After over a quarter century of operations, one of India’s largest private airline operator Jet Airways grounded its fleet in April due to heavy debts. India’s state operator Air India is reeling under debts of over ₹50,000 crore. Despite a strong bankruptcy law such as the Insolvency and Bankruptcy Code, 2016 (IBC), why are Indian airlines unable to launch a restructuring measure whilst operating?
The Jet Airways fiasco
With the exit of Naresh Goyal from Jet’s board, the Indian government now owns two airlines – Air India and the grounded Jet Airways, whose over 50% shares are held by the government-led consortium. The combined debts of these two airlines exceed over ₹58,500 crore. Taxpayers’ money that has funded the poorly run state airline is now set to bear the brunt of Jet’s debt.
Why has Jet not been referred to the IBC?
“There is no doubt that IBC is the last resort, currently the lenders and debtors are involved in negotiations, which we think would be better for both the lenders and the company. Bids are being called by the lenders to revive the airline, but going by the recent developments, it seems to be very tough for the lender to get a viable bid, that is, with a lower haircut. To add to the woes, the government has temporarily allocated the slots at key airports to its competitors, which would further keep away prospective bidders. If there is any further delay in the resolution, then the IBC route is inevitable for the Jet Airways,” says Rajnath Yadav, senior fundamental research analyst, Choice Broking.
A recent survey* says the average recovery rate of debts for businesses that have declared insolvency through IBC is 26% which is less than the one-third of the top-five countries’ average of 85.98%. And Indians take almost thrice as much time as the US debt resolution strategies at about 4.3 years on an average to resolve it as opposed to US’ 1.5 years and Japan’s 0.6 years.
If the IBC process had been initiated, there would have been a freeze on lenders from grounding of the airline and also on other stakeholders from taking a forcible action against Jet. In simple terms, initiating IBC would have enabled Jet to restructure while being operational. This could have been a partial operation but would have given leeway to the ailing airline from losing more aircraft and airport slots while the damage control is being done.
Can the government on-board investors for Jet?
The government’s handling of Air India’s debt reorganisation has not been great. They tried to unsuccessfully offload Air India’s equity shares in 2018. So what gives them the guarantee that investors will be found by June, the next quarter?
How US airlines battled bankruptcy?
US carrier Delta Air filed for bankruptcy in 2005. Shortly, they cut costs in labour and operational charges and raised new funds, re-launching in 2007. Several US airlines such as the American Airlines, Northwest, US Airways and Delta were victims of the post 9/11 slump in flyers.
One of the biggest measure in aid of these ailing airlines was the possibility of a merger. The US Airways merged with America West Airlines, Northwest merged Delta Air, United with Continental, AirTran with Southwest and American Airlines with US Airways, to name a few.
A merger between two airlines meant increased geographic coverage and better revenue earned per seat. It helps companies to narrow their debt by combining their profits and losses.
Chapter 11 (USA) vs IBC (India)
A chapter 11 bankruptcy filing with the Securities and Exchange Council (SEC), the SEBI-equivalent of the US, can be initiated by the debtors as opposed to a creditor prompted filing under India’s IBC. A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed by creditors. Under Chapter 11, the company can continue its operation while it comes up with a plan to restructure under a court-appointed trustee. The debtor has the exclusive right for four months after filing Chapter 11 to propose reorganisations, which can be extended up to 18 months upon showing a good cause. However, the bankruptcy court has control over the major business decisions. It also helps companies that do not want to liquidate all of their assets.
As per IBC, a borrower or creditor can approach the National Company Law Tribunal (NCLT) to initiate processing. The maximum time allowed to either accept or reject the plea is 14 days. Once a case is admitted, the NCLT appoints an insolvency professional. They are authorised to run a company in the interim. In 180 days, the company has to come up with a plan for debt obligation, 90 days more could be given. For the said period, the board of directors of the company stands suspended, and the promoters do not have a say in the management of the company. If 75% of the creditors approve of the plan, the resolution goes through or else the assets have to be auctioned off for debt obligation.
“The key difference would be the suspension of current management in India, while this is not the case in the US. Another difference is the resolution timeline and process of liquidation. In India, the resolution time is less as compared to the US. For liquidation, in India NCLT decides, while in the US a separate process,” explains Yadav.
The Directorate General of Civil Aviation (DGCA) needs to check on the occupancy status of airlines religiously to keep a tab on their operational soundness. Promoting a merger of airlines with minimal occupancy can help save fuel costs and enable operating packed flights.
It is also important that they conduct surveys on the routes that these airlines operate, the frequency of the flights and the cost that they charge. In 2014, IndiGo charged a premium** of 2-3% in tier-2 city routes compared to their competitors. Quarterly surveys are essential to understand if any airline is exploiting flyers.
Recently, several airlines have started charging a price for online seat selection during check-in. While some argue that this is in gross violation of free seat selection, others say that any choice beyond a booking should be considered an add-on.
Bankruptcy, a corporate’s best friend?
When a corporate files for bankruptcy, the lives of several thousands of employees, crores of investment, many vendors and associated businesses are impacted. By enabling an ailing business to file bankruptcy, the government can help them restructure and reorganise in a phased manner, under supervision as opposed to a grinding halt.
The current issues faced by the aviation industry are the end product of poor government policies. It’s time that the government changes the policies and attracts more investors from across the world.
Yadav says, “In India, the aviation sector is highly regulated with a higher regulatory cost. For instance, in India, the Aviation Turbine Fuel (ATF) constitutes around 34% of the cost as compared to a global average of 24%. There is a level of monopoly in supplying ATF to the airlines, which keeps the prices elevated. Additionally, there are various taxes adding to the costs. GST cannot be levied on international air tickets as it would deviate the international norms.”
With current regulations, it would be tough for the lenders to come with a resolution and hardly any investor would be interested in the fastest growing aviation market in the world.
Caught between the general elections and poor employment status, Jet Airways resolution would remain in limbo.
* International Journal of Management, IT & Engineering Vol. 7 Issue 9, September 2017
** Centre for Asia Pacific Aviation (CAPA) study, 2017