Over a nightcap at the InterContinental Hotel overlooking the alpine slopes of Europe earlier in the year, Naresh Goyal was dispensing avuncular counsel to a fellow NRI billionaire. Garrulous as ever, his demeanour gave away no signs of stress in the airline he had founded a quarter of a century back. Even a few weeks back, investors couldn’t have possibly second guessed the massive turbulence that Jet Airways was flying into yet again. This May, Jet celebrated its 25th anniversary with much cheer. Company statements attributed words of supreme confidence to its chairman Goyal.“The outlook remains bright,” he said in the latest Jet annual report. On another occassion, he indicated that an investment in ailing national carrier Air India, potentially running into several thousand crores, wasn’t off the airline’s radar.Barely a quarter later, the headlines hit them last week — India’s second biggest airline by market share had cash just enough to survive for 60 more days. That was enough reason to put the stock into a tailspin to crash nearly to its a 52-week low. Goyal and Jet’s management headed by CEO Vinay Dube, were imploring its pilots, engineers and technicians to take pay cuts up to 25% if they wanted their employer to survive.Jet has denied it gave the 60-day deadline deflecting attention to the pan industry headwinds impacting sectoral profitability across the world’s third-largest aviation market. “Despite the high growth environment, the aviation industry is currently passing through a tough phase given the rising fuel prices, a depreciating rupee, which is further compounded by the mismatch between high fuel prices and low fares,” says a spokesperson at the airline in response to queries.“As a part of the turnaround plan of the company, several cost optimization and revenue enhancement measures are being taken and are ongoing. Similarly there are many commercial initiatives which are taken by the company from time to time,” she adds.To be sure, a 97% decline in net profit of InterGlobe Aviation’s IndiGo, the country’s largest airline, has put everyone in a disarray.Even then, Jet’s financials do suggest it is short on time just 5 years after it sold 24% in the company to Abu Dhabi-based Etihad Airways. The total cash and cash equivalents at the end of last fiscal year, stood at Rs 320.50 crore, the levels at which it was in 2013-14 and less than a fortieth of closest rival IndiGo at the end of FY18. The net debt as on March 31, stood at Rs 8,150 crore, down 23% in half a decade, but still significant and more than threefold of IndiGo.“Jet is clearly struggling with a very tight liquidity position and highly streteched balance sheet,” argues Achal Kumar, an analyst with HSBC.
AIR POCKET The macro pressures coupled with legacy costs —fleet, maintenance, distribution and salaries – seems to have led the airline into a perfect storm. The airline is estimated to be bleeding Rs 5 crore-10 crore daily in operating expenses alone.Banks are therefore reluctant to lend additional working capital until it shows a turnaround plan. The company hasn’t defaulted yet but with huge repayment obligations spread over three years, the outlook is grim.“The company has a definite turnaround plan on the basis of which discussion with banks etc. are in progress and therefore no speculative conclusions need be drawn,” says the airline spokesperson cited above.Analysts aren’t biting.“Jet having the most negative net worth in the airline industry, would make it even more difficult to raise funds,” says Mahantesh Sabarad, vice president at SBI CAP Securities.Etihad Airways which owns a quarter of its shares, has also tightened its purse strings. As some of its other airline investments have soured it is not ready to burn more cash to fuel Jet. Meanwhile Goyal, perhaps one of the world’s best networkers in aviation, continues to court new friends, including commercial partner Delta Air Lines for lucrative deals. All this, while painstakingly micro-managing his company, refusing to let go of old processes and people and often in disagreement with his own management.The spokesperson denies this, saying “all decisions are taken by the competent forum be they the Board of directors or its committees”.Jet’s own executives admit a turnaround isn’t easy.“The airline will need to invest money to refurbish its planes and infrastructure and make the company more agile. The professional management needs a mandate to completely turnaround the operations,” says a senior Jet executive.So unless Goyal has a trump card up his sleeve and forge a fresh strategic partnership for a much needed equity infusion, the airline can totally careen off the runway.
Excess Baggage“Chop off dead wood,” says Shukor Yusof, founder of Malaysian aviation consultancy Endau Analytics, as the key solution for Jet, tacking on review of its business model and cost structure.“It has not really evolved as an airline, is risk averse, lacks new ideas or innovation..basically a 1970s airlines in 2000s disguise,” quips a senior executive at a rival airline, calling Jet “a slightly more service-oriented version of Air India”. The beleaguered national carrier is struggling with its own legacy issues, bloated costs, debt, workforce and archaic processes. On Friday, Vinay Dube Jet’s CEO in a statement said it is taking several measures to reduce costs and stay resilient. “Some of these include sales and distribution, payroll, and maintenance, among many others.” To be fair, Jet has been able to tighten its belt through greater aircraft utilisation since FY15 compared to many homegrown rivals but its high cost structure has always been a bugbear for its profitability. Its current non-fuel cost per available seat kilometre is 25-50% higher than its peers and salary expenses rose by 53% in the last five years, overtaking plane lease payments as its second-biggest expense after fuel. When Dube joined, a year back, he was given a list of 100 executives that needed to be given “gracious exits.” Only a fourth have been shown the door till date. They include regional airport managers Valerian Lobo and Rakesh Chawla following whose exits the post was removed from Jet’s hierarchy;Colin Neubronner a senior vice president for sales and marketing along with the entire sales team in Singapore; country managers such as John Victor in charge of Colombo; four executives in the engineering department and several airport managers.Several more will be asked to go but Jet still remains a top-heavy organisation and the industry’s best paymaster for senior management. It still has 25 vice presidents, senior vice presidents and executive vice presidents who get annual salaries starting at Rs 2 crore, says one of the executives cited above even after the total strength of senior leadership halved in the last two years. Dube and his top brass have already taken a pay cut of up to 25% but pilots, who were also asked to join in, refused. “We took salary cuts of about 10% in 2001 after the 9/11 attacks and again in 2008 after the Mumbai terror strikes, both of which affected air travel across the world and revenues. We took a cut in flight duty allowance last year which comprised of 3%-8% of our salary. It was promised to be restored but hasn’t been yet,” points out an aircraft engineer at Jet who doesn’t want to be named.In 2008, Jet gave pink slips to a total of 1,900 employees. It took them back in two days after vehement protests. The engineer adds that 11 years after Jet acquired Air Sahara, it still hasn’t managed to bring in complete pay parity between employees of the two companies often triggering internal conflicts. It doesn’t help that Jet changes its functional structure as frequently as its priorities and partners. The airline recently changed its commercial reporting structure placing Marnix Fruitema, former vice president at Jet’s new partner Air France-KLM at the helm. This was after four reshuffles in 18 monthsAt one of the recent meetings with employees, Dube said there would be a freeze on hiring in several functions, and if the expansion called for 2,000 more employees, Jet would hire 1,000 and optimize the rest with technology.All this may be too little, too late.
FLEET FAUX PASDube also pointed at “fleet simplification,” in his statement as one of the key initiatives to cut cost. But the airline has taken limited initiative so far to correct the high maintenance costs.Jet has 4 types and 14 sub-types of planes in its fleet of just 120 planes, one of the most complex fleet structure in this region given its size. The average age of its fleet is eight years, with its most of its wide-bodied planes more than 10 years old, older than the ones flown by Air India. Jet’s maintenance costs in three years (it didn’t declare this as as a separate cost item before) has risen by 22% to Rs 2,538 crore, whereas it has added just 4 planes in that time. The airline sweats some its planes — a daily average of 13.52 hours on the narrow bodied Boeing 737 planes counting as among the highest levels of utilization for that aircraft type in the world— but underuses others— it used two of its eight widebodied Airbus A330 planes on domestic routes, flying for 4.3 hours a day, less than half of its range.“Its engineering and maintenance is a bit of a blackbox,” says a former Jet executive. “Added to the complexities of fleet, it often overspends and hasn’t renegotiated some contracts for years.” Some of Jet’s fleet configurations make it worse. For example, the airline has a three-class configuration of 346 seats on its widebodied Boeing 777-300ER planes that fly on long-haul international routes. On the same planes, Air France operates a configuration of 381 seats while KLM uses 408 seats, thus earning higher revenue.A plan to change the configuration has been in the works for a few years, without a final decision. Also, costs for such a makeover would run into millions of dollars, something Jet can ill afford. Also pending for two years, are its plans to lease out its ATR turbo-prop planes to another airline. Jet plans to increase the haul of the A330s, has reworked its engine overhaul contract on the existing Boeing 737s which would mean shaving off annual costs of up to $100 million (Rs 680 crore), says an executive. The biggest savings would come from the new Boeing 737 Max planes, of which it has ordered 225 and is getting 12 by March end.Operationally too, Jet is planning to cut down frequencies on loss-making routes and reduce revenue concentration risks by diversifying its overseas hubs adding Amsterdam (which replaced Brussels) Paris, London and Singapore through better partnerships with Air France-KLM/Delta. This should improve load factors with the help of better connectivity. An executive says it has, since last year cut about 10% capacity to the Gulf, a loss-making sector due to lower demand and high competition. It may cut down more.The airline’s cost of selling tickets increased 84% in the last half decade to Rs 2,538.23 crore, while its average fare per passenger declined 17%. It paid $100 million (Rs 680 crore) as fees to use a global distribution system, a computerized network that enables transactions between travel agents and airlines, and is estimated to pay $140 million this year. In comparison, Air India’s annual GDS fees is $90 million while low fare carriers such as IndiGo and SpiceJet don’t use GDS, leading to major savings in terms of distribution.“Jet has no appreciation of modern revenue management. In the current regime with competition on all fronts, they are struggling to find any competitive advantage other than historical access to slots and bilateral rights. They think the only thing that matters is in-flight service,” says the rival airline executive quoted above.
WHO IS THE PILOT?Last Friday, was Dube’s first work anniversary in the airline. He was busy firefighting and soothing employees in town hall meetings when a lady pilot asked him if he would be around to celebrate his second.Dube, a former senior vice president for Asia Pacific at Delta Air Lines, is lauded as one of Jet’s brightest CEOs. But he isn’t the first to be posed with such questions on longevity. He is the 7th CEO to head Jet in 25 years. Several left abruptly, citing “personal reasons”, which led to strong rumours of disagreements with Goyal or an inability to adapt to his exacting ways. The two and half years before Dube joined were marked with five changes at the chief’s position: four resignations and one reshuffle. An instance is Goyal’s close but chequered relationship with Nikos Kardassis, the airline’s first CEO in 1993, who, with Goyal and his former close associate Saroj Datta is said to have drawn the first blueprint for the airline. Kardassis left in 1999, and was brought back in 2003, first in an advisory position then bumped up to the helm. He left again in 2013, reportedly over differences of opinion with Goyal over the latter’s decision to sell stake to Etihad. Earlier this year, Goyal approached his old friend again and brought him back in an advisory position.Goyal is said to stonewall at times, his management’s practical suggestions. For instance, a proposal to introduce a buy-meals-on-board model for all domestic flights, has been stalled by him for more than a year, given it would dilute his airline’s premium branding.A master at forging alliances, Goyal, according to people in the know, is now making relentless efforts to expand the purview of Jet’s commercial ties with Delta to strategic terms. Jet has a commercial agreement with the Air France-KLM combine which in turn has a transatlantic venture with Delta. Goyal and Jet’s management have repeatedly denied intentions of a stake sale.This delay is the most damaging. “Jet’s restructuring efforts have not led to a turnaround as yet…delays in recapitalization is core to Jet’s current challenges and further delays will enhance risk profile to critical levels especially with continuing losses in FY 19,” says Kapil Kaul, CEO South Asia at Sydney-based consultant CAPA-Centre for Aviation. Goyal has been a survivor so far but Jet being a full service airline needs a radical revamp. Memories of Kingfisher after all are still fresh in mind. The A TEAMIn January this year, Jet Airways CEO Vinay Dube set up a strategy & business transformation team mandated to look into operations and bring about solutions to cut costs and enhance revenue. Key members include…
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