Many airlines around the world are struggling with profitability right now. However, one of the carriers most drastically floundering is Indian airline Jet Airways. Just last week the carrier was forced to ground 23 of its aircraft; now that number has risen to 32, accounting for more than 25% of its fleet.
The most recent grounding was announced just yesterday, as a further four aircraft had to be stood down due to non payment of leases. In an exchange filing, the beleaguered airline said:
“An additional four aircraft have been grounded due to non-payment of amounts outstanding to lessors under their respective lease agreements,”
The number of aircraft affected by non payment of lease agreements currently stands at 32. However, the Chairman of Jet Airways, Naresh Goyal, told Etihad’s Tony Douglas that more than 50 aircraft are grounded. In a letter dated the 8th March, Goyal said:
“As you are no doubt aware, Jet Airways is in a very precarious position, with more than 50 aircraft grounded and increasing arrears of vendors and salaries which makes the need for interim funding all the all the more imperative.”
Right now the airline’s estimated debt is thought to be in excess of $1 billion. As a result, it has been reported that pilots, suppliers and lessors are all not being paid, and that the carrier is defaulting on loan repayments to the banks.
As you might expect, the airline is searching enthusiastically for new funding in order to continue operating, but what’s put them in this position? There are a couple of clear causes of Jet Airways’ current struggles; let’s take a closer look at the most important ones.
Competition in India
What seems to be one of the main reasons behind the financial issues at Jet Airways is the fierce competition in the Indian aviation market. We’ve already witnessed the result of this back in 2012 when Kingfisher airlines collapsed.
The airlines are fighting for passengers, which is driving the prices lower. This leads to low profit margins and potential losses if they fail to fill their flights. The impact of this price war is clear to see throughout the entire market.
Indigo, the airline with the highest domestic market share of 38%, has posted a $6 million loss in the last quarter. SpiceJet, who are the third biggest competitor in India, posted a $22 million loss in 2018. And the national carrier, Air India, has received multiple financial support packages from the state, further showcasing the extreme impact of competition in the market.
The situation at Jet Airways is more worrying than at its competitors. The airline has posted a net loss in the last three consecutive quarters. In the first six months of the fiscal year 2018-19, Jet Airways lost a total of Rs 26.2 billion. To put that in perspective, its current market capitalization is just Rs 28.20 billion ($280 million).
Extreme price competition in the Indian market is not a new phenomenon. It’s been an influence on the local market since the mid-2000’s, when the LCCs Indigo and SpiceJet first entered the market. In fact, LCCs carried over 60% of all passengers in 2017, driving ticket prices downwards across the industry.
A great example of how low the fares get can be seen back in 2015 when SpiceJet was selling tickets for an absolutely unsustainable 2 cents. However, it’s not only competition which has contributed to Jet Airways’ problems, as oil prices and a weakening currency are also having an impact.
Oil and the Indian Rupee
The combination of the higher oil prices together with a weakening currency has turned out to be a poisonous combination for Jet Airways. The airline spent 695,325 lakhs on fuel in 2018, noting a 27% increase compared to the year before.
The reason behind this increase is down to a spike in oil prices, which began in mid-2018. The WTI crude was over $70 a barrel and average yearly prices were up 30%. On top of that, in the fourth quarter of 2018 the Indian Rupee suffered a 12% depreciation against the US dollar, mainly due to the weaker Turkish Lira, rising Indian current account deficit and interest rates hike in the US.
The weaker currency has not only further increased the already high fuel prices but also spiked the leasing prices, leading to the airline posting multi million dollar losses. Due to the rivalry in the Indian market, Jet Airways had no choice but to continue flying at unsustainable prices, unable to increase the fares as this would have resulted in passengers choosing other carriers.
Currently the Indian rupee has appreciated slightly against the US dollar and the oil prices are lower than a couple of months ago. However, the airline urgently needs cash to continue operating. Significant changes are needed, but the future looks rather uncertain for the second biggest Indian airline.