Jet A Semi-State-Owned Airline, Taxpayers Already Fund Air India

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As I wrote last month, the problematic full-service operator needed to accumulate an additional rupee (1.4 cents) per kilometer per seat available to offset its cost disadvantage against low-cost rivals. The fierce price competition denied him that opportunity, and now banks are acquiring a majority stake, at a price of 1 rupee for 11.4 million shares.

The bet, which seeks to avoid putting the oldest private airline in India into a bankruptcy administered by the court, will be put to a vote by the shareholders on February 21.

Beyond that, the details of the rescue plan are blurred.

How much of Rs for the airline. Will loans of 7,654 crore ($ 1.08 billion) become capital? Between Rs. 2,500 crore and Rs. 3,000 million rupees, estimates an aviation analyst, while an article in the Business Standard notes the reduction in Rs. 1,000 crore. On the other hand, CFO Amit Agarwal said in a conference call that the agreement with the banks would reduce the debt burden (you guessed it) “1 rupee”.

How will the new funds enter the business? It is expected that the founder Naresh Goyal and Etihad Airways PJSC of Abu Dhabi will provide capital. But Etihad, which is expected to lead the round, does not want to activate the acquisition code of India, which will then force it to buy shares of minority investors. The solution, according to Livemint, can be an Rs. Issuance of 4,000 bankruptcy rights to which the lenders (as new owners of shares), as well as Etihad and Goyal will subscribe.

The banks get into trouble if the rescue finally fails, as happened in the case of a debt to equity swap in 2011 in the now defunct Kingfisher Airlines. Therefore, you will probably want to share the risk with a new investor. The name of the National Fund for Investment in State Infrastructure, or IFRS, is doing the rounds.

The final image is still confusing, but consensus seems to favor more than 50 percent of bank ownership and IFRS; a share of 22 percent to 25 percent with Goyal, which currently controls 51 percent; 12 percent with Etihad, diluting the Middle East airline by half; and the remaining actions with the public.

To this Rs. 4.000 crore infusion of equity, add the Rs. Debt of 1,700 million rupees of aircraft, which can be paid by selling the 16 jet aircraft and leasing them again. (A Boeing Co. executive believes that Jet can get up to $ 300 million, or Rs. 2,100 crore, from the aircraft).

This is how Rs. 5,700 crore of the estimated Rs of Jet. The funding shortfall of 8,500 crore can be capped. As for the remaining Rs. 2,800 crore, this gap will be closed only if lenders agree to convert part of their loans into a quasi-equity instrument. BloombergQuint says that cumulative exchangeable preferential shares, with a 0.01 percent coupon, can be part of the toolkit.

On paper, the plan seems to work. However, Jet’s shares, which have fallen 70 percent in the last year, have not reacted. After all, the minority shareholders will also be diluted along with Etihad and Goyal. The founder could lose his seat in the council. Who will be in the cabin instead of him? The state banks (plus IFRS) will have control, but they do not know how to run an airline. In addition, even when Jet becomes a semi-state transportation company, taxpayers already have another mouth to feed. The government tried to sell 76 percent of Air India Ltd., along with $ 5 billion in debt; there were no buyers for the unprofitable flag bearer.

Among them, IndiGo, Jet Airways and SpiceJet Ltd. of InterGlobe Aviation Ltd., the three Indian publicly traded airlines, lost Rs. 20 million rupees per day between April and September due to high oil prices and a weak rupee, according to ICRA, the local subsidiary of Moody’s Investors Service. And yet, the fastest growing aviation market in the world is caught up in an angry expansion that it can not stop.