Jet Airways shares nosedive 6%; 5 reasons why Naresh Goyal's airline is in tailspin

Jet Airways started the year 2019 with back-to-back shocks! This has led the airline's share price to take a massive beating from investors. Today, the airline finished at Rs 263.75 per piece, down by 6.16%. However, it had dropped by as much as 7.13%  after touching an intraday low of Rs 261 per piece on BSE. Cash crunch! Yes, the money is tight at the Naresh Goyal led airline! Jet Airways, is notably, the second largest airline in terms of market share in India after Indigo.

 Each passing day throws up more negative news about Jet Airways, which is facing new problems that are so big, they have put a question mark on the airline's ability to even survive.

Early today, Jet Airways revealed that it has delayed payment of interest and principal installment to a consortium of banks led by State Bank of India (SBI). Reason behind this delay was due to temporary cash flow mismatch. 

Following this, today’s market trading session for Jet Airways began with a bloodbath. If this was not enough, another shock was revealed in the form of rating agency ICRA downgrading the outlook ahead. 

ICRA in its notification said, “There have been delays in the implementation of the proposed liquidity initiatives by the management, which have aggravated its liquidity. The company has already been delaying its employee salary payments and lease rental payments to the aircraft lessors.”

Check out the five reasons why Jet Airways is in tailspin: 

 Credit profile of the company continues to remain stretched, characterised by negative networth and high leverage:

Jet Airways continues to have negative networth due to accumulated losses and diminution in the value of its investments in its subsidiary Jet Lite (India) Limited. Furthermore, the liquidity strain has aggravated due to delays by the company in implementation of its liquidity initiatives. 

As on September 30, 2018, the company had gross debt of Rs. 8,411 crore, as against Rs. 8,403 crore as on March 31, 2018. This is despite the receipt of lease incentives during June 2018 and advances from JPPL in October 2018. 

The debt levels are, however, expected to increase in the near term because of the ongoing stress on profitability, unless the company is successful in its liquidity initiatives. Overall, till the company starts reporting profits on a sustained basis, the debt levels are expected to continue to remain high.

Large repayments due over FY2019 to FY2021:

The company has repayments of Rs. 1,700 crore due over December 2018 to March 2019, Rs. 2,444.5 crore in FY2020 and Rs. 2,167.9 crore in FY2021. In the absence of adequate cash accruals, the company requires refinancing its repayments falling due. While the company has been undertaking several liquidity initiatives, timely funds tie-up is a key rating sensitivity.

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Weak market conditions in the Middle East, resulting in pressure on yields and thus profitability:

The weakness in the international markets is primarily attributed to the Gulf as the economic slowdown has resulted in significant weakening of demand and thus excess capacity, both in passenger and cargo. This has resulted in a decline in fares in the Gulf. The depressed demand in the Gulf has impacted its profitability, although other markets such as Europe continue to be strong.

Indian airline industry continues to be faced with competitive pressures on industry-wide pricing power despite increased jet fuel prices:

The entry of new airlines in the past two-three years and expansion of capacity by the existing ones have resulted in intensely competitive market and the same has prompted all the airlines to resort to variety of fare promotions to improve their PLFs.

Liquidity position:

The company’s liquidity position is stressed, with operating losses, high debt levels and negative networth. Furthermore, the company has large repayments of Rs. 1,700 crore due over December 2018 to March 2019, Rs. 2,444.5 crore in FY2020 and Rs. 2,167.9 crore in FY2021. 

The company had already been delaying payments of employee salaries and lease rental payments to the aircraft lessors on account of the liquidity stress, and has delayed on the payment of interest and principal repayment due on December 31, 2018.

In ICRA’s view, “ In the absence of adequate cash accruals, the company will be required to refinance its repayments falling due. While it has been undertaking several liquidity initiatives, timely funds tie-up is a key rating sensitivity. Timely implementation of proposed liquidity initiatives by the management to alleviate its liquidity strain would remain critical to its credit profile.”

Hence, if above mentioned scenarios does not find resolution, the matter at Jet Airways can be furthermore critical.