What happened with Jet airways?
- The past year has been a harrowing one for India’s oldest private airline, Jet Airways. Its founder Naresh Goyal had to give up the reins last month after lenders took charge of the organisation.
- Now the carrier has now run out of money to continue operations, which led Jet to cancel hundreds of flights. Saddled with more than $1.2 billion in debt, and with dwindling revenue, the airline has said it also owes money to banks, pilots and suppliers.
- Jet, which had a 44% share of the domestic passenger market in 2003-04, steadily lost ground and in February 2019, it had only 10% of the domestic market share, fourth behind IndiGo (43.4%), SpiceJet (13.7%) and Air India (domestic, 12.8%), according to government data.
- In 2013, Jet was close to running out of cash, but survived collapse when Abu Dhabi's Etihad Airways bought a 24 percent stake in the Indian airline.
So what went wrong with Jet Airways?
- When Naresh Goyal and his wife, Anita, started Jet in 1993, state-run Air India was the only formidable opponent, and the country's aviation market was just taking off. His focus was to ensure that the country's biggest private carrier had impeccable service.
- International expansion: Jet's problems began when it embarked on an aggressive international expansion plan. The carrier ordered 22 wide-body aircraft for delivery over about 18 months, starting in 2006, depleting cash.
- Acquisition of Sahara: Then Jet bought a struggling Indian airline called Sahara for 14.5 billion rupees ($209 million) in 2007 that had an ageing fleet and did not fit Jet's corporate culture.
- Low cost carriers (LCC):
- In 2003, Captain G R Gopinath started the country’s first low-cost carrier Air Deccan, which was followed by the launch of SpiceJet, IndiGo and GoAir.
- All these carriers followed the model of no-frills, cheaper tickets, and higher passenger load factors which started eating into Jet's market share. To compete with low-cost carriers, Jet has lowered prices without reducing its expensive services.
- High fuel prices and hefty taxes:
- Fuel costs account for roughly 40 % of a carrier’s operating cost.
- Steep taxes on aviation turbine fuel (ATF) in India — one of the highest in the world — make Indian carriers less competitive against global players.
- Shift from 5/20 to 0/20:
- In 2004, the government announced the 5/20 rule (allowing Indian scheduled carriers with a minimum 5 years’ continuous operations and a minimum of 20 aircrafts to fly international routes. Jet was the key beneficiary of this rule.
- In 2016, the government scrapped the 5/20 rule and replaced it with 0/20, enabling SpiceJet, IndiGo and GoAir to launch international flights.
- Centralised control: Goyal's penchant for control, which helped him build the airline, has been a stumbling block for potential investors. Tata Sons was in talks with Jet for a deal that never materialised. Etihad has also been reluctant to increase its stake in the carrier for similar reasons.
- FDI Cap: Indian rules cap foreign airline investment in domestic carriers at 49 %, and the government is eager to see Jet remain with an Indian entity. That narrows the list of potential investors, aviation financiers and leasing executives.
What is the paradoxical situation of Indian Aviation Sector?
- Over the past four years, passenger growth in India has been rapid: The number of flights taken has increased between 15 and 20 percent per year. Demand growth this year is likely to be the highest in the world.
- Yet the industry itself hasn’t benefited. Almost every Indian airline is struggling. The suspension of operations at Jet Airways — at one time India’s largest private airline — announced, follows the troubles at Kingfisher, Air Deccan, and Sahara.
What is the way ahead?
- It illustrates the challenge of making money in the country's aviation sector, dominated by low-cost carriers such as IndiGo and SpiceJet Ltd.
- The Indian market is also highly price-sensitive, and airlines compete to keep fares low, even at a loss, to continue expanding.
- In India's aviation market, one needs not only deep pockets but a deep threshold for pain. When India's Kingfisher Airlines went bankrupt in 2012, lessors were forced to write off millions of dollars in losses.