April 8, 2019

Jet Airways deal faces bevy of hurdles (update)

Lenders to struggling Indian low-cost carrier Jet Airways have invited initial bids to buy up to 75% of the debt-laden carrier, starting a process that will determine the future of India’s oldest surviving private airline.

While all efforts will be made by lenders to sell the Jet stake, other options may be considered should these efforts not result in an acceptable outcome.

Government-run State Bank of India (SBI) is lead lender to Jet, which is shouldering a debt burden of over $1.15 billion.

Jet also has defaulted on loan repayments and vendor payments and has delayed salaries and laid off staff.

The carrier’s financial problems are attributed to the 2006 purchase of low-cost carrier Air Sahara and subsequent losses incurred during a time of high oil prices and intense competition from new players.

Potential buyers were given a deadline of 10 April to submit expressions of interest.

… banks outline bidder requirements

A strategic bidder should have a net worth of at least INR10 billion ($144 million) in the preceding financial year, or at least three years of experience in the airline business.

Prospective bidders are required to settle Jet’s existing debt as part of any deal to buy a stake in the carrier, according to the consortium of lenders.

Jet lenders on 25 March agreed to bail out the airline in a complex debt-to-equity transaction that involved the banks taking a temporary majority stake in the company while seeking a new investor and providing a fresh loan of $218 million to the carrier.

There may have been government pressure for the state-owned banks to put together at least a temporary rescue plan as federal elections are scheduled for April and May, and the government is keen to avoid thousands of job losses.

On that same date, the carrier’s founder Naresh Goyal agreed to step down as chairman as part of a plan designed to bring the airline out of crisis.

As part of the turnaround plan, the 50.1% stake held by Goyal has been reduced to 25.5%, while the 24% previously held by Abu Dhabi-based Etihad Airways has been pared to 12.5%.

It is unclear if Goyal and Etihad would also sell their stakes as part of the auction.

… Etihad has been seeking an exit

In 2013, Etihad rescued Jet by taking a now-reduced 24% stake.

Prior to adoption of the debt-resolution plan, Etihad had asked SBI to purchase its 24% stake in cash-strapped Jet, compounding the Indian carrier’s problems.

Etihad, which has been a reluctant participant in talks to resolve Jet’s financial woes, had offered to sell its entire stake in Jet at INR150 per share, or a total of about $58 million-equivalent.

Etihad also wants SBI to take over its liabilities in the form of a guarantee for Jet’s $140 million loan from HSBC Dubai that was taken out in 2014.

Individuals, including foreign nationals, as well as consortia of up to three companies are permitted to bid for a stake in the financially ailing airline, subject to Indian regulations.

Consortia submitting bids should have no more than three members, with each holding a share of no less than 15%.

After qualified bidders are selected, they will be provided access to the company’s data and the bid document.

Foreign ownership of Indian airlines is capped at 49%.

… private equity tipped to bid in auction

Private equity firms KKR, Blackstone and TPG Capital are among the parties said to be in negotiations to conduct due diligence on Jet.

Delta Air Lines also has been tipped as a possible contender.

Delta remains in negotiations with Italian state railway Ferrovie dello Stato (FS) concerning a rescue of bankrupt Italian flag carrier Alitalia.

UK-based low-cost carrier EasyJet announced on 18 March a decision to withdraw from negotiations with FS and Delta about forming a consortium to explore options for the future operation of Alitalia.

The foreign carriers were considering whether to jointly buy as much as 40% of Alitalia.

Delta’s holdings include 49% of Virgin Atlantic Airways, 49% of Grupo Aeromexico and 3.6% of China Eastern Airlines.

India-based diversified conglomerate Adani Group is a likely bidder for Jet.

The group, with interests in logistics, energy and agriculture, made a foray into airports in February, winning six bids to operate regional airports in India under a public-private partnership (PPP) scheme.

While Adani Group has made an entry into the airport sector, the group previously tested the waters for investing in airlines.

Adani Group had looked at investing in low-cost carrier SpiceJet about five years ago, when the then-promoter, Kalanithi Maran was scouting for a buyer.

Jet, once the largest Indian international carrier by market share, has grounded a majority of its fleet due to inability to pay aircraft lessors.

Grounding has also forced Jet to operate on a curtailed schedule and lose prime takeoff and landing slots.

Due to Jet’s vacating a number of slots in Mumbai, rival airlines have added new flights.

Vistara, the domestic airline joint venture of Indian conglomerate Tata Group and Singapore Airlines, has added 14 new flights to the summer schedule, including five frequencies on the trunk route of Mumbai-Bengaluru, and one frequency each on Mumbai-Kolkata and Mumbai-Hyderabad.

Tata Group’s low-cost joint venture airline AirAsia India is also expected to announce new flights from Mumbai.

Even as the reallocation of slots comes as a relief for airlines looking to add capacity from a congested airport, sources maintain that unless the reallocation is on a temporary basis and the slots are to be returned to Jet once the carrier adds capacity, the development could impact Jet’s sale process.

Jet plans to operate 75 aircraft by the end of April.

The most likely scenario for Jet will involve banks offloading a stake in Jet on the cheap; the need to sell comes at a bad time.

While oil prices have retreated from the highs of last year, Indian airlines are faced with a capacity crunch that has been aggravated by the recent grounding of B-737max aircraft.

The industry is also grappling with a shortage of pilots that has forced Indian airline IndiGo to cancel several flights each day.

Should the banks fail to land an investor, Jet could go the way of loss-making flag carrier Air India, which remains under state control after New Delhi failed to find an investor last year.