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Governance & Social Justice
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Science & Technology
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Spice of the Month
- GS 3 || Economy || Infrastructure || Transportation
Why in news?
Debt-ravaged Jet Airways, the country’s biggest full-service airline, is selling a majority stake for Re 1. Its part of a bailout plan by its state-owned lenders that will give the airline time to arrange fresh equity.
What is Jet Airways?
- Its consistently been one of India’s top three airlines in the past decade.
- Jet Airways was founded by ticketing agent-turned-entrepreneur Naresh Goyal after India ended a state monopoly on aviation in the early 1990s.
- Its now 24 per cent owned by Abu Dhabi’s Etihad Airways PJSC and controls 13.9 per cent of India’s market, one of the fastest-growing in the world.
- Jet Airways also flies to international destinations including London and Singapore.
Why is it in trouble?
- Competition: As a slew of budget carriers started flooding the market in the mid 2000s, offering no-frills, yet on-time flights, Jet Airways began dropping fares, some to below cost.
- Cost of operations: On top of that, provincial taxes of as much as 30 per cent on jet fuel added to its expenses, while price-conscious Indian travellers refused to pay a premium for on-board meals and entertainment. Unlike budget operators, full-service airlines such as Jet Airways offer such amenities mostly for free.
- Debt: Jet Airways lost money in all but two of the past 11 years and has Rs 72.99 billion ($1 billion) of net debt.
- While it didn’t separately disclose cash and cash equivalents as of December 31, the airline had about Rs 3.55 billion of cash at the end of last year.
- It defaulted on loans that were due by December 31 and has delayed payments to staff and lessors.
What is the proposed deal?
- A group of lenders led by State Bank of India has proposed taking a 50.1 per cent stake for Re 1 through the issuance of 114 million new shares, a maneuver that is allowed under a framework outlined by the Reserve Bank of India last year.
- The procedure, applicable for companies with a negative net worth, is called Bank-led provisional resolution plan (BLPRP), and it needs to be approved by all lenders, a banking industry group, founder Goyal and the board of Etihad.
- The structure is expected to be temporary, allowing the airline to raise equity from investors, which in in turn would alter the shareholding pattern.
- Jet Airways, which requires some Rs 85 billion to get back on its feet, now needs to bridge that gap through fresh equity infusion, debt restructuring and asset disposals, such as selling aircraft and leasing them back.
- While the bank deal is nominally a conversion of debt into shares, debt levels will come down only by Re 1 once the exercise is completed.
Why is it important to rescue a private company?
- Employment: The collapse of an airline — with 23,000 jobs at stake — would fuel criticism that the government has failed to deliver on promises about creating jobs.
- Ease of Doing Business: Further, it will put a dent in the government’s business-friendly image.
- Push-up Airfares: Mumbai-based Jet Airways disappearance would also likely push up airfares — it flies to 37 destinations across the country.
- The sensitivity of the matter was highlighted last year when the government reached out to the Tata Group seeking help.
Airline Business in India: General Overview
- The airline business in India is notoriously difficult, with cut throat competition pushing base fares to as low as 2 cents.
- Kingfisher Airlines, founded by beer tycoon Vijay Mallya, ended operations in 2012 after failing to clear its dues to banks, staff, lessors and airports.
- SpiceJet Ltd. almost collapsed two years later before its founders returned to gain control and revive the company.
- State-run Air India Ltd. is surviving on bailouts worth billions of dollars.
- Apart from Etihad, Singapore Airlines Ltd. and AirAsia Bhd. have also set up local ventures, but they are all loss-making.
- Theres one exception: IndiGo, operated by InterGlobe Aviation Ltd., has managed to consistently make money with a tight lid on costs and lucrative maintenance and engineering contracts negotiated as part of large aircraft orders.
- Civil aviation sector in India
- According to a report published by CAPA in 2017, India is the third largest civil aviation market in terms of domestic passenger traffic
- International Air Transport Association has predicted that India would become the third largest market in terms of international passenger traffic by 2025
- Government Initiatives for civil aviation sector
- The government has 100 per cent FDI under automatic route in scheduled air transport service, regional air transport service and domestic scheduled passenger airline. However, FDI over 49 per cent would require government approval.
- The government launched the National Civil Aviation policy to make flying affordable for the masses and to enable 30 crore domestic ticketing by 2022 and 50 crore by 2027, and international ticketing to increase to 20 crore by 2027. Key features of the policy include:
- 5/20 rule has been replaced with 0/20 rule, i.e. domestic experience of 5 years for an airline is no longer needed to start international operations
- Regional Connectivity Scheme (UDAN) caps charges to Rs 2500 for 1-hour long flights between two small cities
- Open Sky Policy: for countries beyond 5,000 on reciprocal basis. This means that airlines from European or SAARC countries, will have unlimited access, in terms of number of flights and seats, to Indian airports, leading to increased flight frequencies with these countries.
- The government has also launched platforms such as Air Sewa and DigiYatra to bring all stakeholders on a single platform to resolve customer grievances and to ensure a seamless, consistent and paperless service experience at every touch point of their journey.
Inspite of government push, the civil aviation sector in India is struggling with several impediments. Examine.