Crisis-hit Jet Airways is still dealing with the baggage from the Air Sahara deal

Among the many things at stake at beleaguered private Indian airline Jet Airways is the legacy of its promoter, Naresh Goyal.

Goyal, who established Jet over 25 years ago, is a battle-scarred veteran of India’s highly competitive aviation sector, which has seen the rise and fall of many entrepreneurs. Despite long periods in the red, Goyal’s skills in negotiating tough corners and striking beneficial deals has kept Jet airborne, if not soaring.

For instance, in 2005, when the now-defunct Kingfisher Airlines, led by an ambitious liquor baron, barged its way into a still nascent Indian market, Goyal dialled back by lapping up smaller rival Air Sahara. The deal was hanging fire for many months and was even called off initially in 2006. But a persistent Goyal revived his attempt in 2007 and managed to bring the Sahara India Pariwar-owned airline into Jet Airways’ fold, consolidating the market leadership it enjoyed at the time.

Much later, in 2012, when Indian aviation was opened up to foreign direct investment, Goyal again used his networking skills to rope in the deep-pocketed Etihad Airways as an investor. After negotiating many roadblocks, the deal went through in 2013, and today, the Abu Dhabi-based airline owns a 24% stake in Jet.

However, what might seal Goyal’s legacy is how he pulls Jet out from its current crisis. The airline, India’s second-largest by passengers flown, is after all in the eye of a storm that has hit the aviation sector as a whole.

This time it’s different

After two years of relative calm – small profits aided by low oil prices – the industry is in turmoil again as crude prices have soared and the Indian rupee has depreciated against the dollar.

SpiceJet, India’s fourth-largest airline by market share, posted a loss of Rs 38 crore for the first quarter of the ongoing financial year. Market leader IndiGo hasn’t been spared either. The budget carrier’s profit in the April-June period of this year nosedived 97% from a year ago to a mere Rs 27.80 crore.

But Jet Airways seems to be facing the maximum heat. It posted enormous losses of Rs 1,036 crore and Rs 1,323 crore in the March and June quarters, respectively. Besides, the airline is in the dock for alleged tax evasion and is also facing probes by India’s civil aviation regulator for safety lapses.

It is also struggling to pay its employees their salaries. In August, it delayed salary payouts to pilots and engineers; in September, it reportedly failed to pay other employees as well.

“Time and again, the company has faced cash crunches. And now its back with the oil price rise and the rupee crisis,” a person with close knowledge of the affairs of the company told Quartz on the condition of anonymity. “Salary issues had not been there for a long time. But again, two to three years ago, there were talks of asking the senior management to take a pay cut. Now it’s across categories. Now it’s about whatever keeps the airline flying.”

The airline is in desperate need of funds. India’s banks, beset with their own bad-loan problems, are wary of sanctioning any more loans to Jet whose total cash and cash equivalents stood at Rs 320.50 crore at the end of the last financial year.

“The situation is so bad that all of Jet’s aircraft deals and leases are being renegotiated. Banks have clearly told Jet to first show how it is running its business. The flash sale that the airline recently announced was done to just pay employees and other dues,” an informed source told Quartz on the condition of anonymity.

Stonewalled by banks, and in need of cash, there are talks that Goyal may sell a part of his 51% stake in the company.

As part of its plan to overcome its liquidity crisis, Jet Airways on Friday raised Rs 250 crore from Jet Privilege by monetising its customer loyalty programme for advance ticket sales. The customer loyalty programme purchases tickets from Jet to offer them to its members against redemption of miles. Etihad Airways has a 50.1% stake in Jet Privilege.

What makes the cash crunch more acute is that Jet’s investor Etihad itself is now mired in trouble.

For a while, the Abu Dhabi-based carrier had been buying minority stakes in airlines across the globe to be in step with regional rivals Emirates and Qatar Airways. But since 2016, it has been reviewing its investments as they accounted for nearly $2 billion in losses. Thus, talks of its stake sale in Jet could be a part of Etihad’s review of its own business strategy itself, though Jet Airways has denied the claim.

“Etihad is a global player...It wouldn’t be surprising if they want to exit a micro market like India at this point in time,” said Ashish Nainan, research analyst for the aviation sector at CARE Ratings.

The West Asian airline’s exit may complicate matters for Jet, whose problems cannot be explained by macroeconomic factors like the rupee’s depreciation or oil price rises alone.

Analysts trace most of Jet’s troubles to legacy issues. Put differently, Goyal’s 2007 Air Sahara deal, which was meant to salvage Jet’s market share from the threat of an aggressive Kingfisher Airlines, may have boomeranged.

Past baggage

Kingfisher Airlines’ entry into Indian aviation came after Jet had altered the market’s dynamics. By 1993, it had successfully elbowed out Indian Airlines (merged with Air India later in 2007) to become the domestic leader.

After Jet acquired Air Sahara for about Rs 1,450 crore in 2007, the latter was renamed JetLite as a budget brand.

Aviation experts had then described the deal as a terrible idea as Jet was widely believed to have paid a huge premium for a loss-making airline. “It’s very difficult for an airline company to be profitable. At that point, the idea was that Air Sahara was struggling and Jet was an established player. So, probably, the understanding was that Jet could leverage that network and make something out of it,” said Nainan.

Besides the valuation, experts have also questioned the way JetLite was managed by Goyal. The decision to run it as a separate entity was flawed, they say.

“When you have two different airlines, you don’t have either cost control or optimisation in operations. They have completely different operating structures. This played havoc into the operating structure of the airline (Jet Airways),” Mark Martin, CEO of the aviation consultancy Martin Consultancy.

Ultimately, JetLite was merged with Jet’s low-frills brand JetKonnect in 2012, and the latter dissolved. Goel’s plan to merge JetLite with Jet Airways was rejected by the aviation ministry in May this year.

After over a decade, the weight of that bad business decision is now back to haunt Jet Airways.

Yet, what keeps hopes of a turnaround alive at Jet Airways is Goel’s leadership skills. “Governments have come and gone and economic meltdowns have happened, but Naresh Goyal has survived,” said Martin.

In 2009, hundreds of Jet Airways flights had got affected following strikes called by its pilots. It has also successfully navigated the 2008 economic meltdown.

The first person quoted in the story, who has seen the company negotiating these tough corners, said with the wisdom of hindsight: “Jet Airways is used to such crises and it will fly through.”

Update: In a statement to Quartz, Jet Airways said that “salaries for all employees, excluding pilots, aircraft maintenance engineers and the leadership, were remitted as per schedule.”

This article first appeared on Quartz.