Jet Creditors Have Two Options: Head For NCLT, Or Take Haircuts; Either Way, Goyal Is Out

It is difficult to castigate the government for endlessly subsidising white elephants like Air India or some public sector banks, when some private sector promoters seem unable (or unwilling) to read the writing on the wall any better.

For more than two quarters now, we have known that Naresh Goyal’s Jet Airways has been thrashing about for survival, with first-half net losses in 2018-19 crossing Rs 2,620 crore. The company has now gone into default on loans to the State Bank and some others in December. Jet has over Rs 8,000 crore in debts, and Rs 1,700 crore of it is due to be repaid between now and March-end, with repayment obligations of another Rs 2,444 crore coming in the next fiscal.

Faced with this situation, and the fact that no one, including minority partner Etihad, is willing to help it out, Jet Airways has, according to The Economic Times, offered to create an escrow account from ticket sales, so that some repayments can be made.

This is desperation masquerading as a short-term solution. If ticket sales, the revenues from which are just about able to keep Jet planes flying and staff partially paid, are now earmarked to repay financial creditors, there is no way Jet operations will not shrink as flights get cancelled and staff payments and dues to fuel and other suppliers get further delayed. Stressed-out staff flying planes constitute the worst hazard in the skies. This will show in the staff’s body language and customer dealings, and as news about Jet’s difficult finances become widely known to the public, flyers will desert in droves.

It is worth recalling that Jet has been trying to find buyers for its loyalty programme, Jet Privilege, in which it owns 49 per cent, but has made little progress. There will be few buyers for a loyalty programme if the airline is itself not sure of survival. So, the loyalty programme has value only if the rescue comes quickly.

This is where Goyal has got his business instincts completely wrong. If this sale had been done last year, when there were fewer question marks about Jet’s survival, he might have got some value for it. Now, he will either get a very bad deal, or none at all.

The company’s creditors have only two options when the promoter has no viable solutions to offer: one is euthanasia, ie, reference to the insolvency and bankruptcy courts for a resolution, or a straightforward haircut (ie, a voluntary rescheduling of outstanding loans along with interest waivers, and sale of controlling interest to a new promoter). The fact that Goyal asked for a loan moratorium at least two months ago should have prompted the lenders to act earlier, but they didn’t do so. What are they waiting for? Anyone seeking a moratorium is essentially saying he can’t repay. He can get the moratorium by approaching the bankruptcy court. If banks don’t do so, one can assume Goyal himself could consider the option. In all situations, Goyal is out.

A third option rests with the government. If it allows a foreign airline to hold 51 per cent in a domestic airline, Etihad may be interested. Air India could also be sold. Many foreign airlines would kill to get a slice of the booming domestic market in India, but politics will not easily allow this to happen.

With the 49 per cent cap on foreign airline holdings, the field of potential buyers gets restricted to domestic players. But with even the deep-pocketed Tatas, who showed some interest earlier this year, now discovering that discretion is the better part of valour, Goyal knows only too well that he is heading for a financial crash. His company, already negative in terms of net worth, will have to be sold for Re 1. If Goyal is smart, Jet itself should file for bankruptcy, and not wait a few more weeks for the financial creditors to do so.

It is surprising that the markets still value Jet at Rs 2,700 crore (based on a share quote of Rs 237 around 11 am on Friday), which is 23 times the share’s face value. Clearly, investors believe that Goyal will still pull something out of his empty hat, or it may be a severe case of “loss aversion”. Humans are particularly averse to suffering losses even if the cost of not losing today is losing much more tomorrow.

Goyal’s history at Jet yields many business lessons for those willing to learn.

One, businessmen don’t seem to learn much from the failures of other businesses. Despite the fall of Kingfisher in similar conditions, Goyal has learnt no lessons. If you hold on for too long, you dig yourself into a deeper hole. The fact that creditors went on lending money to him shows that even banks learnt no lessons from the Vijay Mallya fiasco. The banks are now in another huddle trying to figure out what to do.

Two, when governments are less willing to bail out cronies, it is only your own ability to bring in equity or a strong partner that matters. Trying to retain high equity or control of a company when you need to sell out to save is foolishness. Goyal survived in the past by using his lobbying powers to keep out new competitors (Tatas in the late 1990s); in 2011, Kingfisher was elbowed out by not allowing foreign airlines to invest in the airline, and Goyal was the beneficiary of allowing Vijay Mallya’s airline to die. Today, the surviving parts of the industry will be hoping his own airline will exit the business and save them the blushes.

Three, trying to wait endlessly to encash assets at higher values can make things worse. Goyal could have got better value for his loyalty programme last year, and his debts would have come down by now, enough to find selling easier today. But he didn’t do either, and he has destroyed value in both the airline and his loyalty programme. In similar circumstances, Anil Ambani delayed the sale of his telecom towers business, and ended up having to be bailed out by Mukesh Ambani – and this saga is still to end. The moral: A good enough valuation today is better than the best theoretical valuation one can get some time in the future.

Four, if your profitability is only dependent on low fuel prices, by definition your business model is flawed. Likewise, and by analogy, if Indian IT can be profitable only because of cheap labour, the advantage is not sustainable. Competitors can get the same cheap engineering talent today by setting up shop in India, and when they do so, your own costs quickly start moving towards global levels.

Five, and this is a message for employees: if you cannot read your own company’s balance-sheet, you cannot expect to be paid. Businesses need profits to stay afloat and retain you in the job. In the age of repeated business failures, employees ought not to think that jobs are forever. The longer you stay in a losing company when it can’t pay wages, the more the company will owe you when it finally goes bust. You lose more. Get out when you are still employable.