Jet Airways, once the poster child of a rapidly growing Indian aviation industry, finds itself on the brink of collapse. The finger points to the same Indian government which is now trying to rescue the airline.
Jet Airways, India's oldest private airline, grounded all of its operations on Wednesday after it failed to secure emergency funding from state-backed lenders, who took control of the company last month as part of a rare move by the Indian government to rescue a private company.
The company, which was until recently the country's second-largest airline by market share, had already suspended all international flights and was operating fewer than 10 aircraft out of a fleet of 119 jets.
Two sources at state-run banks told Reuters news agency on Wednesday that the banks had rejected $58 million (€51 million) in emergency funding that Jet had sought to keep itself temporarily afloat, while its lenders, led by the State Bank of India, looked for a buyer for a majority stake in the airline.
"Bankers did not want to go for a piecemeal approach that would keep the carrier flying for a few days and then again risk having Jet come back for more interim funding," Reuters quoted one of the bank sources directly involved in Jet's bailout process as saying.
Thousands of Jet Airways employees, many of whom have not been paid for weeks or months, stand to lose their jobs if the airline fails to attract a buyer and collapses.
Hurt by government policies
The carrier, saddled with roughly $1.2 billion of bank debt, has been struggling for more than a decade to remain afloat in the face of competition from a host of budget airlines. The airline was pinched further last year when Prime Minister Narendra Modi's government slapped a 5% import duty on jet fuel, which accounts for about a third of the carrier's costs, even as oil prices rose globally and the rupee fell to record lows.
"Which government imposes import duty on jet fuel when oil prices are going up," said Mark Martin, chief executive of New Delhi-based aviation consultancy Martin Consulting. "That's what I have got a problem with."
Martin blames the ruling government's policies as one of the three main reasons behind Jet Airways' current plight. Competition from budget carriers and bad corporate decisions are the other two.
"Costs went up 18% as a result of the Goods and Services Tax introduced by the government," Martin told DW. "And the government did nothing to soften the blow to an industry already struggling to stay afloat.
Jet Airways — a full-service airline — was also hurt by the Modi government's 2016 decision to recall 86% of cash in circulation.
"Demonetization hurt the capacity of the people to pay and that hurt Jet's high yield routes," Harsh Vardhan, the chairman of New Delhi-based Starair Consultancy, told DW.
Blown away by budget carriers
When Jet Airways began flying in the early 1990s, its only real competitors were feeble state-controlled Indian Airlines and Air India. The airline with its world-class service stood out and gradually became a significant player in the domestic market.
But the airline flew into turbulence with the emergence of budget airlines in the mid 2000s. Low-cost carriers such as Air Deccan, Air Sahara, Kingfisher, Spicejet, IndiGo and GoAir grabbed market share with competitive offerings — some of which were unsustainable and saw the airlines go bankrupt.
Jet Airways was forced to discount fares to remain competitive even as it continued to be a full-service airline. The resulting revenue could not cover the airline's costs, forcing it to keep borrowing from banks to stay afloat.
"Once you reduce prices, you can't bring them back up, especially in India, where consumers are extremely price-sensitive," said Harsh Vardhan.
Jet Airways made an ill-fated foray into low-cost flying with the pricey acquisition of Air Sahara for $500 million in 2006. The rebranded "JetLite" burnt cash, forcing Jet Airways to write off its entire investment.
Most Indian carriers, with the exception of IndiGo and Go Air, have struggled to consistently post profits in the past few years amid volatile global crude oil prices and a depreciating rupee.
Indian carriers are particularly sensitive to volatility in crude oil prices given India is a major importer of oil. When the rupee is weak, as has been the case in the past few years, fuel becomes all the more expensive.
"India has the highest fuel rates in the world today and the government has been imposing more and more levies and taxes on operators and passengers," said Harsh Vardhan. "This has dragged most airlines into losses. Jet Airways became most vulnerable, because it was a full-service carrier and had previous liabilities."
The fall of the rupee also increased its cost of debt servicing and lease payments.
"Every airline has suffered. But the weakest falls down first," he said.
Lessons for others
Jet Airways, like many other global and domestic carriers that have folded in the past few years, missed the opportunity to cut costs when the going was easy, especially when jet fuel prices fell to multiyear lows in 2015-2016. Boosted by rare profits around that time, the airline kept its focus on expansion rather than consolidation or restructuring.
Jet Airways' strategy is reflective of a fundamental problem across the aviation industry where airlines wait until the times are tough to reduce costs and more than often fail to do so.
"One of the lessons is that even if growth rates of markets and of the airline are spectacular, an essential focus should be on the bottom line, Peter Morris, chief economist at aviation consultancy Ascend by Cirium, told DW. "In only two years did Jet show a profit… So no matter what its traffic growth rate was, it should have concentrated on achieving and maintaining profitability."