The story so far: Jet Airways, the troubled private airline that has failed to meet its huge debt obligations, was admitted to the National Company Law Tribunal (NCLT) on Thursday. This happened after a consortium of lenders led by State Bank of India (SBI) that had lent money to the airline over the years approached the NCLT to begin insolvency proceedings. Shares of the airline soared more than 120% on Thursday after news broke that the airline has been admitted by the NCLT for bankruptcy proceedings.
In accordance with the procedures laid out under the Insolvency and Bankruptcy Code, 2016, the court ordered an interim resolution professional to take control of Jet Airways. The professional appointed by the court will now look at ways to salvage the most value out of the airline so that the money can be used to pay back lenders.
Why did Jet Airways fail?
It was founded by Naresh Goyal in 1992, and began flying a year later. It was one of the earliest private entrants into India’s airline industry after the government slowly began to liberalise the economy. The opening up of the airline industry to more private companies in the ensuing years caused a boom in air travel in the country. At the same time, greater competition put increasing pressure on airlines to either deliver better services to justify their high prices, or cut costs to operate more efficiently as budget airlines. Jet, which was unable to adapt to changing market conditions, suffered losses for many consecutive years. The unpredictability of the price of oil in the global market also played a role in messing up its cost calculations. In the first quarter of financial year 2018, Jet posted a loss of ₹1,323 crore.
Since that huge loss, its management has tried to pump additional money into the airline to meet its operating costs and has also announced various aggressive measures to cut down costs. But all this may have come a little too late. Lenders, seeing the writing on the wall, have refused to keep throwing good money after bad just to keep the airline afloat. Kingfisher and Sahara are two other private airlines which failed under the pressures of competition. Air India, which is again burdened by a huge amount of debt like Jet, was another prominent loser in the battle for market share. But unlike Air India, Jet does not have the government to bail it out of its financial trouble.
What made lenders approach the bankruptcy court?
It is estimated that Jet may owe about ₹20,000 crore in the form of short- and long-term debt obligations to an array of lenders. A consortium of lenders that loaned money to Jet has already been in talks with some potential buyers such as Etihad (UAE) and Tata Sons who could invest capital in Jet in order to make the airline fully operational once again. However, these talks have failed to materialise into an actual deal given the high level of debt on Jet’s balance sheet. It is worth noting that buyers of troubled companies are generally reluctant to take responsibility for the debt of the troubled entity as it will affect their own return from the investment. The lender consortium led by the SBI, on the other hand, may believe that it can salvage more value from the failed airline through the insolvency proceedings carried out under the purview of the court.
Further, the lenders may also be able to gain greater control over Jet’s management by approaching court. Mr. Goyal’s resignation from the airline’s board in March may have been in expectation of unilateral action by the lender consortium to take it to the doorstep of the bankruptcy court. Mr. Goyal’s exit may give Jet’s lenders the confidence to infuse more money in case they decide to make the airline fully operational. The removal of the old management may also make Jet more endearing to buyers who prefer to wrest full control over it. It is worth noting that Jet shares soared on Thursday after the company was admitted to the NCLT. This suggests that investors expect value to be extracted out of Jet through the bankruptcy proceedings.
What lies ahead for the airline and its lenders?
Jet Airways is the first airline company in India to be admitted to undergo bankruptcy proceedings under the Insolvency and Bankruptcy Code, 2016. In contrast to other companies that have previously undergone bankruptcy proceedings under the bankruptcy code, Jet has very few assets, especially when compared to the size of its debt obligations. Many of the airline’s aircraft have already been seized by lenders after Jet stopped making payments. This leaves banks such as the SBI with very little to salvage from the airline, so it is very doubtful whether Jet’s lenders will be able to make any significant recovery of their debts just by selling off its assets.
The resolution professional in charge of Jet may thus want to keep the airline running as a going concern so that it might fetch the best value for lenders in the long run. Potential buyers may be interested in capitalising on the airline’s brand value and trying to re-launch the carrier by infusing fresh capital. Buyer interest, however, will depend largely on the amount of debt that lenders are willing to write off. The sale of Air India earlier this year failed to attract any bids due to the airline’s heavy debt burden that the lenders were unwilling to write off before the sale. If no buyer shows interest in purchasing Jet as a going concern, the only option left may be to sell each of Jet’s assets individually. Jet will then cease to exist as a company.
