(Bloomberg Opinion) -- For Jet Airways India Ltd., it's always only about one rupee.
As I wrote last month, the troubled full-service carrier needed to garnerย an additional 1 rupee (1.4ย cents) per available seat kilometer to make up for itsย cost disadvantage against no-frills rivals. Cutthroat price competition denied it that opportunity, and now banks are picking upย a majority stake โย at a price ofย 1ย rupee for 114 million shares.
The gamble, which seeks to avoid puttingย India's oldest private airline into court-administered bankruptcy, will be put to a shareholderย vote on Feb. 21.
Beyond that, the details of the rescue plan are fuzzy.
How much ofย the airline's 76.54 billion rupee ($1.08 billion)ย borrowingsย will get convertedย into equity? Between 25 billion and 30 billion rupees, estimatesย an aviation analyst, while an article inย the Business Standard pegs the reduction atย 10 billion rupees. On the other hand, Chief Financial Officerย Amit Agarwal said on a conference call that the deal with banks would cut the debt burden by (you guessed it)ย ย โ1 rupee.โย
How will new funds enterย the business? Founder Naresh Goyal and Abu Dhabi's Etihad Airways PJSCย are expected to bring in equity. But Etihad, which is expected to lead the round, doesn't want to trigger India's takeover code, which will then forceย it to buy shares from minority investors. The solution, according to Livemint, may be a 40 billion rupee rights issue toย which lenders (as newย equity owners), as well as Etihad and Goyal will subscribe.
Banks will get into trouble if the rescue eventually fails, like it did in the case of a 2011ย debt-to-equity swap at the now-defunct Kingfisher Airlines. Soย they will probably want to share the risk with a new investor. The name of India's state-owned National Infrastructure Investment Fund, or NIIF, is doing the rounds.
The final pictureย is still muddy, but the consensus seems to favor 50 percent-plus ownership byย banks and the NIIF; a 22 percent to 25 percent stake withย Goyal, who currently controls 51 percent;ย 12 percent withย Etihad, diluting the Middle East carrier by half;ย and the remaining sharesย with the public.
To this 40 billion rupee equity infusion, add the 17 billion rupee aircraft debt, which can be repaidย by selling Jet'sย 16ย planes and leasing them back. (A Boeing Co. executive reckons that Jet can get up to $300 million, orย 21 billion rupees, from the aircraft.)ย
That's how 57 billion rupees out of Jet's estimated 85 billion rupeeย funding deficit can be plugged. As for the remaining 28 billion, this gapย will closeย only if lenders agree to convert a part of their loans into a quasi-equity-typeย instrument. BloombergQuint says cumulative redeemable preference shares, carryingย a 0.01 percent coupon, may be part of the toolkit.
On paper, the plan looks like it mayย work. Yetย Jetย shares, which have droppedย 70 percent over theย past year, haven't reacted. After all, minority shareholdersย will also get diluted together with Etihad and Goyal. The founder might lose his board seat. Who'll be in the cockpit instead of him?ย State-owned banks (plus NIIF) will have control, but they don't know how to run an airline. Besides, even asย Jet turnsย into a semi-state-owned carrier, taxpayers already have another mouth to feed. The government tried to sell 76 percent of Air India Ltd., together with $5 billion in debt; there were no takers for the unprofitable flag carrier.
Between them,ย InterGlobe Aviation Ltd.'s IndiGo, Jet Airways andย SpiceJet Ltd., the three publicly traded Indian airlines, lost 200 million rupees per day between April and September because of high oil prices and a weak rupee, according to ICRA, the local affiliate of Moody's Investors Service. And yet the world's fastest-growing aviation marketย is gripped byย a mad expansion it can't stop.
IndiGo, the biggest of the three, will increaseย its passenger carrying capacity byย 34 percent between January andย March despite a crippling pilot shortage and a 75 percent profit slump in the previous three months. SpiceJet, which had a passenger load factor of 90.9 percent in January,ย announced 12 new domestic flights on Tuesday. With 90 more aircraft to be added to the Indian fleet over the 12 months starting in April, cheap tickets will continue to dog profitability.
As long as IndiGo and SpiceJet keep ratcheting up the competitive tempo, only a well-capitalized Jet Airwaysย will be able to stay in the ring, especially if oil prices spike again or the rupee collapses. However,ย state-owned banks, fearingย investigation by the authorities in case theย turnaroundย fails, will try to economizeย on haircuts on the debt. That might notย leave the airline with enough of an equityย cushion toย stomach near-term losses. The new majority owners will also want an early exit. Aย combination of squeamishness and impatience couldย doom this airline's second take-off.
To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
ยฉ2019 Bloomberg L.P.
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