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Current Affairs 25 March 2019 Digest 2: Jet Airways Crisis: Explained

Indian full-service carrier Jet Airways on January 1, 2019 informed the stock exchanges that it had defaulted on its loan repayments to banks. Soaked in financial losses and debt of over USD 1 billion, the airline is struggling to even pay out salaries to employees.

Mar 25, 2019 16:41 IST
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Jet Airways Founder and Chairman Naresh Goyal and his wife Anita Goyal resigned from the board on March 25, 2019 amid the reports of looming financial crisis in the airlines. However, the CEO of Jet Airways, Vinay Dube will stay on to steer the airline carrier out of the current financial crisis.

The board of Jet Airways accepted their resignation. Naresh Goyal is presently in London, and addressed all 23,000 employees from there. The Jet Airways was founded nearly 25 years ago by the Goyals in 1993.

Post their resignation, the Bank Led Interim Resolution Plan (BLIRP) came into effect for the revival of the airline.

The board approved the invoking of entire 51 percent stake of Naresh Goyal in the airline for the conversion of USD 1 billion the outstanding debt.

The Board of Directors also passed a resolution for induction of two nominee directors of lenders on the board. The board proposed immediate funding support of up to Rs 1,500 crore by way of issue of appropriate debt instrument.

Resignation of Etihad’s nominee Kevin Knight

Another Director Kevin Knight, Etihad’s nominee, also resigned from the board. His resignation indicates that Etihad may not continue with the investment in the company. The Abu Dhabi-based airline will take the final decision on March 31, 2019. Etihad, having 24 percent stake, is the second equity partner in Jet Airways.

The Etihad Airways infused USD 600 million for a 24 percent stake in the airline in 2013. The infusion helped Jet in paying off its debt and fight the growing domestic competition.

Previous exits in Jet Airways

The exit of Naresh Goyal and his wife Anita Goyal is not the first exit of a leader from the board of Jet Airways.

Earlier in November 2018, Ranjan Mathai had left Jet Airways board as an Independent Director. Vikram Singh Mehta too had put in his papers.

Anticipated new joiners

As per the media reports, former SBI Managing Director and former Jet Airways board member Srinivasan Vishvanathan might join the airline’s top leadership. Vishvanathan was on the Jet Board as an Independent Director till August 2018 and has served the company for nearly three years.

Lenders may also invite former SBI Chairman and ex CVC Commissioner Janki Ballabh to the Jet Airways Board.

Jet Airways: A defaulter

Indian full-service carrier Jet Airways on January 1, 2019 informed the stock exchanges that it had defaulted on its loan repayments to banks. Soaked in financial losses and debt of over USD 1 billion, the airline is struggling to even pay out salaries to employees.

It has defaulted in making payments to banks, suppliers, lessors and pilots, a situation that forced the airline to ground as many as 40 planes.

Action by Lenders

The lenders consortium may invoke the entire 51 percent stake of Naresh Goyal in the airline, and will look for a new buyer.

On March 31, 2019, the lending banks would classify the account of the Jet as a non-performing asset (NPA), as per the RBI’s Income Recognition and Asset Classification guidelines.

Once a company announces its failure to make payments, lenders are given a total of 180 days from the first day of default to implement a resolution plan for large stressed accounts. If lenders fail to implement the resolution plan, they then refer the firm for insolvency proceedings.

Why ‘Insolvency’ route won’t be easy for Jet Airways?

Though lenders may advice insolvency route, however, it will not be easy for Jet Airways having no prospect of any obvious investor.

On the other hand, if due to non-payment of dues and salaries, lease agreements for planes are cancelled and the employees move to other organizations, the recoveries might be low. Lenders may not find any tangible assets of to attract new buyers under the Insolvency and Bankruptcy Code (IBC), 2016.

This situation will leave the lenders with the only option to operate the airlines themselves for some time and look for a suitable buyer thereafter.

What led to financial crisis at Jet Airways?

Increasing cost of aviation fuel

The airlines operate on the Aviation Turbine Fuel (ATF), the price of which is determined by global players. The increasing cost of the fuel took a heavy toll on Indian airlines, especially on Jet Airways as it operates on international routes as well.

However, the increase in fuel cost could not be dealt with by increasing the cost of passenger tickets due to low-cost model of the planes.

Low-cost model

The low-cost model of Jet Airways’ planes is one of the biggest factors behind rising operational costs of the airline. Though the airline undertook various measures to cover-up the same by offering heavy discounts on flight tickets, it only contributed to increasing costs and losses at the same time.

Decline in operations

Due to the increasing financial losses and inability to pay for fuel and services, Jet Airways had to cancel over 40 flights a week in nine Gulf country routes, thus, leading to reduced flight operations that directly hamper the airline reputation and prominence.

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