Friday, June 21, 2019

Jet Airways case study

The Promoter,The lender, The Management, The Strategic Partener,and The Government were all flying blind
 
 
After months of stalling, there is some progress made towards a resolution of the Jet Airways crisis. The Mumbai bench of the National Company Law Tribunal (NCLT) admitted a petition filed by the State Bank of India for resolution of Jet Airways under the Insolvency code and suggested a timeline of 90 days, citing it as a matter of national importance.
In anticipation of such a move, the Jet Airways stock shot up by 150 percent on Thursday. The huge move was possible because of the unwinding of the short position in the counter.
But is the rally justified? Certainly not.
The case is now with NCLT, a body which is expected to protect the interest of the lenders. Given the present status of Jet Airways, it is very unlikely that there would be anything left over for shareholders after providing for lenders and creditors in case liquidation is recommended by the Insolvency and Bankruptcy Code (IBC).
Jet Airways has already been grounded for two months after the airline ran out of cash, owing Rs 8,500 crore to a consortium of 26 banks led by SBI. Many employees of the company have since then been picked up by other airlines. Further, a number of lawsuits have been filed against the company and most of its 100 operational aircraft impounded.
Any company, consortium of investors or private equity player keen on acquiring the company will have a tougher task to revive the company than creating a new one. Unlike a manufacturing unit which is mothballed before it is shut down, reviving a company in the service sector like an airline is far more difficult.
It would be a sad day for the 22,000 employees and over 80,000 indirect dependents of Jet Airways if the company is stripped and sold. The blame for bringing the company down to the current state has to be shared by the promoter, its management, employees, lenders, strategic partner and the government.
The airline industry has low accident rates only because they listen to the black box of a crashed aeroplane and analyse the faults and take lessons from it. Similarly, the fall of Jet Airways also holds lessons for all stakeholders.
 
Promoters
For promoters, Jet Airways' promoter Naresh Goyal's stubbornness is a key takeaway. He held on to his position for too long, even when there were buyers and bankers willing to negotiate a deal to save the airline on condition that he steps down. For Goyal, his position was more important than the airline he created. Goyal also has did not see the changing tide of low-cost airlines. He continued to micro-manage the company, losing sight of the big picture.
 
Management
Goyal's management team and its Board of directors should have advised him of the changing fortunes. When it was obvious that the industry structure had changed with the fast growth of low-cost airlines, the Jet Airways team continued with its high-cost structure. For the management of other companies, the Jet Airways management represent the traditional workforce who would follow the owner unquestionably. This is not healthy for any company. Divergent views need to be encouraged and a logical solution chosen for the growth of the company rather than massaging the promoter's ego.
 
Employees
The highly paid employees of Jet Airways, especially the pilots, were worse than industry union leaders. At the drop of a hat, they were willing to go on a strike despite knowing the poor health of the company and the industry. They took political help to push their case and exert pressure on the management. But at the same time, thought should be spared to those thousands of workers who kept on coming every day for work without getting paid for months. There is a lesson here for the human resources departments across all companies.
 
Lenders
Lenders lived up to their reputation of offering an umbrella when the sun is out. Kicking out Goyal from the cockpit was the worst step the lenders could have taken. Goyal had his skin on the table and was running from pillar to post to keep his airline afloat. From the day Goyal was asked to resign from Jet Airways the company's operation collapsed like an aircraft without its engine.
The banks were only concerned about their own money and had no interest in running the company. They did not extend much-needed working capital which would have bought them time to find a suitor to buy the company. Their insistence of not taking a hit on their loan has now resulted in them losing most of their money. A case of penny wise and pound foolish is how this consortium led by SBI can be described.
There is no lesson here for the bankers since they never learn. They have not learnt from thousands of default cases and it is unlikely that they will now. SBI and other banks made the same mistake in the case of Kingfisher Airlines and are now crying foul over Jet Airways.
 
Strategic Partners
Jet Airways' strategic partner Etihad Airways also has contributed to the fall of Jet Airways. It placed its own interest in filling its Gulf and European routes which were in its parent company over that of running the airline efficiently in India and other parts of the world. The one-sided relationship led to a number of senior staff in Jet Airways leaving the company at a time when they were most needed to steer the company. Goyal in his desperation for funds agreed to terms with Etihad which in the long run led to its failure.
The lesson here for all companies seeking strategic partners is to think long-term rather than short term survival.
 
Government
Just like the bankers the government and its bureaucracy too will not take away anything from the Jet Airways fiasco. Creating a mess in Air India and Kingfisher the government did little to help Jet Airways. Though helping the company directly would have set a bad precedent, the government could have taken steps to help the airline industry. When almost all airlines are making losses there is surely something structurally wrong in the industry.
Airline operators have been pointing out the skewed cost structure on account of government taxes but all pleas fell on deaf ears. Unless something is done for the sector we may soon see more airlines crashing.
 
Shareholders
Finally, there is a big lesson for the shareholders. The market rewards performance and not hopes. Jet Airways was grounded in April 2019 yet there were buyers for the company at Rs 160. It took one month for these buyers to realise that there is little hope for the company. Even on Thursday there were no lessons learnt, a company going to NCLT does not mean that it is saved. It is sent there when all other doors are closed, just like they are for the shareholders of Jet Airways unless there is an investor with big pockets willing to take a huge risk.

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