A not so happy prognosis

No real surprises at the Jet Airways board meeting on Monday. After a delay, Jet announced its first quarter results and the story was not much different from what was expected. The loss was higher than expected, revenues lower than expected and the first quarter loss staggering.

In general, the company management made the usual noises: It is considering cost cuts, debt reduction and funding options, including infusion of capital and monetisation of assets.

The airline is looking to reduce non-fuel CASK (cost per seat kilometre) by 12-15 per cent in the next eight-ten quarters. It aims to reduce costs by Rs 20 billion over the next two years.

Let me explain why the bit on cutting costs doesn’t sound very reassuring or convincing. Akin to a structure or building, airlines are built with a certain cost structure in mind. The specs of the structure, the fittings and the materials used determine how fancy or simple your building is in its final avatar. Changing that structure mid way is not an option. You have to bring the edifice down to actually alter what’s on offer. One can’t turn an Oberoi or Taj property into a Lemon Tree offering on a whim. Costs can be tinkered with but major structural changes cannot be made once the structure is up and running.

Also, there is a sense of déjà vu. I for one have been reporting on how Jet has been crafting its revival plan for at least the last 10-15 years. The airline has been trying to cut costs, alter its cost structure and boost its revenues since as long as I can recall. But we can all see where we are today.

Two, the airline has said that it plans to induct another 10 Boeing 737 MAX aircraft into its fleet during the year. This doesn’t sound like music to my ears. At a stage when despite heavy traffic, loads and full planes, each aircraft is clearly losing money, adding another 10 might spell further trouble. Unless the economics of operating each plane changes very dramatically overnight, I expect losses to multiply as more aircraft are added to the fleet. 

The airline has said that it will look at ways to infuse funds including capital infusion. This means that Naresh Goyal (NG) will be diluting his holding (thereby losing further control in the carrier) from his current 51 per cent.

This is always an option as there are enough people — it could be a PE investor, another airline or an Indian fat cat — willing to be parted with their money but the real question is at what valuation. With a negative net worth, debts to be paid, a bloating cost structure and salary bill and a bleak future, who will pay how much for a stake in the airline? How long will even that sustain its operations? Jet today strongly resembles Air India, a black hole into which mountains of cash disappear with no trace. 

The airline has also spoken of monetising its Jet Privilege programme but again it is a weak idea. Jet’s frequent flier programme (FFP) is not a patch on what it used to be. At one point, the FFP of Jet airways read like the who’s who of corporate India and a remarkable number of celebrities. But today not only have all the rats, so to speak, abandoned the ship, the numbers of general fliers have dwindled dramatically. Whatever monetisation is possible, I will be surprised if it is enough to keep it afloat over for more than a few months.

Last, there’s all this talk of a detailed examination of whether the airline is siphoning off funds, whether its selling and distribution costs are over the top, whether the amounts paid for various services are higher than they ought to be, whether the airline tends to buy most things at prices higher than its competitors, whether funds are funneled out of the books and so on. DGCA officials are conducting some kind of financial audit of the company. 

Here I think a different approach should be adopted by anyone actually keen to get to the bottom of the matter. Let someone embark on an exercise of calculating NG’s actual net worth and how that has fared over the last 10 years when his airline has been beset with losses. If I were in the chairman’s shoes, I would ask for this — if only to clear my name once and for all.


Outbrain