If Jet Airways Bailout Fails, Who Pays the Price?

Jet Airways, which had two former civil aviation secretaries on its board, couldn’t come up with a plan to stay afloat. Will an interim committee with just two months of fresh funding do any better?

The government last week seems to have nudged public sector banks (PSBs) to bail out the bankrupt Jet Airways yet again. Was this a good idea? No, but there was no alternative either.

Jet Airways needed a quick solution to get the planes back in service. Air travel is no longer restricted to the affluent; it is now an important component of public transport. A giant airline which, for a while, was India’s biggest domestic carrier, going belly-up would mean punishing ordinary citizens for the follies of banks and the government. People need to travel for work or pleasure and many had done bookings for the summer holidays months in advance.

Also, in a tightly regulated sector that restricts open competition and limits the number of players, the government has a responsibility to ensure adequate air transport in a fast-growing economy like ours. Also, finding a buyer is always easier when the airline is in operation because its staff, pilots and aircraft are the main assets.

Let’s not forget that the Bharatiya Janata Party (BJP) would also have been affected in a big way during election time. While top leaders may charter flights or heli-drop to their rallies, large teams of party workers have to zip around on commercial flights to arrange their mega-rallies. So, a bailout of this sort wouldn’t have happened without political support. But is this the best that the bankers could have done? Let’s take a look at the deal.

The Bailout Deal

The lenders did well to force Jet Airways to convert a debt of one rupee into 11.4 crore shares giving them a 50.5% stake in the capital; but a lot of other issues remain unclear. Banks will provide fresh funds of Rs1,500 crore to restore some normalcy in the airline’s operations. This is supposed to be against ‘security of assets’; but this is mainly the value of the 50.5% equity that the lenders have extracted. If no buyer materialises in two months, then the share price, which shot up after the bailout, will fizzle out equally fast and lenders will be left with worthless paper and the prospect of liquidation.

A corporate announcement says that the money will be used to clear dues owed to vendors, creditors, lessors, pay salaries to Jet’s 22,000 employees and get more aircraft off the ground again. A committee of experts, along with management consultants and an audit firm, will handle the revival of the airline and, probably, find a buyer.

The official announcement says that founder Naresh Goyal and his wife Anita will step down from the board of directors but omits many important details that were revealed in media interviews by Rajnish Kumar, chairman of the State Bank of India (SBI).

In an interview to The Economic Times, the SBI chairman spoke of a ‘binding agreement’ with Mr Goyal the details of which have not been informed to the Exchanges. The announcement makes no mention of the fact that Naresh Goyal will continue to hold 25.5% of the equity and it is a big mystery why lenders continue to be so generous to him. The stake of Etihad Airways also halves to 12%. With Etihad, or any other institutional shareholder, Mr Goyal can still block special resolutions, although the SBI chairman has said that it is not possible.

Mr Kumar told The Economic Times, “If any new investor wants that his (Mr Goyal’s) shareholding should come below 10%, then he will have to abide by that. Both Etihad and (Mr) Goyal will have to sell their stakes as desired by the new investors.” He then adds a surprising detail, “He has to sell his stake or bring in an investor willing to back him.” This means that Mr Goyal is very much in the picture even after the bailout. Why hasn’t the ‘binding agreement’ with Mr Goyal and Etihad been disclosed to the stock exchanges? Does it have any more surprises?

It is also unclear from the interview whether Mr Goyal can retain a minimum of 10% or will have to sell out fully, because Mr Kumar seems to hold out both possibilities. And, if Mr Goyal does sell, will he be walking away with a nice nest egg? The biggest mystery is: Why isn’t anyone holding him responsible for repaying the massive Rs8,000 crore that the airline owes banks?

It is almost as though this is a national burden and Mr Goyal has nothing to do it. Instead, we were treated to the fake optics of Mr Goyal sending out an emotional farewell letter, broadcast to all customers, in which he says, “No sacrifice is too big for me to safeguard the interest of Jet Airways…”

This is hugely ironical when you consider that Vijay Mallya, whose Kingfisher Airlines owes Rs9,000 crore (with interest) to lenders is having all his assets liquidated and faces untold humiliation. Is the difference in treatment explained by the fact that Mr Mallya chose to run away to the UK when it seemed likely that he would be arrested?

It is important to remember that Naresh Goyal’s business dealings are far more controversial than those of Vijay Mallya; but he was sensible enough to maintain a low profile and adopt a humble demeanour.

In 2001, Arun Shourie, then a minister in the NDA government, had revealed details of an Intelligence Bureau (IB) report, which raised serious questions about Mr Goyal’s funding and some dangerous links to the underworld. While Mr Goyal vehemently denied it, the report was buried with the active support of key BJP stalwarts and every successive government thereafter.

On the contrary, Jet  was allowed to fly abroad; got the choicest destinations; was allowed to buy Sahara Airlines in what was probably an ego trip to retain market leadership (for a short while) and also wangle a great deal for Etihad Airways, to persuade it to come in as a strategic partner.

There are many things that lenders should have done over the years to rein in the airline, but failed to do so and allowed its debt to balloon. Aviation expert, Jitender Bhargava, and others raise some pertinent questions that need answers. For instance:

1) Why didn’t the lenders demand a board position earlier? They will now nominate two directors on the board.

2) Jet Airways, which had two former civil aviation secretaries—Ashok Chawla and Nisim Zaidi—on its board of directors, couldn’t come up with a plan to stay afloat. Will an interim committee with just two months of fresh funding do any better?

3) Wasn’t it obvious to the board that running a full-service airline, when its ticket prices were a bit more than the budget airline and market leader Indigo, was unsustainable? The interim management will need to come up with a plan very quickly.

4) Interestingly, stand of the Reserve Bank of India (RBI) on Singapore-based Wilmar International’s acquisition of Renuka Sugars, seems to rule out a bid for control by Etihad Airways, until that issue is resolved. In that case, Business Standard reports that RBI has refused to recognise a change in ownership. Wilmar, which pumped in nearly Rs4,000 crore, increased its stake from 37.6% to 58% and issued loan guarantees, would be considered a related party and the outstanding loans will remain bad loans. Wilmar plans take the issue to court.

Jitender Bhargava, whose book, Descent of Air India, has boldly exposed the political machinations that led to the fall of Air India, says, “If Naresh Goyal was to pen the salvage plan, would it have been any different?” Jet Airways would need a buyer with deep pockets, political savvy and ability to deal with Mr Goyal, who presence still looms large inside the airline with 25.5% of the equity. Will Mr Goyal himself succeed in finding another financial backer this time? We will know, soon enough.

The SBI chairman has led the restructuring effort and even put his reputation on the line. He told a journalist, “If my transaction is successful, after May 31, I will write a book on it.” If he succeeds, he certainly deserves every accolade; but what if his gamble fails and the airline ends up in a bigger mess, like Air India? Will he be held accountable or will he be allowed to shrug it off and put the airline into liquidation?

Remember, SBI has made a virtue of ripping off small account-holders who do not have the resources to maintain a minimum monthly balance and collecting thousands of crores from them.

Sucheta Dalal is the Managing Editor of Moneylife where this column was first published.