Jet Airways is facing severe turbulence. With only 41 aircraft flying in a fleet of 118, unpaid salaries — in some cases for over two months — and a daily cash burn of Rs 7 to 10 crore has turned the situation precarious. Till now parties have refused to infuse any additional funds. The airline needs a white night, and only time will tell if s/he will come forward? Until then, to ensure continuity and subsequent revival, the airline requires a focus on three key elements. What are these?
Cash — Because Cash Flow Gone, Never Comes Back
The immediate challenge for Jet Airways is to generate cash. Airlines generate cash-flow mainly via “forward bookings”. That is, tickets that are booked in advance by passengers. As the bookings come in, the airline receives cash and the “service” of flying a passenger from one city to another is rendered at a later date (think of the last time you flew and how many days beforehand the tickets were purchased). This flow of advance bookings is critical to the working capital of the airline.
Unfortunately, given the multiple cancellations, the forward bookings for Jet Airways have declined. Which means cash balances are low. The immediate options the airline has to stimulate sales are:
1. By incentivising its travel agents
2. Additional marketing and advertising
3. Announcing fare sales
Because cash balance is low, option 1 and 2 are not attractive. Thus, the airline is left with option 3. But given the uncertainty of flight schedules not everyone is booking.
With a decline in forward bookings, the airline is forced to look at interim measures for cash. These include cargo sales, frequent flier program sales, bank lines of credit and financing options that generate cash such as sale and leasebacks, recapitalisations and structured debt (to name a few).
Additionally, it has to conserve as much cash as possible. And thus the delayed payment to lessors, delayed payment to banks and even delayed payment to staff. Despite these measures of conserving cash, the lenders are not convinced.
“I will gladly pay you a dollar on Tuesday for a hamburger today works only if a dollar gets earned by Tuesday” — Peter Thiel (Entrepreneur, Venture Capitalist)
For banks to lend and invest in the airline there must be clarity that the airline will be in a state where it is generating cash to repay the loans with interest (similar to when one takes out a home loan and pays EMIs). And as of now, the industry does not seem to have clarity on the plan. And thus the importance of communication.
Communication — Because Trust is Essential to the Airline Business
For any business, communication is crucial. But in airlines this is more so because airlines are a key player in the value chain. And a passenger trusts an airline with so much. With getting to the interview they are flying for; with getting to the honeymoon destination and back; with the family holiday; with the business deal; and once they board the airplane — with their lives.
In the situation Jet Airways finds itself in, one could argue that communication is as critical as cash-flow. This because, uncertainty is bad for employees, customers and suppliers alike and a lack of communication leads to speculation which then plays out on the news.
In the ecosystem, the old way of doing business with press releases is simply not tenable. Senior management essentially has to be out and center to win the trust of stakeholders. Across cities, across crew bases and across media. No doubt there will be difficult questions but management has to show that they care.
Nobody cares how much you know until they know how much you care. -Theodore Roosevelt
The communication ecosystem has changed and the airline can actually use this to its advantage. Ironically, Jet Airways has some of the most loyal employees, customers and suppliers and one would be surprised with how forgiving they are. But for that the airline needs to communicate. And unfortunately that has not been the case.
One is yet to see an open press conference, internal emails are being played out in the press and pilots have openly declared April 1st as a strike deadline. If one digs deeper, these issues are linked to communication more than anything else.
For Jet Airways to win back trust, it must communicate. And winning over trust is essential. The passenger who has booked a family holiday does not care about financing structures or debt equity swaps or a structured equity recapitalisation. S/he cares about the holiday and cares about certainty in an uncertain environment. And the only way to win this trust is via communication.
Costs – Take Care of the Bottom-line and the Topline Will Come
At the heart of any airline that faces financial challenges is the simple equation: Revenues – Costs = Profit. Airline planners like to complicate this by using a metric per available seat kilometre (ASK) whereby they divide each side by the ASK and equation becomes: RASK – CASK = Profit/ ASK
For the Indian market, costs are the key criteria. With more than one crore passengers per month, the discernible trend is that when passengers book tickets in India, it is the price that drives the decision – followed by timing (schedule) and then other items such as frequencies/ frequent flier points (as a test to confirm if this is true, one can reflect about the last ticket they booked and what drove the decision). Thus, airlines that have lower costs are able to offer lower fares and command a greater passenger share. It is no surprise then that low-cost-carriers (LCCs) now command 70.4% of the market as of January 2019.
The basic fact is that for an airline to generate profit, the revenues cannot be lower than costs. In the case of Jet Airways this has been the case for some time now. There have been some financial structuring and methods that have unlocked cash value but when it comes to the cost of flying each seat and generating revenue from that seat, in the recent past, Jet Airways has been flying at a loss.
As of the third quarter of this year, the Profit (loss) per ASK was (0.77). Put simply the airline lost 0.77 paise on each seat it flew each kilometre. So if a flight was 1,000 km, the airline would lose Rs 770 per ticket. And this situation where the airline loses money on every kilometre flown is not sustainable.
The airline can either attack costs or focus on higher revenues – ideally do both. In the current scenario, the lenders are questioning Jet’s ability to generate revenues (keep in mind it still has some great slots, bilateral rights and alliances) rather it is generating revenues that exceed costs. And if this is not possible then they want certainty on the airlines ability to cut cost. There are no easy solutions here. But that said, it is also not impossible.
The situation at Jet Airways continues to be extremely challenging. Given that an airline affects connectivity and thereby tourism, transport, trade, community and employment, there are several nervous watchers and well-wishers. The government has asked for daily updates and it seems banks are huddling together to see if a financial package can be structured. A white knight investor cannot be ruled out. That said, from the airlines side, it has to focus on cash, communication and costs. This is easier said than done, yet is critical to success and survival.
(The author led the advisory and research teams at Centre for Aviation (CAPA). Views expressed are personal.)