Is Jet Airways, India's second largest airline, already insolvent?

Jet Airways has nine lives. In three it stays, in three it plays and for the remaining three--it strays, just like cats. Jet today is living through one of the latter. A negative net worth of over Rs 7,000 crore, net loss of Rs 767 crore in fiscal 2017-18 and fast depleting cash flows from operations are what corporate nightmares are made of.

But the worst was to come at the end of the fiscal. As global crude prices rose, Jet's cost of fuel as a percentage of operations shot up from nearly 40 per cent 2 years ago to nearly 65 per cent today.

In Q4 of 2017-18, Jet reported a net loss of Rs 1,036 crore as against a net profit of Rs 602 crore in Q4 of the previous fiscal. And now results of Q1 2018-19 have been deferred after the management failed to present the accounts to the audit committee in time for the board meeting. As of March 31, 2018, Jet's free cash flow on revenue of Rs 23,958 crore was barely Rs 321 crore. But higher aviation fuel prices have worsened its finances since then. It's been in scramble mode, even recommending employee wage cuts ranging from 5 to 25 per cent before withdrawing the proposal following an uproar.

In May 2018, ratings agency ICRA lowered credit ratings on its short-term and long-term loans due to weakening finances. "Their cost structure is one of the highest in the industry. Yields are flat. And the cost of fuel and other dollar denominated costs are 65-70 per cent which have impacted the performance severely," says Rashesh Shah of ICICI Securities, which stopped coverage on the airline in June.

The question is: Is India's second largest airline still solvent at all? Or, is it already bankrupt?

"No," says Jet Airways emphatically in an email response to this direct question.

"The Management informed the Audit committee that they needed more time to finalise the Accounts, the Audit committee on their request agreed to accord them further time to finalise the accounts and directed that the finalised accounts be placed before the Audit Committee thereafter. At the Board Meeting, the Chairman of the Audit Committee informed the members of the Board that the management required further time to finalise the accounts, and that the Accounts once finalised would be approved by the Audit Committee and then placed before the Board. The members of the Board agreed with this [sic]," says the Jet response.

"Jet Airways is a flying NPA," says whistleblower Arvind Gupta of ICICI Bank/Chanda Kochhar fame. Gupta has written to the government, including finance minister Arun Jaitley, twice in 2016 and 2017 asking for an investigation against Jet and promoter Naresh Goyal for alleged irregularities. "It has negative net worth. It would have been bankrupt three years ago," alleges Gupta.

'Bankruptcy' is essentially the court's stamp of approval on 'insolvency'. An entity or an individual is insolvent when what it owes is more than what it owns, for example, when its liabilities are more than its assets. Or, when it's unable to pay debts when they are due. On the latter: "Jet Airways is absolutely current on all of its debt obligations. The airline has not defaulted in payment of any interest or principal to banks," says the Jet Airways response.

But on the former parameter, the airline was in the negative in 2017-18 with total liabilities of Rs 19,743 crore against total assets of Rs 12,501 crore. Under such circumstances, free cash flow from operations is the only lifeline which allows the company to continue paying off interest and principal on debt-preventing insolvency. Jet's Rs 321 crore free cash flows have, however, only taken a turn for the worse in the quarter ended June 30, 2018. That would have been one of the key points to mull over for the audit committee. However, the accounts were deferred even before they were brought before the audit committee.

"The audit committee & Board of Directors of the Company would reconvene at an appropriate future date in due course, to approve and adopt the financial statements for quarter ended 30th June 2018," says Jet Airways.

The other option to keep the organisation afloat is through additional loans. But with existing debt in excess of Rs 8,400 crore, more loans will only add to the interest burden. That's something Jet cannot afford with mounting losses. Though it may have to resort to it only to keep the operations going until it can reduce costs. For fiscal 2017-18, just the finance cost was Rs 849 crore besides the Rs 2,457 crore it paid towards aircraft lease rentals.

"In line with the Company's stated focus of creating a healthier and more resilient business, it has been implementing several measures to reduce costs as well as realise higher revenues, for desired business efficiencies. Some of these areas amongst others include, sales and distribution, payroll, maintenance and fleet simplification," says Jet Airways CEO Vinay Dube. "...the Company has been in dialogue with all its key stakeholders - internal and external... with an intent to enlist their full support and cooperation for realising necessary savings across all business functions."

As far as the company's accounts are concerned, Jet and its auditors are yet to finalise them (read, agree on the numbers!) "The Company focuses on managing liquidity and is unable to comment beyond March as results have not been announced for the quarter," says Jet Airways in the email response.

Coming back to Jet's nine lives. Set up way back in 1992 as an air taxi operator, it got approval as a scheduled airline in 1995. Jet has weathered several ups and downs. It lived a charmed existence alongside government-owned Air India with limited competition until India allowed low-cost airlines in 1999.

By 2005, most airlines in the country were floundering due to intense competition triggered by low-cost carriers such as Deccan Airways, Air Sahara, SpiceJet and IndiGo. That set off a wave of consolidation with Vijay Mallya's Kingfisher Airlines acquiring Deccan. Jet Airways acquired Sahara in April, 2007 and renamed it JetLite.

In 2013, Jet Airways sold 24 per cent equity to Etihad Airways for $379 million after the government allowed foreign airlines to take up to 49 per cent stake in Indian carriers. It entered into a fare war right after.

Jet began straying again from fiscal 2013-14 when it reported a net loss of Rs 4,128 crore, wiping out its net worth to a negative Rs 4,490 crore. This was followed by another net loss of Rs 2,101 crore in the following fiscal 2014-15, taking its negative networth to Rs 6,640 crore. But with crude and ATF prices falling, it had two good years thereafter with net profit of Rs 1,201 crore and Rs 1,445 crore - its first net profits in nearly a decade. But losses in 2017-18 have brought it to the brink.

Dube, however, stays confident: "Jet Airways has been in existence for over 25 years and through the years has been successful in combating such business volatility".

Getting over this will surely be another life.

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