Jet Airways liquidation: Why India needs a new regime to save airlines

After Go Air, it is now Jet Airways’s turn to go into liquidation after an insolvency resolution process under IBC failed to sell the business as a going concern and recover a decent portion of the money owed to lenders. The rules under IBC aren’t ideal for dealing with airlines because of their unique business model, and India needs a customised legal and procedural regime to deal with such entities.

After the Go Air resolution threatened to wreck India’s airlines’ ability to lease aircraft on anything but the most onerous terms, the government modified IBC rules to comply with India’s commitment under the Cape Town Convention and Protocol. This treaty cuts across differences in national juridical regimes on dealing with insolvency and bankruptcy to give lessors of aircraft engines, air frames and helicopters the right to hassle-free repossession of leased aircraft.

Also read: Jet Airways' liquidation wasn't the ideal way out of insolvency

India acceded to the treaty in 2008 and agreed to let its terms come into force the same year, but when IBC was framed in 2016, it did not specifically exempt aircraft from being frozen under the law. This left Go Air’s lessors unable to repossess their leased aircraft. Under IBC, lessors are inferior to financial creditors in the hierarchy of claims over resolved assets. 

An insufficient tweak

Under the revised IBC provisions, however, aircraft lessors who possess Irrevocable Deregistration and Export Request Authorisation (IDERA) can repossess aircraft from bankrupt airlines as these are not counted among the frozen assets. 

So far, so good. Lessors can now avoid a repeat of their experience with Goa Air. But this doesn’t mean the resolution of defunct airline companies is smooth. 

Take the example of Jet Airways. The airline’s insolvency resolution began in 2019, found a potential buyer in the Jalan Kalrock Consortium (JKC), and asked it to go ahead after it pledged to deposit ₹350 crore of its commitment of ₹4,793 crore to relaunch the airline. The airline’s lenders are owed ₹7,500 crore, of which JKC said it would pay all of ₹475 crore. The consortium also promised to settle employees’ dues worth ₹226 crore and airport dues of ₹1,100 crore. 

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However, JKC failed to settle the dues, to deposit the ₹350 crore it had pledged, or even provide a bank guarantee for ₹150 crore as directed by the Supreme Court. This prompted the lenders to move the Supreme Court against the National Company Law Tribunal’s award of the airline to JKC.

Given the shadow of suspicion over the source of funds that JKC would access and the consortium’s total lack of experience in running an airline, the court’s decision to abandon the resolution plan and move to liquidate the company is more than understandable. Lenders can hope to recover some money from the 11 aircraft and spares Jet Airways owned. It is not clear that the planes have been serviced or maintained during the prolonged resolution process, so their value may have eroded.

Time is the enemy

Clearly, bankruptcy resolutions of airline companies cannot be allowed to drag on for years, and new legal provisions are needed for speedy resolution of such cases. More to the point, banks need new rules for declaring an airline to be in default, different from the norm of a three-months delay in servicing a loan that’s applied to other businesses.

An airline is a capital-intensive business, but most of the capital needed is variable capital that can be sourced through loans. Lease expenses are variable capital, as are expenses on maintenance, repairs, overhaul, and the biggest operational expense – fuel. Staff salary is also variable capital, as are airport charges. In fact, all the identifiable elements of airline costs – general and administrative expenses, insurance, ticketing and promotions, passenger services, navigation charges and depreciation – can be met by variable capital.

Also read | Jet Airways liquidation: A wake-up call for India’s insolvency code

In other words, an airline can operate with very little in equity and fixed assets, and lots of debt. A smart operator who understands the business can run an airline with very little risk capital, provided he can convince lenders to provide sufficient credit. The trick is to service the loans religiously.

Salaries, rentals, lease payments, airport fees and other such charges and are paid monthly. Insurance premiums are paid annually. But revenue comes in daily from the sale of tickets. Of course, revenue is not uniform throughout the year, but years of data are available to determine the average for each season.

A potential solution

Is there any reason for airlines to not service their loans on a daily or a weekly basis – seasonally adjusted, if necessary? Why should a loan to an airline not be declared non-performing if a payment is overdue for 14 or 21 days? These terms can vary depending on how much equity capital backs up the debt, with airlines that have a larger proportion of equity getting greater leeway in servicing loans.

Such a system would catch non-performance early enough for lenders to remove the incumbent management and hand over the business to a new operator to minimise losses. This arrangement would not only ensure faster and smoother resolution of bankrupt airlines but increase the number of airlines as well. 

Also read | The Insolvency Code’s progress: From deep haircuts to fuller recoveries

Smart entrepreneurs whose chief asset is expertise in running an airline would be able to launch and operate airlines without having to first mobilise a whole lot of equity capital or offer substantial fixed assets as collateral. Banks could finance the business, knowing that they could swiftly retrieve their funds if the operation went belly up. The IBC norms and procedures for airlines ought to be revamped to incorporate this logic.