By: Harsh Dhiraj Singh and Arpit Saini
THE DEMISE OF ‘JET’
On April 17, 2019, the 25-year-old carrier Jet Airways informed the Ministry of Civil Aviation that it is temporarily ceasing all its domestic and international operations. The decision followed the banks’ rejection of the debt-laden carrier’s request for emergency funding.
The once-dominant Indian airline’s market share fell to their lowest level (18.3%) since August 2015. A year ago, the airline had more than 120 operational aircraft. However, high oil prices, hefty fuel taxes and a weak rupee coupled with the competition from the low-cost carriers such as IndiGo and SpiceJet Ltd. led to its downfall. The future of the carrier appears conjectural as the lenders do not want to lend more to an airline which owes money to its lessors, staff, and others, over and above its bank borrowings. The airline already owes an amount of Rs. 9,000 crores to its lenders.
SpiceJet, IndiGo, and others have been allocated the airport slots of Jet Airways at Delhi, Mumbai, and Bengaluru. Whether these airport slots will be handed over back to the carrier is a question which cannot be answered by the aviation industry at present. Jet Airways will become the second full-service airline after Kingfisher to have ceased operations in the last decade if it fails to take off. The massive outcry and protests by the airline’s employees at the time forced the government to take matters in its own hands.
WHAT HAPPENS NOW?
The carrier has considered a range of options including a sale of the aircraft, capital infusion and sale of a stake in its loyalty program, in order to meet its obligations of over Rs 1,500 crores, which might have doubled till now with the addition of the applicable interest. However, a fund infusion isn’t enough to help the airways. Due to stiff competition and lower occupancy, it lacks the ability to generate enough revenue and needs a radical restructuring in the cost structure and revenue enhancement to meet the cost and to become more competitive in the industry.
Even with the rising debt, there are some who want to see the airline gain additional financing to resume its operations. The former Jet Airways staff is engaged in a movement to get the airline up and running again. Despite some crew members going off to rival carriers, others are still looking for opportunities in the Jet Airways.
Jet Airways has been running out of time for a new investor, especially with rival carriers securing Jet’s valuable assets and the valuable slots at crowded airports. Over the years, Jet Airways has relied heavily on Etihad Airways who has put millions of dollars into Jet even with its significant financial concerns. However, with the collapse of Jet and its on-going losses, Etihad wouldn’t want to pump in funds before Jet gets a solid financial footing itself. A revived Jet Airways, in any case, will have to reassure the travellers with their travel plans. The crowded aviation market will make it necessary for Jet Airways to define itself differently from the current carriers. Given the current situation, it seems unlikely that Jet Airways will ever fly again.
Meanwhile, the officials from SBI Capital Market Limited (the merchant banking arm of SBI) have informed the employee representatives that the financial situation of the company, in terms of outstanding liabilities, is extremely precarious. The State Bank of India-led lenders has initiated the stake sale for the grounded Jet Airways. However, experts opine that it is unlikely to get any serious bid from investors due to the loss of value, loss of pilots and de-registration of planes. The public sector banks are looking at massive write-off of loans. Private equity firm TPG Capital, Indigo Partners, National Investment and Infrastructure Fund (hereinafter ‘NIIF’) and Etihad Airways are in the race to buy a stake in the grounded Jet Airways.
The situation has become more animated with the Hinduja Brothers (UK’s wealthiest people) planning to start the bidding process after they got backing by Jet’s founder Naresh Goyal and strategic investor Etihad Airways. The group has reportedly been in talks with the investment bankers led by SBI Capital Markets and has obtained the assent of a key stakeholder.
IS INSOLVENCY ‘INTANGIBLE’ ASSET FRIENDLY?
When the aviation industry, as well as the financial sector of our economy, awaits the fate of one of the largest Indian Aviation service provider, this question becomes more significant. Although it is not unprecedented to have a company undergo insolvency proceedings, it is highly prodigious for a company in the service industry to have its intangible assets subjected to these proceedings. A lot of scepticism has been cast over Jet Airways going to the National Company Law Tribunal (hereinafter ‘NCLT’) and also requires appreciation because of the nature of the assets involved.
The fact demanding emphasis is that Jet Airways is a service provider. If the Jet moves for insolvency, it will not only entail its tangible assets but also bring into the tally a copious number of intangible assets. At the outset, the valuation of the intangible assets is an analysis from the financial point of view rather than a legal point of view. As in the service, industry time is of the essence, the valuation of intangible assets can be extremely volatile. This volatility is with respect to the insolvency and bankruptcy process, as the debtor may lose out on the value of its assets during the process itself. The resolution window under the Insolvency and Bankruptcy Code, 2016 is of 270 days. This window itself is a threat to the debtor’s assets as they keep losing their value with each passing day.
It is safe to say that the insolvency and bankruptcy process is more suitable for hard assets than for the service industry. However, with the present set of circumstances revolving around the Jet Airways case, it becomes evident that sooner or later it will have to file for insolvency in the Company Law Tribunal. This has received critical acclamation from various personalities involved in the matter. They all seem to point out towards the fact that subjecting the company to this process is analogous to grounding its future operations. This bitter truth has seen appalling reactions from its employees as well as its customers.
NO ONE KNOWS THE FUTURE
It is common knowledge that intangible assets are highly volatile in nature. Their values significantly differ for different purposes and different time frames. There can be two very distinct outcomes of the process: an outright sale of the assets as a result of the liquidation of the company or a prospective re-organisation of the business/company. The value of these intangible assets might get affected, either positively or negatively, depending upon the outcome of the entire process. To understand how this will operate, one should understand how prices of a product fluctuate when its supply increases or decreases. If a buyer badly needs a product, a sale is viable. If the situation is reversed, a re-organisation becomes more viable. Much to the modalities of the insolvency and bankruptcy process, this cannot be discerned before the whole process comes to an end.
In this untoward case of Jet Airways, the airways company is not mindful of the aftermath of the process and therefore, unable to objectively decide what to choose and what not to choose. This forces us to look for different options that it can look forward to.
At this juncture, the options available to Jet Airways are plenty in number; however, none of them seems to be a ray of hope for the airlines in the current hour of need. The infusion of capital from Etihad Airways, which holds a 24% stake in the Jet Airways, is unlikely given its reluctance in the past few weeks. The options galore have been duly assessed and analysed. It seems that the infusion of capital is still the best option on the table. From the precursory analysis, it’s shown that knocking the doors of the NCLT is not a good option, knowing that a lot of soft assets are at stake. The time taken until now has already brushed off a lot of hopes, so much so that they have been forced to sell their parking slots at various airports. The State Bank of India has not given a decisive response, which has not only affected the Jet Airways but also abbreviated the confidence of the investors and the public in the entire aviation sector.
Any other option, if used, would only lead to the grounding of the airlines’ operations. Though it is very challenging, given the present set of circumstances, there could be a way out. If the capital can be infused through financial institutions by selling off their stake in the Jet Prestige Private Limited or through any other possible way, it could still reap better results for the customers, employees and the entire sector, than subjecting themselves to the process under the Insolvency and Bankruptcy Code, 2016.
(Harsh and Arpit are currently law undergraduates at National Law University, Jodhpur.)