Last August i wrote a column in this paper called, ‘Mayday! Time to stop Jet from going the Kingfisher way.’ At that time Jet was still seen as invincible, a proud Indian brand from the 1990s whose growth symbolised the growth of liberalised India.
Despite warnings from several people, Jet stakeholders (bankers, shareholders, suppliers, lease providers, top management) twiddled their thumbs while the airline kept running its loss making operations like earlier, burning cash at over Rs 15 crore a day. Things worsened, and the company literally ran out of cash. Leased planes were repossessed, salaries remained unpaid and there was no money to buy fuel.
Eventually the company ceased operations last month, but only after running up a massive debt of around Rs 15,000 crore. Top management sent emotional letters to the same employees they had betrayed, thanking them for organising prayer meets to rescue the airline (this really happened). Many Jet employees still wait for good news of a new buyer coming in and saving their jobs.
Those still hoping for a rescue answer this: If you wanted to own an Indian airline, what would you rather do? Start a new one for Rs 15,000 crore? Or pay the debts of Jet Airways of Rs 15,000 crore first and then put in even more money to fix this loss making operation?
Do Indian passengers even care if the aircraft they are flying has Jet Airways written on it, or are they just as fine if they get good fares on any DGCA approved airline, even if it is called RedAir or BlueAir? Really, the customer doesn’t care enough for the brand name to make it worth Rs 15,000 crore.
One year ago, things were different. Jet made losses, but it had full operations and revenues of around Rs 25,000 crore. This meant the airline had some value, if it could be turned around. A sick horse can be healed. A dead horse cannot. Last year, Jet Airways was sick and people were calling for a cure. Now, Jet Airways is dead. Good luck trying to find buyers for it. At best, it will sell as a carcass.
I am sorry for making such a morbid analogy. However, it is important to drive home this point: In certain sectors, when companies are in financial trouble, one needs to act fast to recover maximum value. Unfortunately, the way our PSU banks and their management processes are designed, acting fast in a crisis can almost never happen.
The slow-motion banking services we provide mean that Jet Airways, which could have at least repaid say half to two-thirds of its debts, will now be able to repay almost nothing. This implies that even up to a year ago, despite the downfall of Jet, banks could have recovered up to Rs 10,000 crore. Now, they will earn almost nothing, leading to massive value destruction due to slow-motion banking in the last one year alone. These are taxpayer funded banks that have destroyed Rs 10,000 crore of value in a year.
This is a second-level mess-up. At the first level, PSU banks could have easily seen Jet’s cost of operations (Rs 4.49/km) being higher than its revenues (Rs 4.21/km) as leading to a business designed to lose money. In comparison, Indigo’s cost of operations (Rs 3.15/km) and revenues (Rs 3.64/km) ensured a profitable airline. These numbers are not hard to analyse, and anyone lending thousands of crores to an airline should keep better track of what is going on.
However, sweet uncles run our PSU banks, not shark like investment bankers. The PSU banks were probably enamoured of the aura of the Jet chairman, thankful for being invited to his house parties and generally in awe of the classy English-speaking, yellow-and-blue dressed staff of Jet Airways. The shame we Indians feel when we see someone ‘classier’ who speaks better English is real. Little wonder PSU banks didn’t hit Jet hard three years ago, when it had the highest cost structure in the industry.
But by last year it became clear Jet was hurtling towards the point of no return. In such a scenario, banks need to be ruthless, practical and real. They need to realise the full debt will never get repaid. Instead it is about squeezing out maximum value. For that, the banks needed to fire the management, put new ones in place, add emergency funding that gets priority over existing loans and convert current debt to equity. These are common moves for any bank dealing with a company in distress.
What is crucial here is timing. Move fast, and you can rescue some value. Keep sitting around, and everything comes down to zero. Which is what happened here. Hence, we not only lent money to a bad business, we also could not recover whatever we could when things went wrong.
The only silver lining in this – and yes, there is one – is that the PSUs did finally pull the plug on Jet, and this time they did it faster than they did for Kingfisher. So yes, while banks may have lost Rs 15,000 crore now, at least they won’t lose Rs 25,000 crore. Small mercies!
Aura-driven lending, and slow-motion recovery banking, ensured that lenders lost almost all their money in Jet. The worst hit are the employees who lost jobs for no fault of theirs. Next are taxpayers who fund the PSU banks. As we mourn the loss of Jet, i hope we also reform our PSUs so this doesn’t happen again.