Jet Airways - Strong Business Sense - Weak Cash Management

I am always a fan of Jet Airways.  The elegance with which they carry themselves, the professional service they offer, the smiling staff and their courteous service are quite unique.  Still I remember during customer service training programs Jet Airways customer service examples are quoted as best examples.  We learnt a lot from Jet Airways on customer service.  Today it is painful to see one of the finest corporate struggling and moving into sunset.

Many theories are floating around on what is ailing Jet Airways.  Is it the purchase of Sahara in 2007 for a full cash deal of Rs.1,450 crores or rise in fuel prices or increase in cost of operations or difficulties of being a Full cost Airline or competition from Low cost carriers or is it the immaturity of Indian market to be enable to pay for full cost airline? 

My assessment is nothing of the above.  As all the above are natural events in a corporate world. It is natural to have M&A's (valuation of M&A depends on multiple factors), it is natural for prices of inputs moving up and down, it is natural for competition to be breathing down your neck.  It is a jungle out there in the market place and for everything happening around you have little or no control.  What you can control is your business and your way of approach to customers and market.  You have to adopt to changes and fine tune your strategies and keep moving forward successfully.  

Jet Airways had a turnover of Rs.11,500 crores in 2009 which moved to a turnover of Rs.23,300 crores in 2018 which translates to a Compounded Annual Growth Rate (CAGR) of 8.18%.  Quite good considering the economic situation of the country and increase in competition activity in these 9 years.  Now consider the below table.

Growth in sales @ 8%+ did not have similar translations in EBITDA growth in most of the years because of multiple factors like competition, lower recovery per seat, increasing input cost, increasing labour cost, increasing operations cost.    This is not my main concern.  My main concern is on cashflow.  5 out of 10 years have negative cashflow.  What triggered this negative cashflow?  Let us understand by seeing another table below

Better sales and reasonable EBITDA meant that there is positive cashflow from operations.  Not much of capital investments in the last 10 years meant that cash outflow from investing activities is not impacting significantly. 

What impacts significantly is the cash outflow from financing activities which had negative cashflow in 80% of cases, mainly due to repayments of high debts and payment of interest on debts.  This is where the cash vanished.   Jet airways was a consistently high borrower for funding its operations its debts are quite high and its debt servicing cost is on an average 6% of its revenue (interest cost is 6% of sales).  What it should have done to avert this.  Consider the below table

Equity had been constant largely over the years and reserves have turned negative due to loss at net profit levels.  Jet should have looked to improve its equity position by roping in strategic investors as early as 2010 and using that equity knocked off significant amounts  of debt thereby protecting its net profits (lower interest payout) and cashflow.  Failure to identify or unwillingness to let in another partner to invest in the venture has knocked off the wind out of Jet Airways. 

Conclusion

Now banks and creditors are unwilling to move Insolvency proceedings as they feel it will bring in lower recovery for them.  They are still looking for a strategic investor who can pump in funds into the company.  This is a far fetched dream.  Damage is so impregnated into the system, cash requirement is multi fold, first to get out of the current problem, second is to fund future operations to revive the company which is a quite a big ask.  Sadly the search for the elusive strategic investor is going to get nowhere and Jet Airways will be history soon.  Another example of a corporate shutting doors on its failure to stop leakage of cash.