April 5, 2019

Jet Airways deal faces bevy of hurdles

Lenders to Indian low-cost carrier Jet Airways, led by government-operated State Bank of India (SBI), will invite bids to sell a collective 50.1% stake in the struggling airline from 6 April to 9 April.

The banks acquired the stake via a debt-for-equity swap.

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.

SBI is lead lender to Jet, which is shouldering a debt burden of more than $1.15 billion.

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.

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

Finding a buyer for the stake on offer will not be easy, given the carrier’s huge debt pile and Indian rules that restrict foreign ownership of domestic carriers to a maximum of 49%.

On 25 March, the airline’s board approved a debt-resolution plan under which lenders took control of the airline and agreed to fund an immediate $215 million cash infusion.

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 Etihad has been pared to 12.5%.

… Etihad has been seeking an exit

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.

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

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.

… rivals have been picking up slack

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-Bengalore, 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.

… lenders cast wide net for investors

Goyal and lender SBI have reached out to California-based private equity giant TPG Capital and US major Delta Air Lines to explore the possibility of a Jet stake purchase.

At the same time, 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.

Goyal may still have a chance to get back the airline he founded as he is not disqualified under bidding rules; Etihad also is not barred from hiking its holding in Jet, although this is a highly unlikely scenario.

Doha-based Qatar Airways has expressed interest in entering the Indian market in the past.

Indian conglomerate Tata Group expressed interest in buying the carrier in 2018, but negotiations failed, reportedly over Goyal’s continued role in the company.

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.