If the shareholders of Jet Airways approve the latest bailout plan on Thursday, India could soon have two state-owned airlines since taxpayers will then be part-financing private airline Jet Airways’ revival, whether they like it or not.
Air India, which is wholly owned by the government, is already guzzling taxpayers’ money each year as this inefficient airline struggles to survive in a fiercely competitive market ruled by private players. But now it is the turn of Jet Airways.
Jet has been India’s second largest airline in terms of passengers. For some months now, it has been inching towards a collapse due to unmanageable debt (more than Rs 8,000 crore) and missed repayments. The airline’s promoter Naresh Goyal currently owns majority equity but seems to have failed at getting existing equity partner, Etihad Airways, to invest more money and avert a collapse.
As missed repayments, mounting debt, threat of aircraft repossession by lessors and myriad other issues threaten the very existence of Jet Airways, it seems the Indian taxpayers would be coming forward to bail out this airline too.
Jet’s troubles have come too close to an all-important Lok Sabha election and the Narendra Modi government does not want a big airline to go down, taking thousands of jobs with it. It has anyway been facing heat over woeful job creation during its tenure and Jet’s demise could prove to be the last nail in this coffin. It, therefore, makes sense for the government to hold up Jet.
People close to developments had earlier said that the government had nudged the Tata group to come forward and take control of Jet. But this plan did not work out due to several misgivings the Tatas had about Jet’s source of funds etc. Etihad, too, has been reluctant to bail out the troubled airline.
So now, the government is believed to be stitching together a bailout plan involving state-owned banks, a government investment fund called NIIF (National Investment and Infrastructure Fund) besides other stakeholders.
The plan, if approved on Thursday, will mean banks and NIIF together own over half the equity in this private airline. By extension, it will be Indian taxpayers who will be bailing out Jet Airways, with no say in the matter, as government-owned entities take up equity in Jet. And India may get its second state-owned airline.
A statement issued last week after a board meeting of Jet Airways said that lenders will be acquiring majority stake in the airline for a princely sum of one rupee.
“The BLPRP (Bank Led Provisional Resolution Plan) envisages the company receiving the requisite approvals from shareholders at their meeting scheduled to be held on 21st February, 2019 for conversion of lenders’ debt into appropriate equity shares that would result in the lenders becoming the largest shareholders in the company, and, appointment of lenders’ nominees to the Board of Directors of the company under the provisions of the RBI Circular. Such allotment/conversion of lenders’ debt to equity shares of the company will be made at an aggregate consideration of Re 1, in accordance with the RBI circular, whereby lenders can convert debt to equity at Re 1, when the book value per share of a company is negative."
Several questions arise from the bailout plan being worked by the government. First, why should state-owned banks, not in the pink of health anyway, be taking a substantial haircut? And why then should they convert their loans into equity in a business which has been known to be a high risk one globally?
India’s airline industry has almost always been a very tough market, known for wafer-thin margins and volatile cost structures. Besides, the market leader (IndiGo) accounts for more than four in 10 passengers, leaving six other significant players with not nearly enough leeway in a tough market. How do lenders see any return on their equity investment in the near future in a market where costs are volatile and high, profitability seems to be ephemeral and consolidation the only way forward?
Stakeholders are bound to ask: If banks and other lenders are being asked to convert their loans into equity in Jet, will they be doing the same thing for Air India, which has a multiple times more debt on its books than Jet?
Questions also remain about the government’s continued reluctance to open up Indian airlines to foreign airline investment beyond 49% when the desi airlines are crying out for massive funds’ infusion and desi investment is so hard to come by. As per existing FDI caps, foreign airlines cannot hold more than 49% stake in an Indian carrier though together with foreign non-airline investment the total foreign holding in an Indian airline can go up to 100%.
Saving a big airline from shutdown months before a Lok Sabha election is good politics, but does not seem to be good business. Instead of getting out of the business of flying, the government seems to be committing more and more of public funds to the airline sector. This can only mean one more headache for whichever government comes to power this summer.
(The author is a senior journalist)
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