It's lamentable that after 14 years as a publicly traded firm, operating in a capital-intensive, competitive, regulated industry, Jet was still allowed to carry on basically as Goyal's fief.
The
grounding of Jet
Airways India Ltd., the country's oldest private-sector carrier,
isn't just bad news for customers and its 23,000 employees. It raises
yet again a question that's puzzled two successive governments and
will continue to bedevil whichever party takes power after elections
conclude next month: What's killing capitalism in India?
Jet
was born in the early 1990s, when India's closed Soviet-style planned
economy had just started embracing globalization and private
enterprise. Back then, few Indians could afford to fly; now the
country has the world’s fastest-growing aviation market. An airline
that was at one point the industry’s dominant player should
theoretically have been able to thrive.
While
Jet’s costs were too high compared with those of its no-frills
rivals, that issue could have been fixed. The real problem is that
Jet founder Naresh
Goyal gambled away a perfectly fine — albeit, unprofitable —
airline by not injecting equity himself into the cash-strapped
business, or stepping aside in time and allowing someone else to do
so.
It’s
only natural for entrepreneurs to be possessive and irrational,
especially when — like Goyal — they’ve been so wildly
successful for so long. The bigger conundrum is why providers of
outside capital (banks and capital markets) didn’t act as a
disciplining force on Goyal and save the business.
Despite
Abu Dhabi’s Etihad Airways PJSC taking a 24 percent stake in the
airline in 2013, Jet has been slipping deeper into negative equity
for seven years. Had India’s state-run banks insisted on a timely
and substantial capital infusion, and had they credibly threatened to
dilute Goyal’s 51 percent controlling stake by issuing themselves
new shares when the inevitable debt default occurred, Jet would now
be flying under a new owner.
When
Jet's rival Kingfisher Airlines Ltd. collapsed in 2012, India didn't
have a modern bankruptcy law. Now it does. Even so, in Jet’s case —
or in the high-profile $7 billion insolvency of tycoon Anil Ambani’s
Reliance Communications Ltd. — creditors didn’t utilize that
option. Instead they foolishly relied on entrenched insiders to make
things right, thereby hurting their prospect of extracting value.
Banks
are now awaiting a white knight. Yet for a new owner to revive the
airline after it has stopped flying will necessarily mean very deep
haircuts on its $1 billion of net debt. State-run lenders will lose
heavily, as will employees. It’s an unnecessary waste of capital
and jobs in a country that doesn’t have enough of either.
So what’s to be done?
Private investment in India has been weak for years now, first under
a Congress Party-led coalition and then under Prime Minister Narendra
Modi’s Bharatiya Janata Party
