Sucheta Dalal :Jet Airways: flying into troubled skies?
Sucheta Dalal

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Jet Airways: flying into troubled skies?  

Jan 31, 2005


Despite copious disclosures, Sebi needs to take time to clear the IPO document


Globally, the airline industry is a mess. Oil prices remain high and airlines are reeling under the impact of thin margins, intense competition and expensive fuel. US Airways and United have filed for bankruptcy and Delta Airway may lose revenue due to lower fares. While the global industry suffers from over-capacity, it is boomtime for aviation in India.


Aviation minister Praful Patel’s liberalisation initiatives have set the stage for new entrants in the Indian skies. As many of these will seek to finance their fleet expansions with public money, a rash of Initial Public Offerings (IPOs) from airline companies can be expected next year.


However, intense competition, tariff wars and high fixed and operating costs will continue to keep airline finances in a precarious state. Fortunately for the sector, researchers find investors are attracted by aviation stock. A study in a Wharton School journal says, “Despite all the challenges in the airline industry, investors are willing to buy airline debt and stock leading to a continuous crop of new competitors entering the market”.


In India, the likely candidates for a public debut are Air Deccan and Kingfisher Airlines, Bombay Dyeing (Go Airways) and Britannia (if it enters the business). In addition, the minister has announced that Indian Airlines (IA) and Air-India may be allowed to divest 10% of their equity in 2006. After its recent financial turnaround and aggressive marketing, IA is certainly capable of giving the competition a run in terms of service as well as efficiency.


• A rush of IPOs from airline companies is expected next year

• Investors must be conscious about all facts before investing

• Sebi terms of clearing Jet Airways prospectus will set the benchmark


Nobody has ever seen an annual report of Sahara Airlines, so it is unclear whether it would subject itself to the sort of disclosures that are demanded from IPO documents. But Jet Airways has taken the plunge and filed a draft prospectus with a 20% offer of its equity.


Although the ownership of Jet Airways has been controversial and subject to multiple investigations, the risk factors listed by the company are startling. Tail Winds Ltd, an Isle of Man company (which holds a 99.99% stake) and a few other entities own Jet Airways. Tail Winds is wholly-owned by Naresh Goyal (NG) and the draft prospectus reveals that he and the promoter group will continue to have a stranglehold over all significant decisions even if their shareholding drops to just 26%.


Apart from Naresh Goyal being a permanent chairman, the NG group will have the power to appoint managing directors, executive directors and one-third of the board. Tail Winds is an overseas corporate body (OCB) which had been deregistered by the Reserve Bank of India and needs to divest its holding to resident and non-resident Indian investors.


Interestingly, for all the airline’s success and the power vested in NG and the owner group, Jet Airways doesn’t even own the brand “Jet Airways”. This is owned by Jet Enterprises, a company “substantially owned by Naresh Goyal”. The company is contractually bound to pay out a fat fee varying between 0.10 and 0.20% of gross revenue as licence fee to NG’s Jet Enterprises. It also pays a fixed annual licence fee of Rs 0.1 million for each trade mark licensed to it.


That too is not a secure arrangement. The draft prospectus says, “Certain parties have raised objections to the registration of the Jet Airways trade mark in the UK and United States”. If the company loses this litigation, would it fly to some destinations under another name? Worse, if the licensing agreement for the trademark expires or is terminated, the Articles of Association of Jet Airways explicitly state that the airline will have to discontinue using the “Jet Airways” trademark and change its corporate name.


Further, the general sales of Jet Airways is outsourced to Jetair Pvt Ltd, another Naresh Goyal-controlled company, which earns a 3% commission on all passenger sales. In addition to the commission (which is over that paid to travel agents) Jetair, the sales agent, seems to recover most of its infrastructure and employee costs from Jet Airways through a ‘charge back’ agreement. In addition to Jetair, there are other promoter-owned subsidiaries in Dubai, Canada and South Africa who also earn commissions from Jet Airways.


These arrangements present what the draft prospectus confesses could lead to “potential conflict between Naresh Goyal and his promoter group and the interests of the airline”. Investors have to be conscious about these facts before investing.


Not owning the trademark becomes even more significant when you read that some of the “promoter group” companies are making losses. However, Jet Airways shows a net profit of Rs 163 crore for the year ended March 31, 2004 and Rs 129 crore for the six month period ending September 2004. These profits were possible after contingent liabilities that add up to a hefty Rs 400 crore. They include Rs 163 crore on outstanding letters of credit, Rs 157 crore on outstanding bank guarantees and Rs 8.8 crore of arrears on “cumulative dividends” to be paid to the International Finance Corporation.


To sum up the situation, we have promoter companies with enormous rights over all corporate decisions and who will keep earning a handsome royalty on the brand name and ticket sales, irrespective of whether the airline makes a profit or not. They will also control every significant decision and contract of the listed company, whether or not they present a conflict with their other interests. It is no wonder then that despite its copious disclosures, Sebi officials need to take their time in clearing the IPO document of Jet Airways. The terms of clearing the Jet Airways prospectus will act as a benchmark for disclosures by other airline companies, at least until Indian Airlines chooses to tap the market.

-- Sucheta Dalal