Indian full-service carrier Jet Airways on January 1, 2019 informed the stock exchanges that it had defaulted on its loan repayments to banks. Soaked in financial losses and debt of over USD 1 billion, the airline is struggling to even pay out salaries to employees.

It has defaulted in making payments to banks, suppliers, lessors and pilots, a situation that forced the airline to ground as many as 40 planes.

Action by Lenders

The lenders consortium invoked the entire 51 percent stake of Naresh Goyal in the airline, and are lookng for a new buyer.

Note: Once a company announces its failure to make payments, lenders are given a total of 180 days from the first day of default to implement a resolution plan for large stressed accounts. If lenders fail to implement the resolution plan, they then refer the firm for insolvency proceedings.

Why ‘Insolvency’ route won’t be easy for Jet Airways?

Though lenders may advice insolvency route, however, it will not be easy for Jet Airways having no prospect of any obvious investor.

On the other hand, if due to non-payment of dues and salaries, lease agreements for planes are cancelled and the employees move to other organisations, the recoveries might be low. Lenders may not find any tangible assets of to attract new buyers under the Insolvency and Bankruptcy Code (IBC), 2016.

This situation will leave the lenders with the only option to operate the airlines themselves for some time and look for a suitable buyer thereafter.

What led to financial crisis at Jet Airways?

Increasing cost of aviation fuel

The airlines operate on the Aviation Turbine Fuel (ATF), the price of which is determined by global players. The increasing cost of the fuel took a heavy toll on Indian airlines, especially on Jet Airways as it operates on international routes as well.

However, the increase in fuel cost could not be dealt with by increasing the cost of passenger tickets due to low-cost model of the planes.

Low-cost model

The low-cost model of Jet Airways’ planes is one of the biggest factors behind rising operational costs of the airline. Though the airline undertook various measures to cover-up the same by offering heavy discounts on flight tickets, it only contributed to increasing costs and losses at the same time.

Decline in operations

Due to the increasing financial losses and inability to pay for fuel and services, Jet Airways had to cancel over 40 flights a week in nine Gulf country routes, thus, leading to reduced flight operations that directly hamper the airline reputation and prominence.

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