of Jet Airways and that's led to where the airline is today,” Mr Martin said.

Jet declined to comment when contacted by The National.

Last week, State Bank of India said lenders are looking at a restructure plan for the airline, which also said it was working on a resolution plan, potentially involving a cash injection by stakeholders and board changes.

“If we are looking at short-term solutions for Jet Airways then financial restructuring would help the airline survive for some more months,” said Satish Modh, who worked in the aviation sector for 28 years and was part of a turnaround plan for Air India before becoming the director of VES Institute of Management Studies and Research, in Mumbai.

Longer term,"the real solution would entail lots of surgery in the form of fleet and route rationalisation", he added.
With the elections coming up "the government may give some concessions to help the airline survive for the next few months."

Jal Irani, an analyst at Edelweiss Securities based in Mumbai, said a fresh equity infusion will enable Jet to "exploit lower oil prices and expand fleet capacity to leverage the fastest-growing aviation market in the world”.

Airlines in India have been banking on tapping the enormous potential of the market. The country’s aviation sector supports 7.5 million jobs directly and indirectly within India and accounts for 30 billion rupees of its gross domestic product, or 1.5 per cent of the economy, according to the International Air Transport Association. Air travel in India is also on the rise and the country is set to become the world's third largest aviation market by 2025, amid expanding middle class incomes and a growing economy, said Iata.

Undoubtedly, the stakes are high for the Mr Modi led BJP government.