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Steep and accelerated swings in oil prices can induce gargantuan impacts on companies, economies, and politics. History bears testimony to the fact that unwarranted changes in oil prices have dismantled economic conditions, political budgets, and corporate strategies. Needless to mention, there isn’t anything more volatile than oil prices and that the world continues to be governed by changing oil prices at large.


On the corporate side of things, oil prices have, at times, been the reason behind the downfall of well-established companies. To add to this, they have shaken up entire industries as well, causing every constituent company in that industry to venture into a turbulent spiral.


Talking about turbulence, rising oil prices have lately rattled a sizeable industry in India – the aviation industry. The Indian airline industry, being an oligopoly market, is run by a few major operators who indulge in intense competition with respect to prices and services and are highly interdependent on the actions of one another. This very interdependence and competition is the reason behind the woes of the airline sector in India today. Inability to hike prices despite the unfettered rise in input costs due to the oligopoly nature of the industry has kept airline aggregators on their heels, as they risk losing market share. The statistics today seem to be extremely ironical given that India has emerged as the largest growing market in terms of passenger growth in the world.


At the forefront of this turmoil is the second-largest airline in India, which is struggling to keep alive its 25-year-old legacy – Jet Airways. Notwithstanding its 17.8% market share (as of October 2017), Jet is cash-strapped since the beginning of 2018. After earning profits for two consecutive years in 2016 (₹ 1173 crores) and 2017 (₹ 1482 crores), Jet incurred losses of ₹ 767 crores in the financial year ending 31st March 2018. On delving deep into this loss, we find that the combined output of the first three quarters of 2018 results is a profit of ₹ 269 crores. That is to say, the overall loss in 2018 owes its courtesy to the colossal loss of ₹ 1036 crores in the 4th quarter. The situation got worse in the 1st quarter of FY 19 with losses mounting to Rs. 1323 crores. On the whole, an airline which finally started taking flight 3 years ago, now finds itself in an unusually shaky position with an alarming fear of crashing to the ground.


So what are the reasons behind this steep and sudden downfall? What is it that lies at the backdrop of the quandary that Jet finds itself in?

  1. Rise in oil prices – As has been mentioned at the start, it is the unconstrained hike in oil prices that has strangled the airline industry, especially Jet. Brent crude oil has witnessed a continued rise in price over the last year. The price of the same was US $74.4 per barrel in June 2018, a stark 60% increase from the US $46.37 per barrel in the same period last year. It is owing to this that Jet has had to expend 29% of its revenue over fuel costs in FY 18 as opposed to a decent 23.75% in FY 17. This is coupled with an unusual increase in the “Other Expenses” from Rs 9395 crores in 2017 to Rs 10998 crores in 2018. Thus, increasing pressure on expenses has pushed Jet’s financials against the wall.

  2. Depreciation of rupee – Akin to the rise in oil prices is the continually depreciating rupee. The weakening rupee has aggravated Jet’s troubles as oil imports have become all the more costlier on account of it. More importantly, around 10% of the total expenditure of the airline comprise the “Aircraft Lease Rentals” that have to be incurred in dollars. Thus, while having incurred more or less the same rental expenses in terms of dollars, Jet has had to bear a lot more in terms of rupees which rose continuously from Rs 63 in January and breached the Rs 70 mark in August.

  3. Wide array of aircrafts – Jet has got multifarious aircrafts in its fleet of 112 planes, this being one of the most complex fleet structures in the world. In the absence of fleet simplification, the airline has not been able to keep in check the extraordinarily high engineering, maintenance and operational expenses. Furthermore, most of its planes are older than those of other airline operators, thus demanding comparatively more upkeep costs.

  4. Intense Competition – Given that increasing costs are the backbone of Jet’s misery, shouldn’t Jet simply increase prices to break even? Unfortunately, this would not be a solution. As discussed earlier, the oligopoly airline market prevents companies to hike prices as with the rise in prices, consumers would move to other aggregators offering similar benefits at lower costs causing Jet to lose its market share. Thus, the company has had to maintain its RASK (Revenue per available seat kilometre) at Rs 4.12 while its CASK (Cost per available seat kilometre) has kept on increasing disproportionately northwards of Rs 4.60. On the whole, increase in prices would be a foolish move until each airline in the industry collectively decides to do so.

The consequences:

Such an impasse was bound to supplement the predicament of the company in more than one way. Lately, Jet has been doing the rounds in the news, earning lots of negative publicity. In a hasty bid to cut down on costs, Jet decided to ask employees to take pay cuts ranging from 5% (for those earning Rs 12 lakh annually) to 25% (for those earning Rs 1 crore and above). Since payroll is a significant constituent of the cost structure, Jet wanted its employees to follow suit as senior management had already taken pay cuts. To intensify the precariousness of the situation, Jet stated that the company would not be able to operate beyond 60 days unless such measures were undertaken. However, the plan was scrapped as a result of hostility from employees.


Consequently, Jet was forced to delay its quarterly results, which were originally supposed to be declared on 9th August 2018 by over a fortnight to the 27th. This alone led to a 3.9% slump in its share prices. In fact, the entire financial turmoil has caused stocks to plunge by as much as 65% this year.


How other airlines have fared?

Be that as it may, there is one thing that has to be noted in this regard. Most of the problems that have kept Jet struggling lately are common to all the companies who operate in the market. Hence, we must also take into consideration the position of other major airline operators and why they are not sinking in dire straits.


The major player in contention is IndiGo, the largest airline in India with 41.3% domestic market share (as of June 2018). Indigo too has not been immune to the weakening rupee and rising oil prices. The company’s quarterly profits have plunged steeply from Rs 762 crores in December 2017 to Rs 117 crores in March 2018 and further down to a mere Rs 27 crores in the quarter ending June 2018. Furthermore, state-owned carrier, Air India is also cash-strapped and has delayed employee salaries for 6 times in the past 7 months, amidst disinvestment tensions. Lastly, SpiceJet, irrespective of the external environment, has been doing quite well over the past few months to keep its costs in check, given that it has just come out from the brink of bankruptcy. Suffice it to say, the airline industry in India has been hit pretty hard. However, it is Jet who is feeling the pinch the most since other companies have promoters with deep enough pockets to tide over the ongoing financial crisis, in this race for survival.


Jet, though, is seeking funds to meet liquidity requirements after cash on hand dwindled to $46 million, the lowest since at least 2008. Jet has reported losses in all of the past 11 years but two and needs to repay $447 million in debt coming due through March 31.


What’s next?

So what’s next for the multi-million dollar company? The situation, however vulnerable, is still not out of hand, at least not when you have the shrewdness of Mr Naresh Goyal, the chairman of the company, at the helm of the management. If aviation companies like Indigo and SpiceJet could handle such menacing situations, writing off Jet Airways in the current debacle would be against rationality. This is simply so because Jet, at the end of the day, has it within them to get through the turmoil. One of the things that it can rely on is the very unique two brand operation technique it has – Jet Airways, the premium segment and Jet Lite, its budget segment. This is an exclusive feature of Jet which it has at its disposal and must use it in the best possible manner to ensure things fall in the right place. Maybe expanding the equity base of the company is not a bad idea given the circumstances. Issuance of new equity shares does put the liquidity, besides the authority, of the company at stake but that would make sure that cases resembling Air Berlin or Alitalia is not put on show again. When looked at deep into the reasons of why Air Berlin and Alitalia had to face the fate they faced, one realizes that Jet has two things in common with them- Etihad and cash crunch. The lack of support from Etihad to these entities when they needed it the most led to its bankruptcy and eventually its non-existence. Jet thus is expected to raise $400-500 million through equity funding for which market giants like Blackstone, TPG and Indigo Capital Partners have been contacted. Raising funds at this juncture is imperative and when debt is tough to raise, as is in the case of Jet Airways, raising funds through equity doesn’t sound perilous. Besides the keen interest shown by a few companies to buy a stake in Jet Airways’ frequent fliers loyalty program, is a ready and safe means of raising money when seen from Jet’s perspective. However, the company ought to complement any move with austerity in order to succeed in reviving itself. This must come in the form of cutting down both the operational and non-operational expenses. Most importantly, the company has to ensure that the amounts which get written against “other expenses” are reduced considerably in the forthcoming years for they have constantly been weighing down the positives of the company.


Conclusion:

Reiterating what has already been stated and given everyone’s faith in Mr Goyal’s astute business-mindedness, Jet Airways is not done yet. This plane is not going to land anytime soon. With a little caution and perseverance, the company is sure to pass through this turbulence and will show itself a green signal to soar to greater heights!


By Rishav Jalan and Pratik Saraf

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