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“Jet is caught between rising costs and falling revenues”
According to Gordon Bevan, Vice-President, UBM Aviation, Jet Airways is charting a rough course. His advice: change or get sold out
Issue Date - 30/04/2012
B&E: Jet Airways, which after AI, holds the largest operational experience today, has seen its net worth fall during the past four years. During the same period, it has amassed losses to the tune of Rs.11 billion. Why such a poor performance?
Gordon Bevan (GB): Jet is caught between uncontrollable costs and declining average revenues. It cannot control international income as it is surrounded by price-leader competitors who can beat Jet’s fares to almost every global destination. For BA, Emirates, Lufthansa, Etihad and Singapore Airlines, their business is not wholly dependent upon the Indian market, so they can pick and choose the traffic that they want. For Jet, it has to exclusively operate in the Indian market at rates being shaped by overseas carriers taking Indian traffic. Also, for Jet, its exposure to currency movements is a concern. In 2011 the rupee fell 16% against the dollar, adding a surcharge to all of these cost elements. It is virtually impossible to recoup these costs in increased revenues, hence the loss widened for Jet.

B&E: Jet boasts of flying to 72 destinations with 24 of these being overseas. Do you feel it expanded too soon, too fast?
GB: The government’s policy created the need for private airlines to ramp up operations rapidly. At the same time, domestic growth had to be balanced by ‘social service flights’ to economically deprived destinations in Western India. Thus there was an over-investment in aircraft in the case of Jet. And it then tried to lure passengers through high-quality service levels at rates below cost. For passengers this was a seductive mix; for Jet it was toxic. It destroyed its balance sheet.

B&E: How’s Jet’s international operations doing?
GB: The situation appears patchy. All routes are subject to rising fuel costs. This makes Jet’s ultra-long haul routes susceptible to losses. Fuel prices have doubled from around February 2009, whilst air fares have increased in low single digits. This is an issue for all carriers, and compounds the job of Jet’s management. Also, the fact that Jet is expanding its international passenger traffic at the expense of average fares is bad news.

B&E: JetLite which it acquired in 2007, today has a market share of 7.9% – 4% less than what Sahara had pre-merger. Forget thriving as an LCC, hasn’t Jet become a confused carrier?
GB: Without serious re-engineering of the JetLite cost base, the business is simply not worth investing in. Over last year, JetLite’s revenue was down $6 million. It could deliver more passenger growth yes, but at increasing losses. Because of the confused model, Jet’s operations have become petrified; unable to expand because the business case does not stack up, and wanting to shrink to profitability through the shedding of costs, services and capacity! We have ‘zombie’ airlines in Europe. JetLite could end up similarly.

B&E: Jet’s debt (Rs.134.80 bn) is five times its total net worth. The only airline whose balance sheet appears worse is KFA. Is Jet headed towards a KFA-like scenario?
GB: Market fundamentals indicate that the holes in the balance sheet cannot be filled through rising revenues. The market is too competitive to allow Jet to raise prices. So the solution comes from a Chapter 11 style restructuring, recapitalisation through foreign investment or bankruptcy. Whatever the solution, Jet will not resemble the airline it is today. It will either be smaller or be sold off.

B&E: What steps do you feel Jet should take to salvage its pride?
GB: Jet needs to determine which business it is in – FSCs or LCCs. Also, joining an alliance would be highly beneficial, but only if the Indian Government were to keep its nose out of such decisions.


Steven Philip Warner           

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