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Can Naresh Goyal turn around Jet Airways like he did a decade back?
The airline industry does attract colourful figures like the media-shy Naresh Goyal. It would seem that the smell of gasoline encourages more emotions than economic decisions. Bleeding bottomlines, a confused operational model, a mixed fleet and an unforgiving environment. How can Goyal rescue a company in such turbulence?
Issue Date - 30/04/2012
Oman Airways’ Neha Jalan is unable to bury her dreadful experience on the day of October 18, 2008. A cabin crew at Jet Airways then, she received a text message from a friend (Kunal Rastogi) at 4 am that morning. It read: “Three of us have been derostered.” Translation: he had been fired. When Neha called up her Area Manager (Vipul Jalan), she was told that a mass firing was on. By 1 pm that noon, more than 2,000 employees of Jet had been shown the door sans notice. This incidence so unnerved her that she immediately started looking out for options. A month later, she got lucky with Oman Air. Today, she tells B&E that she is thankful to the Jet Chairman who gave his stamp of authority to lay off so many employees in a single stroke – Naresh Goyal. Captain Vikram Joshi (name changed), another former member of the Jet clan has another interesting story to share with B&E. In the present times, he is flying aircraft at the beleaguered Air India. The 31 year-old Delhi-based pilot knows AI won’t close shop, come what may. He’s satisfied. But he wasn’t so at-ease in his cockpit when he started out. Joshi had flown Jet’s aircraft for years, until in mid-2008, he became a victim of the ill-fated merger with Sahara. Grounded for a year, in July 2009, he was fired. Joshi blames the Sahara deal for his axing, and the Chairman who masterminded the deal – Goyal. Love him or loathe him, but that’s how Goyal runs his airline. Talk to an insider and he will probably tell you is that the media-shy baron doesn’t care two hoots about critics within or without. Business is all he knows. Sadly, in recent months, matters haven’t worked out well for him on that front too.

It’s impossible to capture Naresh Goyal’s style of running his airline in a simple phrase. Rather, if there’s any one who loves dirty little business secrets, this czar of Indian aviation is right up there. We are not referring to his ownership of 18 lesser-known companies, or even how he manages the cash flow at the Isle of Man-based Tail Winds Limited (which owns a 79.99% stake in Jet). It’s his decision-making style that keeps people guessing which foot he will put forward next. If there is a CEO in India Inc. who can fire 2,000 employees and recall them in a day by politely blaming his management in public for keeping him in the dark, it is the very diplomatic Goyal (in October 2008). If there is a businessman who can dare to risk souring a two decade-long relationship with a supplier as powerful as Boeing by placing a $3 billion-worth order for 15 Airbus A330s only because Boeing couldn’t assure ‘immediate’ delivery of the aircraft he’d wanted, it is the impatient Goyal. ‘Gut-feel’ is the word that explains how he takes decisions at Jet. Till date, his intuition has led him down the right lane in a market where the honours are ‘unevenly’ divided. But the common sight of heavy losses at Jet in recent quarters, and the revelation that the airline had been trying to save Rs.350 million by delaying service tax payments (in March this year) makes many believers doubt this fact.

But he isn’t new to having his back to the wall. A decade back, Goyal had come to face with a similar situation. An airline bleeding for four consecutive years (losses totalling Rs.5.25 billion between FY1999-2000 and FY2002-03) in an industry that had only bad news (losses of airlines in India during the period amounted to Rs.25.51 billion) made critics question the longevity of Jet. But Goyal brought his airline back into the black (Jet made profits of Rs.10.35 billion in the four years leading to FY2006-07). He did well by paying attention to cost-cutting and better utilisation of Jet’s fleet – between FY2002-03 & FY2006-07, Jet’s annual expenditure per aircraft dropped 41.13% to Rs.971.41 million and its load factor increased 39.21% to 71%.

The present situation is in part a reflection of what occurred ten years back. During the past four years, Jet’s losses have risen to Rs.11.14 billion (with an accumulated loss of Rs.17.3 billion) and the industry is struggling for life (losses of Rs.244.68 billion). The challenge for Goyal is clear – save the airline. Problem is – this time, the numbers read worse. That the company has reported negative earnings of Rs.10.62 billion in just the past four quarters (leading to Q3, FY2011-12) is only a quick summary of the trouble tale. Over the years, competition has intensified implying a division of the revenue pie, Jet’s market share has plummeted (from 48.7% in 2002 to 28.8% today), swinging moods in EU and US markets haven’t helped Jet’s international operations (which contributes to 55% of its topline; during Q3, FY2011-12), ATF prices have skyrocketed (by 235.5% in the past eight years), a weakening rupee has made aircraft-leasing, en route navigation costs and fuel more expensive and recent actions by the fuel supplying companies and the IT department have only made living tougher for Jet. What should Goyal do?

We start with the operations. Between end-2001 and end-2006, the company added just 13 aircraft to its fleet (total fleet of 53 by 2006). Then, starting early 2007, Goyal became a victim of the overhype in the industry. The Jet management was overwhelmed by the positive forecasts and spent huge sums on purchasing aircraft. Today, the airline has 101 aircraft – an addition of 59 new planes in the past five years – a growth of 143.9% in fleet size. Observe this in the light of the fact that since 2006, the number of passengers (domestic and international) carried by scheduled Indian carriers have only increased by 61.25%. Clearly, any doctor would term this a condition of obesity. Next, analyse this development on the domestic front. In 2006, Jet had 45 aircraft dedicated for the 19.94 million passengers it served that year on domestic routes, implying an annual passenger count to fleet (TPF) ratio of 443,111 (considering that in 2006, Jet had a 46% share of the domestic market). Last year (2011), the airline had 88 aircraft to fly 15.21 million passenger on domestic routes. That boils down to a much lower TPF ratio of 172,840! Conclusion: in the name of fleet expansion, Jet has ended up lowering utilisation of its fleet by 61%. Mathematically, Jet has to reduce its fleet size to 34 to function at the same efficiency level that it used to in 2006, the last year when it actually made profits. [It is shocking that the airline has instead ordered for 38 new Boeing 737s to be delivered by 2014, carrying a price tag of $3.21 billion.] In this regard, Kingfisher’s numbers (a TPF ratio of 205,455) are better.

Goyal has to raise his airline’s TPF ratio to the levels at which the three most profitable airlines in the world function – Delta (TPF ratio of 218,569), United-Continental (204,425) and China Southern Airlines (221,739). And after touching the 200,000 ballpark TPF mark, he has to increase it well beyond the 246,400 mark to sustain profitability in the long run (as the Revenues per Passenger-km of Jet is about half of that of the three aforementioned airlines). Why 246,400? Because that is the level at which the three year-in-a-row profit-making IndiGo functions (combined PAT of Rs,12.83 billion). Given that Jet is a mix of LCC and FSC (a 70-30 mix respectively), the airline’s cost base is naturally higher than that of IndiGo. Therefore it would require a higher level of operational efficiency to make up for the added cost.


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