Tl;dr - Rising fuel cost and a decrease in rupee value
Jet Airways has been having money problems for a long time and that is when Etihad bought a 24% stake in it to bail it out. Jet had outstanding debt of $2 billion then (Apr 2013) and Etihad’s investment provided it room to breathe.
Why did they arrive at this point?
There was an increase in Aviation Turbine Fuel(ATF) reflecting the price change in Brent oil prices (There was a dip in Brent oil prices a while back as the Saudi consortium decided to not cap the production and this led to rapid fall of oil prices globally, and the prices have climbed up since then). The Indian government also increased customs duty on ATF by 5% recently. Rupee’s value in the international market has fallen and this impacts the fuel costs as 100% of ATF is imported. This ATF custom duty increase by itself made Jet stocks fall 10%
Foreign investment in Indian Air sector is capped at 49% (currently only Etihad is a significant foreign investor in Jet with a 24% stake) and Jet currently wants to sell around 70-75% of its stake to investors. So, they have to look for both foreign and Indian investors. Etihad was hesitant to increase its stake beyond 25% to avoid capital markets rule that requires an investor to make an open offer for at least 20% more shares in the target company if the acquirer’s shareholding crosses 25%. It asked for an exemption to this rule to SEBI which SEBI denied. Etihad is currently considering raising its stake to 49% (Expressed interest on 12th April).
Indian credit lenders are hesitant as Its credit rating by ICRA dropped to D (like really really bad). State Bank led an investment round backed by national banks but it is refusing to release loans till potential investor is found. This led to Jet not being able to pay its plane lessors and Indian Oil for fuel. Its inventory went from 124 planes in December to 14 planes on Thursday.
Investor sentiment regarding Goyal (Jet’s founder and ex-CEO) is bad and his behavior in the recent meeting with the lessors and investors might have led to them pull their support. He was since taken off from his position.
What is Indigo/SpiceJet doing?
They too are going through the same problems but they are able to handle it better due to their better financial condition. I only researched Indigo and this is what I found. Indigo’s expenses raised 50% but income raised only by 28.4% and it still managed to remain in profit. (profit went from Rs.762 crs same quarter a year ago to Rs.190 crs this year while Jet went from Rs.186 crs to -Rs.732 crs). They simply had a better cushion to capture their fall. This difference is because Jet Airways positions itself as a Premium Airline and Indigo tries to be as low-cost as possible without caring about the service.
Is there a root problem in Indian Aviation?
It is going through a phase of startup-like growth. All the players want to be the cheapest and are willing to sacrifice profits for market capture. This seems like a good idea as the Indian aviation market is the fastest growing market globally. This is all fun until they run out of investor cash that they used to subsidize the flyer’s ticket. These companies cannot increase the prices too as the Indian market is very price-sensitive.
You can easily draw parallels between the Indian aviation market and the startup scene. Ola and Uber are burning through investor cash like insane. PagerDuty listed in NYSE this week and its stocks soared around 60% after listing. It made $79.6M revenue in the fiscal year 2018, but a net loss of $38.1M. Lyft, who filed on March 1st, made $2.2B revenue in the fiscal year 2019, but a net loss of $911.3M. Uber just unveiled its IPO with a warning it may never make a profit. But Uber is reportedly aiming for a valuation between $90 billion and $100 billion. Uber in 2018 had $11.3 billion revenue, but lost $3.03 billion in 2018 from operations. I’m even more skeptical of WeWork and its $45 billion valuation. Sorry that I side-tracked a bit, but I think this is what is happening in the Indian Aviation market, Many will lose out with not enough investor money to spend like Snapdeal did to Flipkart and Amazon and this is what happened to Kingfisher and Jet.
Disclaimer: I do not own any stake in any of the companies mentioned. I also assume no liability if the data/information is incorrect.