NRI's
Jet Airways: flying into troubled skies?
January 31, 2005
The Financial Express
SUCHETA DALAL
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 Patels 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.
Jet Airways
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 airlines success and
the power vested in NG and the owner group, Jet Airways
doesnt 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 NGs 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
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