Jet Airways: How Naresh Goyal lost the plot

Patiala curse
Perhaps the Patiala curse has come to haunt Goyal decades later. Today, the 26-year-old Jet Airways, which he nurtured like a baby, has slipped out of his hands. He was unceremoniously booted out of his own company by lenders who plan to sell India’s oldest private sector airline. This was soon after Goyal approached them to restructure his debt—caused by relentless borrowing over the past decade—as India’s changing aviation sector, particularly the low-cost model, pulled the company into a downward spiral.

Today, Jet Airways is sitting on a debt of over $1.2 billion, unpaid salaries, and has lenders lining up to impound aircraft over non-payment of dues. The airline has suspended its operations, its pilots and staff have threatened to strike work, and have sought Prime Minister Narendra Modi’s help in saving their jobs and the airline. Goyal himself bid for the airline after the lenders sought bids to keep it running, only to back out a few days later. An investor needs to have a net worth of ₹1,000 crore and another ₹1,000 crore to invest in Jet Airways, according to the bid document.

Questions sent to Goyal’s office by Forbes India remained unanswered.

“Goyal is the product of crony capitalism,” says Jitender Bhargava, former executive director of Air India. “All his life, he didn’t have a baptism by fire. Rules were tweaked to ensure that competition had a tough time while he kept building his airline. Over the past few years, market dynamics changed and that was a real test of his leadership. He was never leading the fight and that’s where he failed. Even today, amidst all the crisis, you don’t see much of him.”

Taking flight
Goyal’s foray into the travel industry, by his own account, was an accident. He left his family behind in Patiala and moved to Delhi in the late 1960s to work in a travel agency floated by Das. It became his home and he even slept in the office on most nights. Soon after, Goyal was picked up by Iraqi Airways as a public relations manager. Between 1971 and 1974, he also served the Royal Jordanian Airlines as a regional manager where he became acquainted with route strategy, traffic patterns and operational plans.

The entrepreneurship bug bit him. In 1974, Goyal set up his travel agency, Jetair Transportation Pvt Ltd, which represented the likes of Air France, Austrian Airlines and Cathay Pacific. 

Jetair was doing remarkably well, but India was in deep financial turmoil by 1991, forcing the government to embrace economic liberalisation and privatisation. The government embarked on an open skies policy, allowing private airlines to enter the aviation sector. Armed with a deep understanding of the travel and airline industry, Goyal knew about the enormous potential of operating an airline.

This was also when the country’s oldest airline, Air India, was facing frequent troubles from its unions, sometimes for as long as five weeks at a stretch. Offering a better customer experience, including a friendly crew and a better selection of food and refreshments, Goyal launched Jet Airways in 1993. He was backed by Gulf Air and Kuwait Airways, which held a 40 percent stake in the airline; the company operated with four leased aircraft. “He had a relatively smooth entry into the civil aviation industry. The situation was largely positive and favourable for him. He could create a quality product and not face issues like union troubles… and offer an experience to flyers, particularly business travellers, looking for some luxury,” says Bhargava, who wrote The Descent of Air India.

Goyal’ competition back then included three airlines—Subrata Roy’s Sahara Airlines, SK Modi’s ModiLuft, Parvez and Vispi Damania’s Damania Airways, and Thakiyudeen Wahid’s East-West Airline, apart from state-owned Air India and Indian Airlines. Wahid was shot dead in 1995; East-West and Damania eventually shut down, while ModiLuft, which was a partnership between Modi and Lufthansa, ceased to exist over disagreements.

By 1997, the government announced a new policy, prohibiting Indian airlines from having foreign partners. As a result, Gulf Air and Kuwait Airways sold their stakes in Jet Airways to Goyal.

“If you look at it, Goyal had a clout within the system,” says Mark Martin, founder of Dubai-based Martin Consulting, an airline consultancy company. “For instance, Pramod Mahajan’s [three-time Union minister from the BJP] children were already working with Jet Airways. Moreover, back then, Jet was a dream venture, and everybody wanted to be part of it.”

Others agree that the cunning and sharp Goyal had strong lobbying skills that helped him build the company. “He had ensured that the 5/20 system was in place,” says Bhargava. The 5/20 rule required an airline to operate for five years and have a fleet of 20 aircraft before it can fly international routes, a move that essentially benefited Jet. “Also, when Tata and Singapore Airlines were looking to buy out Air India, he ensured that the deal didn’t go through,” says Bhargava. Reportedly, it was Goyal who ensured that Parliamentarians protested the government’s move for disinvestment in the national carrier.

Meanwhile, as India’s economy began to grow and air traffic boomed, Jet quietly cemented its place as the country’s preferred airline. According to the Directorate General of Civil Aviation (DGCA), in 1997-1998, 1.17 crore Indians took the skies for domestic travel. Of this, Air India and Indian Airlines had a 49.8 percent share while the other domestic airlines, including Jet and Sahara, had 48.5 percent. Five years before that, Air India and Indian Airlines controlled 75 percent of domestic travel. By 1998, however, Jet had a market share of 54 percent among private carriers.

Jet began its international operations in 2004 and by next year, its market share in the domestic aviation sector stood at 44 percent, carrying close to 19,000 passengers a day. Air Sahara had a market share of 12 percent with 5,000 passengers a day while Air Deccan’s stood at 0.9 percent.

Over the next few years, however, new entrants set foot in the sector. Air Deccan’s low-cost strategy, a flourishing Kingfisher Airlines and a sudden influx of players such as Go Air, SpiceJet and IndiGo had Goyal worried. That’s when he contemplated buying Sahara Airlines. The negotiations went on for over a year and Goyal bought Sahara for ₹2,250 crore in 2007, the biggest airline deal in India to date. The contract added 27 aircraft to his fleet of 53.

“The Sahara acquisition could have come at a much cheaper rate,” says Santhosh Chalke, a veteran at Jet Airways and former head of employee relations. “We ended up paying ₹2,000 crore and taking up many expenses involved in repairing the aircraft. At that point, the acquisition might have helped in international operations, but the prize may not have been worth it.”

Start of the fall
Those who have worked closely with Goyal say the Sahara deal has come back to haunt Jet. “In hindsight, it was the Sahara deal that was the beginning of the fall,” says a former vice president (VP) at Jet. “We had decided that it wasn’t worth it, and Goyal agreed that we shouldn’t pursue the deal. Then he went to meet [Subrata] Roy and within half an hour called us to say that he had purchased Sahara. It was nothing, but his ego at play.”

Goyal’s rags-to-riches story had become folklore by then, and he found a spot among the world’s billionaires. “He thought he had arrived and could manipulate anyone. However, it was foolish self-confidence,” says the former VP.

While the Sahara negotiations were under way, Jet decided to order 22 wide-bodied aircraft, including Boeing 777 and Airbus 330. The company also began applying for route rights for many international destinations. “When you get a route and don’t use it within six months, it goes back to the pool,” the former Jet executive explains. “With Kingfisher on its toes, there was a need to begin operations soon. However, we didn’t have the back-end infrastructure to deal with these aircraft. Pilots were not trained and maintenance was an issue. So we had to hire expats for maintenance and flying… all that meant that the costs spiralled up.”

The period also saw fare wars between Jet and Kingfisher, which had a combined market share of over 50 percent. Plus there were low-cost carriers. “When there are four types of aircraft, you have a different cost structure. Then you also yield to the blackmail of employees. It is a situation of having no control over your expenses,” says Chalke. “The staff cost alone was some $40 million [₹180 crore] a month because it had different cabin crews. Jet was spending between 14 and 15 percent on their employee costs alone.” Compared to this, IndiGo spent between 8 and 9 percent.

Meanwhile, following the Sahara deal, Jet upgraded its existing airlines and launched JetLite, a low-cost carrier using Sahara’s aircraft. “They spent much money on the revamp,” says Martin. “When you put in-flight entertainment across aircraft and rebrand yourself completely, it only adds to the cost. My sense is, they spent close to $2 million (₹9 crore) on an aircraft. That’s a lot.”

In 2007, Jet roped in Landor Associates to design new livery, which added yellow and gold ribbons to the existing dark blue and gold colour scheme. Cabin crew uniforms were changed while private suites with closed doors and a flat bed, complete with Dom Pérignon [vintage champagne] were also offered.

But there was a crisis brewing globally. Oil prices were rising steadily and hit a record high of $147 per barrel in 2008. Air turbine fuel accounts for 50 percent of an airline’s costs. “Even the dollar had begun to rise against the rupee. That meant additional costs,” says a VP at one of the lenders of Jet. The global recession that followed the collapse of Lehman Brothers in 2008 threw the travel industry into a downward spiral.

“FY08-09 has been one of the worst for the aviation industry in living memory,” Goyal wrote in a letter to shareholders in 2009. “This situation has been caused by two main factors. First, the very high costs of aviation turbine fuel… the second has been the global economic downturn, which has led to a steep fall in demand for air travel and intense pressure on yields.”

By 2009, Jet began losing ground to new low-cost carriers, including IndiGo, SpiceJet and Go Air, which together controlled 30 percent of the market. Jet’s share was 30 percent while Kingfisher had 22 percent. Then the inevitable happened. While Jet continued to borrow, Kingfisher Airlines, owned by billionaire Vijay Mallya, shut down due to heavy financial losses. “That was the cue for Goyal. The Kingfisher crisis was a lesson, but unfortunately there was no learning,” says Chalke.

“He just didn’t read the writing on the wall,” says Bhargava. “The market was bad, and the low-cost model was gaining ground. He should have tweaked his business model to keep up with the times.” Jet in 2009 launched Jet Konnect, a low-cost arm, but running three different models was becoming tough. The company merged JetLite with Jet Konnect in 2012 before eventually merging Jet Konnect with the parent company in 2014.

Slippery slope
By 2012, Jet was under intense pressure from IndiGo. As Kingfisher went bust, IndiGo turned out to be the biggest beneficiary. “IndiGo became aggressive and kept on adding capacity,” the former Jet executive says. “It had a low-cost structure with the sale and leaseback model, while Jet was struggling with debt. Whatever money it was making was used to service the debt.” In a sale and leaseback model, an airline buys an aircraft, sells it to a lessor and then leases the plane back. The model helps conserve cash, and also keeps the books debt free. IndiGo also controlled costs by running only one model, the Airbus 320.

Rising competition, low fares and a high-cost structure meant that Jet needed to raise more money to sustain itself. “By 2011, Jet was in big trouble,” says Chalke. The government then introduced a policy that allowed foreign airlines to own up to 49 percent stake in Indian airlines. Goyal, who had resisted the entry of foreign airlines into India, was now at the forefront, seeking a change. “There shouldn’t be any doubt that lobbying from his end helped introduce the new law,” says Bhargava.

Soon after the government changed its policy, Jet struck a deal with Abu Dhabi-based Etihad Airways PJSC to sell 24 percent stake in the company for ₹2,050 crore ($379 million). It was to help Jet reduce its debt, which stood at $2.16 billion on December 31, 2012. Much of that debt was raised for aircraft acquisition. In return, Etihad purchased three of Jet’s landing slots at London’s Heathrow airport and a 51 percent stake in its frequent flyer programme. “This transaction further strengthens the balance sheet of Jet and underpins future revenue streams, which will accelerate our return to sustainable profitability and liquidity,” Goyal had then said.

However, the partnership with Etihad was keeping Goyal on his toes. “He was spending time on wresting back control,” says the former Jet executive. “He somehow felt he was ceding control and was worried about Etihad. For nearly 36 months after that deal, IndiGo kept dropping fares. It knew Jet would struggle to service its debt. IndiGo had better market share and was the price leader. Jet didn’t have the frequency of operations that IndigGo had to dictate fares.”

Goyal’s insecurity, coupled with his lack of foresight, are to be blamed for the crisis, says Shukor Yusof, founder of Malaysian-based aviation consultancy firm Endau Analytics. “He has a huge ego… he could not trust others and hand over control… that has led to this situation. With the influx of low-cost carriers, having an experienced team could have helped identify problems and react. They didn’t react quickly and became complacent. That’s what caused the end of Naresh and the airline.”

Hard landings
Over the past five years, particularly after Etihad become an investor, there were moments when Jet seemed to be back on track. In 2016 and 2017, the airline posted profits, primarily aided by bottomed out oil prices. In 2016, the company saw earnings over ₹1,000 crore. However, oil prices soon began to rebound. A dwindling rupee added to the woes. Since January 2018, Jet posted four consecutive quarters of losses. Plus there were allegations that Goyal was siphoning off money from the airline.

Jet’s financial loss during the first nine months of FY18-19 stood at over ₹3,000 crore, forcing the Mumbai-headquartered company to seek a debt resolution plan proposed by lenders led by the State Bank of India. The decision was aimed at paying employee salaries, loan servicing and aircraft rentals, after the company’s net worth had turned negative.

As part of the debt resolution plan, lenders have acquired over 50 percent stake in the airline in line with a Reserve Bank of India guideline. It also booted out Goyal, his wife Anita, and two others from the board. Goyal approached Eithad and the Tatas to put in money into the beleaguered airline, but they asked him to step down.

The airline’s entire fleet got grounded on April 17. “Karma has a strange way of getting back,” says Bhargava, referring to the fact that Goyal had helped create the 5/20 rule.

“What is likely to happen now is that bidders are likely to buy the airline for its international operations. Whether it is Tata or SpiceJet, Jet has the best of the slots, and that is the only attraction” says the former Jet VP.

Meanwhile, Jetair Transportation, the company Goyal founded in 1974, and in which he continues to be the largest shareholder, submitted a bid along with two global funds to buy Jet. But after strong protests from Etihad and TPG Capital, who reportedly said they would withdraw their bids if Goyal also bid for it, the estranged chairman decided to back out of the race. “There are many vultures flying around,” says Yousuf. “They will all want a piece of the pie. It is such a shame that a company like Jet had to wind up this way. As for Goyal, it’s perhaps time to retire quietly.”

Those who know him say it’s unlikely that Goyal will hang up his boots without a fight. After all, he knows a thing or two about starting from the bottom.