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Debt Airways. But The Shares Trade Like There Is A Tomorrow.


Jet Airways is now slowly going into conversations as past tense. Meaning, what a wonderful airline it used to be. Because it isn’t there anymore, and in two weeks, it hasn’t been “rescued”. We wrote about the saga: Jet Airways – what it would take to keep it flying

What’s happened since then:

  • The airline has run out of money and completely stopped operations
  • Naresh Goyal has resigned and walked away
  • The banks haven’t converted part of their debt to equity like they said, and do not own 50% of this airline
  • Etihad did not invest money into the airline, even at Rs. 150
  • Some of their aircraft have been taken over by SpiceJet (Indigo only does Airbus, so it won’t take the aircraft)
  • The slots they were given have now been giving to other airlines – even temporarily
  • Jet airways has lost staff too, to other airlines, largely after they’ve stopped paying salaries as well
  • Tickets that were issued earlier have to be refunded, and that’s the primary activity for the company now.

The total amount that’s at stake could be over Rs. 9,000 cr. – as debt to various banks and such.

What Assets Does Jet Have?

This is a good question. It didn’t own too many planes. (Just 12 and even those have loans with liens, apparently). It didn’t own the slots – those are leased and cannot be sold to someone else. In fact, if unused, the authorities can give the slots to other airlines.

Jet has international landing rights, but those too are a license rather than an asset – they cannot be sold meaningfully. Jet’s other assets – any of the vehicles, equipment etc. will likely be leased too. There are some assets, but in the context of Rs. 9,000 cr. of debt, the assets are tiny.

There is of course the ownership of Jet Privilege, a frequent flyer programme that has some value and is part owned by Etihad. However, the value in this also erodes regularly as the core airline behind it is not flying.

Then, what can lenders sell if the airline can’t pay? The answer: very little.

If the debt cannot be paid, then what’s the value of the equity? Very good question, and in math, we learn of a concept called “tending to zero” – which is perhaps relevant in Jet’s equity.

But Shareholders are Super Optimistic!

The stock looks like it’s not more than a bit worried. You would think it should be terrified. Like hiding in a corner waiting for things to calm down. But no, it’s out there telling us that Jet is valued at 1,900 cr. at the current value of Rs. 152 per share.

Debt Airways. But The Shares Trade Like There Is A Tomorrow.

Which is surprising. What are they thinking of? Can the airline be sold now? Will a buyer pay Rs. 11,000 cr. to own the airline? (Which is what it should be valued at – 9,000 cr. debt plus nearly 2,000 cr. equity)

This looks quite tough, and there’s a significant chance the company will be valued at less than the debt itself, even if there was a buyer. After all if a buyer is paying that much money, why doesn’t he just start a new airline (or acquire a significant stake in an existing airline) and take over whatever slots, planes and rights Jet had? That’s likely to be much cheaper.

Meanwhile, since there aren’t enough planes by other airlines that can take over capacity, demand is higher than supply and airfares have gone up. This is also not irrationally higher – I recall paying Rs. 10,000+ per flight from Bangalore to Delhi in the early 2000s (before Air Deccan came along) and even now, fares for two days later are less than that. Which tells us that a lot of flyers will not pay high rates, and perhaps even not fly unless absolutely necessary – and that wreaks havoc on airlines (who will lose money on “half full” planes – and profit only when the planes run nearly full).

Given this, and the fact that slots and planes are being taken over by other airlines, the impact of Jet’s “shutdown” will only be felt a few days more. Then flyers will see normalcy return – and the problem then becomes one of the lenders – where do they recover anything from?

But the Shareholders….

It will take a miracle to recover the debt.

If that is the case, there is a second miracle required to have any value for the equity.

There are two miracles required, and that may well happen because stranger things have happened. It’s like winning two lotteries in a row, and let me not be the person discouraging the extremely confident lottery buyer that he can never win.

But to many shareholders, it may not be apparent, right now, that a Jet Airways share is such a long shot. There’s still Rs. 152 out there for the taking.

Headline Credit: Thanks to Akhilesh B for suggesting this!


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