Jet Airways deal historic and path-breaking for airline industry

One of the best things that has happened to the Indian airline industry is the recent report about Jet Airways finding new suitors to run the airline.

Last week, the committee of creditors voted in favour of a consortium of bidders, Kalrock Capital and Murari Lal Jalan over another one, the FSTC-Imperial Capital after 99 per cent of votes in favour of the former with the lenders backing a revival plan instead of recovery through liquidation.

The deal in many ways has been historic and path-breaking for the airline industry as the earlier one, Kingfisher Airlines, went down quite unceremoniously. Either the lenders did not have a precedent to fall back upon while considering a move to revive the airline or felt cheated enough not to look at reviving the carrier after its founder, Vijay Mallya fled the country and has not returned since even though the home secretary of the UK government had signed an executive order for his extradition back to India over a year ago.

The deal to bring Jet Airways back on the runway is still a few months away and before that it needs several regulatory approvals and perhaps a very decisive management to push its agenda ahead. The deal has to be approved by the National Company Law Tribunal (NCLT) as required by the Insolvency and Bankruptcy Board of India. The key to their approval lies in whether the process and compliances have been carried out and more importantly whether the government will return the airport slots and traffic rights, without which, the new promoters might as well, launch a brand new airline.

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According to an Economic Times interview with the resolution professional for the airline, Ashish Chhawchcharia, Jet Airways’ revival plan revolves around how soon the government will act to help the airline to take to the skies again. Any bureaucratic delay can completely derail the effort to revive the airline leaving over 4,000 employees without jobs.

It will take at least four to six months before one can see Jet Airways start flying again. Fortunately, for the new owners, they are protected from any past actions of the promoters under the bankruptcy code. The promoters are still under the scanner of the investigative agencies who are probing allegations of money laundering and siphoning off funds.

The new owners plan to involve employees while putting together the revival plan and its implementation. There have been talks about how the new owners will let the employee-run the management over a period of time which reminds one of the US-based United Airlines which went down following 9/11 but was revived by the collective effort of the employees.

Now that the revival of the airline has been put in place, the lenders themselves will leave the scene without much in their bags. The lenders have so far put over ₹8,000 crore into the airline but will now be forced to take a 90 per cent haircut to revive the airline. In other words, the Kalrock-Jalan combine will give about ₹800 crore to the lenders who will get about 10 per cent stake in the airline. They will also get some money from the sale of aircraft while the employees have been offered 75 per cent stake in the airline’s ground handling arm and a financial incentive of around ₹20,000.

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The lenders led by State Bank of India are already struggling to get around ₹12,000 crore back from Vijay Mallya. Add another ₹8,000 crore excluding interest of Jet Airways, the rest of the airlines might as well forget receiving any more loans from either the public sector banks or the private sector ones. The airline business, unlike most others, does not require much of an asset base to operate. There are hardly any assets which an airline acquires over a period of time and hence to pin them down by pledging them in return of loans has never been an easy call for the lenders.

While the lenders have made full provision for the Jet Airways’ loan, they don’t see any chance of getting most of their money back. But that is just part of the story. The bigger and the more important one is whether the consortium which has won the bid to revive the airline will actually be able to do so. It has no previous experience to run an airline. Kalrock Capital is into management and investment consultancy and the UAE-based Jalan has businesses in the UAE, Russia and Uzbekistan where his firm, MJ Developers has invested in the real estate and mining sectors.

As the fallen heroes of the airline industry might tell us, running an airline needs professionals with continuous funding over a period of five to six years before one can see some profits on the horizon. How the new owners will be able to fund the airline and also allow the professionals to run the airline without any interference, remains a mystery as of now.