Jet Airways: Exit is best

In Jet’s heyday, service levels set new global benchmarks.  The crew were the best of any airline in the world — providing unmatched courtesy, efficiency and friendliness.  A 40-minute flight in economy from Bombay to Baroda came with a hot breakfast. The food was good, and the seats in all classes better than the competition.  The comparison with what had come before was dramatic. Indian Airlines combined matronly service with a punctuality record where the time-table served only to calculate how late one was. For a while, it seemed that Jet Airways would not only be India’s best airline but a national champion, ruling the international skies.

It all then started to go sour. A series of blunders began with the purchase of Sahara in 2007. Renamed JetLite, it was clumsily integrated into Jet Airways. When Jet tried to restructure and reduce employment in Jet Lite, the government stepped in and made them rehire everyone. Not content with one low-cost carrier, it launched another, Jet Konnect, and then introduced a business class on the low-cost carrier. The end result was a muddled customer offering. In 2010, Jet had five different domestic offerings — business and economy with meals on their full-service domestic Jet Airways flights, Jet Connect Plus and economy on Jet Konnect, and economy on Jet Lite. The ticket agents were probably as confused as the passengers.  As Jet got into financial trouble, it managed things poorly. Staff benefits were cut back, demoralising employees, and diluting the key differentiator of the quality of service that came from a proud team.  

The offerings were eventually sorted out, and Jet reverted to being a full-service carrier with an economy and business class on all flights.  But the damage had been done.  In the intervening years, Indigo had entered the market with a single offering, and had steadily increased market share. You may not like what you get with Indigo, but you know what you get.  Jet somehow managed to fill its flights and still make a loss — the mark of a broken business model. When Jet started suspending flights in January of this year, the question was not if the end would come but when.

Apart from this story of management, Jet Airways offers two important lessons. First is the role of government.  Naresh Goyal has been famous for his political connections. Lobbying by Jet, and later Indigo, did much to delay Tata’s entry into the airline industry. Consider the flip-flops on foreign investment. When Jet began in 1993, it was 60 per cent owned by Naresh Goyal’s entities and 20 per cent each owned by Gulf Air and Kuwait Airlines.  In 1997, the rule was changed and foreign ownership in airlines was not permitted (which effectively grounded Tata’s plans for a joint airline with Singapore Airlines), so he bought over their share. Later, the government clarified that foreign investment in Indian carriers was permitted — provided it didn’t come from an airline!  Now why a pizza-maker or super-market should be permitted to invest in an airline, but not an airline, would effectively compete for the booby prize in policy-making. Finally in 2012, foreign investment in Indian airlines by foreign airlines was permitted.   

Jet Airways (Illustration: Ajay Mohanty)
Naresh Goyal’s connections also seem to have delayed the reckoning with banks.  A banking system immune to influence would have forced Jet Airways into resolution when it still had time — and not the long, lingering demise we have witnessed.  One cannot help wonder if a quick recognition of NPAs, and forced change in ownership some years ago, would have preserved Jet Airways and its jobs.  

But the most important lesson of Jet Airways is the unfolding future. The collapse of Jet Airways has been greeted with great concern — concern over fares, that have risen as capacity has shrunk, over the fate of Jet’s 16,000 employees, and the depressing sight at Bombay and Delhi airports of dozens of Jet aircraft literally gathering dust. But we must note the many positive indicators too.  SpiceJet, which also runs a 737 fleet, has suddenly come to life — taking over the leases of Jet aircraft, not even bothering to repaint them, and adding dozens of new flights.  Vistara has seen capacity and fares rise, improving viability and speeding up investment in new flights and services.  Indigo just reported record profits for Q4.  Who knows, maybe even Air India will make a profit in spite of its Rs 55,000 crore of debt.  The saddest aspect of Jet’s demise is its employees.  But here too, we hear of hundreds of pilots and cabin crew being hired by SpiceJet and Vistara.  The employees need support, given the suddenness with which they lost their jobs, but given some bridging help their commitment and quality will enable them to move on, helping other airlines and industries to prosper. In brief, an industry that was under great financial stress across the board, is suddenly healthier by Jet’s collapse.  

This is how a market economy should work. The Austrian economist Joseph Schumpeter showed that the essence of a vibrant market economy was competition.  Competition fostered innovation, and innovation brought forth gales of “creative destruction”.   The old and the inefficient were replaced by the new and the dynamic.  The essential mechanism is Exit, something we should celebrate much more.   Airlines in the USA go bankrupt almost as often as Donald Trump.  Two of the three largest carriers flying in the US today — American (2011) and United (2002) — went bankrupt — and since revived.  

 So as we rightly concern ourselves with Jet’s employees and their welfare, nothing else should concern us.  Not the increase in fares we see as capacity has shrunk.  As SpiceJet and Vistara and Indigo add seats and flights, competition will come back and take care of it.  Not the bank loans that won’t be repayed.  Banks lend money on commercial terms — they price risk into the interest they charge, lending to the best borrowers at present at 9 per cent when they borrow from the RBI at 4.5 per cent, giving them the highest spreads in the world.  (And next time round, they may resist pressures that tell them to keep lending to a business that a good banker wouldn’t touch).  And not, even, the removal of a favourite service provider that built an Indian brand we could all be proud of— others will take its place, and someone might even build a world beating Indian flag carrier. Exit makes the world better. 

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The writer is co-chairman of Forbes Marshall, past president of CII, and chairman of the Centre for Technology, Innovation and Economic Research (CTIER) Email: ndforbes@forbesmarshall.com