Jet Airways, India’s most successful private airline till date, crash landed due to financial troubles in April, 2019. The airline has since undergone resolution under the Insolvency & Bankruptcy Code (IBC). The new promoters have claimed it will be up and running in a new avatar soon.
But there are many unanswered questions. It is unclear what happened between the summer of 2019, when flights were grounded, and now that led to the demise of the airline. Who were responsible for bringing such a large company down to its knees? Could it have been saved with timely infusion of funds? Could lenders – State Bank of India (SBI) being the largest – have saved the airline?
Thousands of Jet’s employees lost their livelihoods, many other affiliates who functioned as vendors and suppliers too were hit by its demise. Some former employees, left to fend for themselves, are now self-employed— they are trying a shot at entrepreneurship. Others have simply given up aviation altogether, while some are still hopeful that they might get a second chance in the revived airline.
So what really led to Jet’s fall?
Frequent flyer miles and FDI rules: Rajnish Kumar, former chairperson of SBI, who has been in the thick of things when attempts were being made to revive the airline, offers some clues in his recently released book The Custodian of Trust: A Banker’s Memoir. Perhaps the beginning of the end of the airline started when its promoter Naresh Goyal along with an investment banker approached SBI for additional loans. SBI was leading the consortium of banks which had lent nearly ₹2,000 crore to Jet which was one fourth of total liabilities. In lieu of additional loans, the duo offered shares of JP Miles, a frequent flyer programme, run jointly by Jet and Etihad Airways to the lenders.
Kumar in his memoirs, refers to this as “The Custodian of Trust”. The problem lay in the equity structure of JP Miles: it was managed by a separate company (not Jet Airways) and this company was majorly owned by Etihad Airways (51.1 per cent), with Jet being a minority shareholder at 49.9 per cent. India’s FDI rules cap foreign investment in an Indian airline to 49 per cent if the investment is being done by a foreign airline.
But what is unclear till date is whether the same FDI levels applied to JP Miles. Kumar suggests that this was a major stumbling block and caused SBI’s reluctance to lend more. He says, Etihad was looking at $800 million support from banks in return for shares of Jet Privilege. “However financing against shares that were closely held with no secondary market for trading was not SBI’s cup of tea,” he adds.
Interestingly Kumar hasn’t mentioned anywhere whether SBI sought a clarification from the government. He has, however, said that his bank proactively started the formal resolution process in the Jet case on November 1, 2018, under the resolution framework of the RBI. And that equity requirement of the company at the time was ₹3,000-₹4,000 crore. He says lenders (SBI was a lender) realised that increasing the debt further was not an option.
Kumar does mention efforts by SBI to find an acceptable solution that required coordination among stakeholders—the promoters, Etihad officials, lessors, vendors and others, but admits it turned out to be an “uphill task”.
Mistrust between Naresh Goyal and Etihad: Not only did the Jet Airways had no lien to offer for additional capital, Kumar also hints at an apparent lack of trust between the two partners – Etihad and Goyal – which exacerbated Jet’s troubles. “I realised the bigger problem, which had beset the company, it was complete lack of trust between the two partners, Jet and Etihad. In 2013, Jet had brought in Etihad as a joint venture partner with a 24 per cent stake. Further, it sold 51.1 per cent in Jet Privilege to Etihad and went on to sell its three slots at Heathrow Airport in London, with the right to buy them back after three years at $70 million. Etihad had arranged funding from one of its bankers of Etihad, which was to be reportedly secured by pledging shares held by Jet Airways. In hindsight, it appears, at least to me, that Naresh Goyal had got a raw deal and had effectively mortgaged the interest of Jet Airways…,” he says.
At another place in his book, Kumar says that the confusion over FDI rules and ownership of Jet Privilege became a flashpoint between Goyal and Etihad, since “Etihad started believing that Naresh Goyal was using his influence in the ministry of civil aviation to prevent it from issuing a clarification (on the FDI cap)”.
Bilateral flying rights and Jet deal: What Kumar has not mentioned in his memoirs, though, is the large increase in bilateral flying rights between India and the UAE in 2013, when Jet-Etihad deal was being signed. The deal, it is believed, had an inbuilt condition that India and Abu Dhabi must agree to increase weekly seat entitlements to well over 50,000. That the equity deal between two private airlines was conditional to a renewed bilateral flying rights agreement between two countries has never been confirmed, either by the Indian government or Jet. But at that time, it was seen as Goyal’s way of assuring Etihad of his influence over Indian policy making apparatus. A senior official in the ministry of civil aviation had confirmed at that time that negotiations on bilateral rights had started between the two countries though neither side had exhausted than existing seat capacities. With this background, mistrust between Etihad and Goyal seems misplaced. It was Goyal who ensured that the bilateral flying rights were enhanced so that Etihad could benefit manifold from onward traffic from India.
Tatas, Qatar Airways: Kumar says that by the late 2018 and beginning of 2019, the situation had turned dire. By then, Goyal and his son thought Jet Airways should be valued at $2 billion and sought equity infusion of up to ₹4,000 crore, but without giving up control of the airline. “Naresh once confided in me that the Tatas were also seriously pondering about getting involved and were undertaking due diligence through a team positioned in London. However, this deal too did not make any progress like many others as none of the potential investors were willing to put in money in the sinking Jet ship unless Naresh gave up complete control,” Kumar says. He further adds that Qatar Airways was the only investor that was willing to retain Goyal as a partner but it did not materialise due to than prevailing “geopolitical situation in the Gulf, wherein UAE and Qatar were sworn enemies”. It would have been impossible for the government of India to approve the entry of Qatar Airways, he says.
Things got ugly: Kumar says Goyal always have had the apprehension that Etihad’s real interest was limited to acquiring Jet Privilege and opening the programme to other airlines and thus making up the loss it had incurred on its investment in Jet Airways. “The team at SBI had also started veering around to the same view and in one of the meetings, when out of sheer frustration, Arijit Basu, then CMD of SBI, mentioned this to Tony (CEO of Etihad), he became aggressive and started moving towards Arijit menacingly. It was only my strong intervention that stopped Tony in his tracks,” he says.
Though there are many unanswered questions, Kumar’s detailed narrative does indicate that a combination of factors – lack of clarity over FDI rules, mistrust between Naresh Goyal and Etihad, unwillingness of the Goyals to give up control and disinterest shown by prospective buyers— caused Jet’s eventual demise.