Will Jet Airways be able to recover its cash position in an unforgiving Indian aviation market?

India is a market of continued growth, with figures all the more encouraging. For example, the Indian domestic aviation market has enjoyed passenger growth at an average rate of 21.8% for the seven months to Jul-2018. Indian airline ASKs have grown 13% p/a over the past three years, with demand continuing to surge from an emerging middle class and a bustling economy that is now the third-largest globally by purchasing power parity.

So, why is it that almost all Indian airlines agree that the market is such a difficult one to operate in?


Summary:

  • Indian airline executives all express concern at state of country’s aviation market.
  • The macroeconomic conditions come at a bad time for Jet Airways, with the airline unable to raise fares and generate cash in a period of low demand and harsh fiscal and fuel pressures.
  • Jet Airways’ new turnaround scheme results in monetisation of certain assets, infusion of capital.
  • SpiceJet had been in a similar situation in early 2017 but has since recovered.

In the past month, prominent executives of Indian airlines have all expressed warnings around the aviation sector. SpiceJet chairman Ajay Singh has said the sector is “under pressure”, stating: “When oil price rises, there’s bound to be pressure… Also, the rupee’s fall against the dollar, with a lot of airline industry payment denominated in dollar, is hurting airlines”.

Vistara chief strategy and commercial officer Sanjiv Kapoor also expressed concern around challenges recently, particularly about aviation fuel rates in India. He said: “Domestic aviation fuel (ATF) rates ex-DEL are now 97% higher (i.e. almost double) the low it hit in Feb-2016, and less than 10% short of highest ever it hit in 2014”. Average fares are, however, down at least 40% from 2014, according to Mr Kapoor.

From these comments it can be deduced that the main factors affecting the industry are the rise in the price of Brent fuel and a depreciating rupee – tossed together with a typically low-demand monsoon season that does not allow airlines to raise their fares. But Jet Airways seems to be the most affected.

The airline’s share price has declined 62%, from INR740 (USD10.6) to INR280 (USD4) over the past six months, with the airline recently declaring liquidity issues and delaying publication of its financial results for the quarter ended 30-Jun-2018. On 28-Aug-2018 Jet Airways’ financial results for the quarter were published, when there was declaration of a net loss of INR1326 crore (USD186 million) and the subsequent launch of a turnaround plan.

Jet Airways CEO Vinay Dube explained the plan: “The rise in the price of Brent fuel, a depreciating rupee and a resulting mismatch between high fuel prices and low fares have adversely impacted the Indian aviation industry, including Jet Airways… We are implementing a host of measures to reduce costs and grow revenue, while retaining our focus on our guests”.

The real problem for Jet Airways is cash, but the macroeconomic environment is constraining it from recovering

The real issue for Jet Airways is cash on hand. The airline’s FY2018 results, published on 23-May-2018, showed cash and cash equivalents at INR3211 million (USD49.8 million) but total liabilities of INR200,942 million (USD3,117 million). It is likely that the situation has deteriorated since publication of those results, which are separate from the most recent set, which had been delayed.

Jet Airways maintains that all its loan accounts are “standard and there is no overdue in any of our accounts”, but there are still “uncertainties in relation to generation of sustainable cash flows and ability to repay its borrowings”. The natural inclination for an airline, particularly a full service airline like Jet Airways, would be to increase revenue in such a situation – by increasing yields. However, the combination of monsoon season and wider macroeconomic environment is constraining Jet Airways from doing this.

The turnaround scheme has thus identified a few short term measures for Jet Airways to pursue and improve its liquidity position. These include a balance sheet restructuring, infusion of capital and the monetisation of the airline’s stake in its loyalty programme, Jet Privilege.

Jet Privilege is 49.9% owned by Jet Airways, with the remaining stake held by Etihad Aviation Group, the airline group which separately owns a 24% stake in Jet Airways. According to Indian media, Jet Airways could also be in talks with Indian non-banking financial companies (NBFC) to monetise its forward sales to generate a short term cash supply of around USD215 million, while Boeing could return a portion (USD200 million) of the amount paid by Jet Airways to procure 75 737 MAX aircraft.

If these measures are able to improve the airline’s liquidity situation, at least in the short term, Jet Airways may be able to leverage more prudent cost control in its non-fuel operations and recover fully. Besides, SpiceJet was in a similar, cash-strapped position earlier in 2017, however has since significantly improved liquidity and generated cash flows.