Naresh Goyal, Chairman, Jet Airways: The flight gets a lot turbulent

On November 25, when Jet Airways flew over 20 journalists for a mid-air press conference over Mumbai to announce the launch of a co-branded silver credit card with Citibank, it brought along a mind reader for good measure. The man, Deepak Roy, Chief Executive of a little-known Aries Advertising and Publicity, walked the aisle wowing the airborne scribes with his mind-reading skills, divining the number or letter that some sporting journos had written on chits of paper. Roy was unbelievably good.

Too bad then that Naresh Goyal, Jet's 53-year-old reclusive Chairman, wasn't on the flight. For, going by his airline's financial performance, it is the travel-agent-turned-airline-owner who seems most in need of a mind-reader. After an incredibly successful, and professedly even profitable, run in the nineties, the 10-year-old airline is hurtling deeper into the red. While it started the new millennium with a Rs 12.5-crore net profit on revenues of Rs 2,547 crore, it quickly spun into losses of Rs 13.38 crore, which have ballooned to a whopping Rs 245.63 crore.

What's going wrong? According to Jet, a number of things. Over the last six years, it has bought 25 aircraft (mainly Boeing 737-800s and 900s) increasing its depreciation and interest costs. For example, interest costs alone were higher by 50 per cent last year compared to the previous year. Prices of aviation turbine fuel, which apparently now accounts for 30 per cent of costs for any airline in India, have risen some 61 per cent since March 2000. There's been a drop in tourist inflow post September 11, its operating costs have gone up due to higher staffing and catering costs, and, of course, discount pricing of fares have lowered yield per seat. According to Jet, the industry is running at a seat factor of only around 55 per cent, which is below the breakeven level. "There's substantial overcapacity in the industry," laments Wolfgang Prock-Schauer, Jet's CEO of five months.

That, Jet's rivals say, is its own making. For example, they point to Jet doubling its capacity between 1997-98 and 2003: a fleet of 19 grew to 40 and 25 of these were bought. In that time, it has grown its marketshare from 25.6 per cent to 48 per cent. With more aircraft chasing passengers, the passenger load factor (an indicator of flight capacity utilisation) for the entire industry has dropped from 68 per cent in 1997-98 to 55 per cent. Says Uttam Kumaar Bose (the extra a in his middle name is a recent addition), CEO, Air Sahara: "Jet grew too fast and too big."

Wolfgang Prock-Schauer, CEO, Jet Airways: Blaming it on excess capacity

Sahara also has had a hand in making Jet's flight turbulent. For well over a year now, the late-starter has been flooding the market with unconventional pricing schemes. It introduced the now-industry-standard super-apex fare scheme, which offers steep discounts on tickets bought a month in advance. It also came up with a Super Sixer scheme, offering six economy tickets for Rs 15,000, and an onboard discount bidding for consumer products-a scheme that's very popular with trader passengers. In a tie up with Standard Chartered, it even offers a "buy-now-pay-later" facility at zero interest rate.

Therefore, an airline that until two years ago was considered a straggler, stormed its way into the market, raising its marketshare from 4.25 per cent in August 2001 to 11 per cent last year. And Sahara, despite its own losses-which industry sources reckon to be higher than Jet's-seems to be in no mood to let up. Last fortnight, both Indian Airlines and Jet announced a new, costlier 21-day apex fares in addition to two existing variants, but Sahara had made no such move when BT went to press. Says Subhash Goyal, Chairman, Stic Group: "Initially, Jet grabbed marketshare from Indian Airlines, but now Air Sahara has become more aggressive and is taking passengers away from Jet."

Slow Ascent

Competition is unlikely to get any easier for Jet. Therefore, Prock-Schauer is going in for some good old belt tightening. Every contract, everything from engineering to catering, is being put under a scanner. To reduce over capacity, the airline has leased out two of its older 737-400s; it has put in place a series of automation initiatives to increase productivity of manpower with an aim to save $2 million (Rs 9.2 crore) annually, and it is multi-tasking its workforce to up employee productivity. But Prock-Schauer admits that after a Rs 245 crore net loss, the return to profitability will be gradual. "Our turnaround depends on internal measures and relief in cost structure from the new civil aviation policy in terms of fuel taxes, landing, and navigation charges," he says.

U.K. Bose, CEO, Air Sahara: Surprise gainer

The more cynical industry watchers, however, feel that Jet's stunning losses may be aimed at something altogether different: At the Naresh Chandra Committee, which is slated to announce the new aviation policy in early December this year. What does Jet's losses have to do with the new aviation policy? The linkage, as offered by Jet's critics, is that it strengthens the two private airlines' case for an (limited) open skies policy. At one stroke, it will take care of their excess capacity problem, and add significantly to revenues and profits (airlines typically make their money on long-hauls). For an idea of how important that concession is, consider that Indian Airlines is more profitable on international routes. And it has only 16 per cent of its daily flights flying international destinations.

From the looks of it, Jet & Co. will get their way with the Naresh Chandra Committee. No less than the Prime Minister of India, Atal Bihari Vajpayee, promised open skies at the ASEAN summit in Bali this year. Also, the Union Civil Aviation Minister, Rajiv Pratap Rudy, has already made it known that he favours such a concession. (In fact, an overzealous Sahara even made a trip to Colombo without a formal permission.) The worst affected will be Indian Airlines, which will then have to compete with Jet and Sahara. And without doubt Jet will further expand its fleet capacity. Already, Sahara plans to increase its fleet strength from 19 to 24 by April, 2004. Of these, two will be 150-seater 737-800s and three 50-seater crj-200s. Says Bose: "With that fleet size, we will achieve 22 per cent of the marketshare."

Perhaps, but Jet seems set to be the biggest gainer of the open skies policy. Given Goyal's clout and contacts in the world airline industry-and not withstanding the enduring controversy over his sources of funds-he may sooner than later emerge as the king of Indian skies. A component of that plan is an initial public offering. "The timing will depend on the right market conditions...that is investor preparedness and right valuation," says Prock-Schauer. "The percentage stake to be offloaded is the owner's (read Goyal's) decision, but it will be a minority stake," he adds.

As Jet flies into its eleventh year, Goyal-despite the losses-looks stronger than ever before. He has played his cards very carefully, and there is no sign that he's getting any rusty at the game. Indeed, don't be surprised if Goyal soon comes roaring back into profits-now that some helpful wind seems to be blowing across India's open skies.

-additional reporting by Ashish Gupta