In November 2018 the Indian business press announced that Tata Sons, an Indian business conglomerate with revenues in excess of $100 Billion, were in talks to acquire majority stake in Jet Airways. In previous months, Jet had defaulted on salary payments to at least some sections of employees. The Airline had recently asked employees across the board to accept varying salary cuts. Why are they in such serious trouble now?

The genesis? 
The seeds of crisis were sown when Jet acquired Air Sahara in January 2006.

It saddled them with large debt, a mismatched fleet of aircraft, and a very different organisation culture from their own.

In the succeeding year, profit fell sharply to near zero after growing rapidly in the previous three years. Between Financial Year (FY) 2008 and FY 2018, the Company lost money in nine out of eleven years.

In fiscal 2019, they may post the largest ever loss of nearly Rs. 5000 Crore (50 Billion) as shown in the figure below.

Jet’s woes are unlikely to diminish unless cost of operation is sharply reduced.

Interestingly, their costs of fuel and aircraft and engine leases are much better than the market leader IndiGo’s. Employee costs are somewhat higher. Interest charges and finance costs are sharply greater. But they do not explain the dire straits Jet is in as much as other costs – selling and distribution, aircraft maintenance, and ‘other expenses’. Together they accounted for 46% of revenues in 2017-18 compared to 28% for IndiGo.

Aircrafts or millstones? 
Their fleet of aircraft is perhaps one of the main reasons for high costs. Indigo with a market share of 42.1 operates 196 aircrafts (4.65 aircraft for every per cent). Jet’s fleet of 124 planes gains the airline just 15.1% share (8.2 aircraft / 1%). They have ten different types of planes including variants of Airbus 330, Boeing 737, and ATR 72. There are five variants of 87 Boeing 737s. IndiGo has just two types of aircraft. The average age of Jet’s fleet is 8.8 years compared to 5.8 for Indigo.

No wonder it costs them far more to operate and maintain the fleet. Unfortunately, accumulated losses and poor cash flow have made renewal difficult.

Too little too late 
What caused this vicious downward spiral? Though root causes are hard to isolate in complex problems, it is not surprising that seeds were sown with the acquisition of Air Sahara.

Sahara was renamed JetLite as the combined entity tried to play in the low cost carrier market. JetKonnect was another budget brand in Jet’s stable. Meanwhile Jet Airways continued to operate as a full service airline. The strategy was a muddle. They continued to lose market share in both budget and full service segments. In March 2012 JetLite was renamed JetKonnect as the airline tried to consolidate brands. It did not work. In December 2014 the airline decided to go full service. Too much damage was already done.

A marriage made in hell 
In Jet Aiways’s crisis lies a cautionary tale. Mergers and acquisitions are notoriously difficult to create value. A Harvard Business Review report quotes failure rates at between 70 and 90 per cent. In the case of Jet-Sahara serious concerns arising from mismatched fleets, vastly different cultures, and lack of brand synergy were overlooked. The top management may have been optimistic about the industry’s future and overconfident of their ability to assimilate and integrate two very different organisations. Perhaps they underestimated the disruption in the budget segment by the new player, IndiGo.

The stock has continued to underperform and lag the Sensex from the day Naresh Goyal announced the acquisition of Sahara.

And now they wait for a white knight!