Aviation players unlikely to invest in Jet Airways, may skip bidding

A Jet Airways aircraft waiting at an airport
Indian businesses with interest in aviation are not inclined to invest in Jet Airways, which will be put up for an open auction by a lenders’ consortium shortly. While the $103-billion Tata group has been at the centre of the narrative when it comes to possible contenders for buying Jet, at least two sources in the know said there’s no such plan. The Tatas already operate two airlines — Vistara and AirAsia India — along with foreign partners Singapore Airlines and Malaysia’s AirAsia, respectively.

Other aviation players in the country SpiceJet and InterGlobe Aviation, which runs IndiGo, too, are highly unlikely to invest in Jet, it is learnt. High cost of acquisition, uncertainty over corporate governance at Jet and their own weak financial conditions are reasons why major Indian airlines would skip bidding for Jet Airways, executives aware of the developments told Business Standard. The companies were not available for comment. 

“Under the current conditions, I see only major conglomerates as potential bidders,” says an investment banker associated with the Air India’s disinvestment process, which had received zero bids last year. There’s tremendous opportunity to grow the international business and Jet Airways would have been an ideal opportunity for that, an executive with a leading airline said. “But the question is at what cost?” However, a team of merchant bankers are working along with the lenders’ consortium and are hopeful of finding a buyer by end of May.

Even as Jet Airways founder Naresh Goyal has signed a binding agreement with lenders to reduce his shareholding to below 10 per cent once a new investor comes in, the move is not enthusing the aviation industry to bid, an executive tracking the development pointed out. Goyal stepped down as chairman of the Jet board halving his stake to 25.5 per cent earlier this week, but he won’t be barred from bidding for the airline, which is operating only a third of its fleet due to non-payment to lessors. 

Lenders’ consortium led by State Bank of India, which now owns more than 50 per cent in Jet, would invite an expression of interest to find a new investor on April 9. The banks hope to conclude the deal by the end of May. 

Although Tatas were believed to be in talks for investing in Jet a few months ago, nothing came of it. 

The board of directors of Tata Sons, the holding company of the group, is learnt to have decided soon after that there should be no dialogue with Jet for any strategic deal without full diligence including a forensic audit. The talks between the sides never resumed, another source said, while citing “legacy issues’’ and the “origin of Jet funding’’ as problem areas that are tough to address. 

Even with Naresh Goyal stepping down, there’s no change in Tatas’ stand, he pointed out.

The past may come to haunt any buyer at any point, one of the sources quoted above said. Instead of looking at acquisitions, Tatas are looking to concentrate on their own airlines and expansion plans, especially as Vistara was recently allowed to fly overseas. A source in a private airline called Jet an albatross and feared investigations by Income-Tax Department and Enforcement Directorate. Also, the worry is that Jet Airways’ current liabilities along with its debt will make buying the airline very costly. “What are we looking at? There is a debt of around Rs 8,500 crore. There are six months of salaries to be paid, airport charges to be paid, lessor payments to be made. Anybody who wants to acquire Jet Airways has to come with a cheque of at least Rs 15,000 crore. I don't see any existing airline having that leverage or will to do so,” a senior executive at SpiceJet said.

Another airline executive argued that with an interim body operating the airline for the next two months at least, Jet’s condition could worsen. ‘’What will be left of the airline,’’ he asked. An executive at IndiGo said with planes remaining grounded and the airline not operating in its full strength, losses are going to climb daily.

Although SBI, which is in the driver’s seat now, has promised to bring back 40 more planes into the Jet fleet in April, industry sources said it may take longer. “No one will put this quantum of money without thorough due diligence which is going to take at least three to four months, “ a source said. “SpiceJet's own current liabilities are at an historic high. Acquiring Jet Airways, which is almost twice their market cap, will kill the company,’’ an executive said. As for IndiGo, the problem is it will run into issues of monopoly as it already enjoys a market share of more than 40 per cent, another executive said.

The air of caution in the aviation industry about acquisitions should not come as a surprise, an analyst said recalling past examples of takeovers and their outcome. Jet’s downfall is being widely attributed to the pricey acquisition of Air Sahara, at Rs 1,450 crore, by Goyal in 2007. Similarly, Vijay Mallya-led Kingfisher’s decline had started after its merger with Air Deccan in 2007. “There’s lots in history to take lessons from,’’ an executive said, pointing out that there are so many mismatches among airlines. “It’s not like buying a steel plant,’’ he added.

Also, nobody’s quite ready to believe yet that Goyal will cease to exercise control over the airline that he had founded more than 25 years ago. He may still enter a tieup with an investor to make a comeback, many believe. Also, Abu Dhabi-based Etihad Airways, which has shed its stake to 12 per cent from 24 per cent earlier, will take a final call on March 31 at its board meeting on whether it would exit Jet or no.