India’s oldest private airline Jet Airways suspended its operations after 26 long years in 2019; the news shook the entire nation. Although it was an unpleasant surprise for Indian flyers, this was inevitable given it’s dried up cash reserves and lack of additional credit lines. A once vibrant venture, Jet Airways is now severely crippled. To this day, the failure of Jet Airways is an unfathomable. However, the Jet Airways crisis has some critical lessons for entrepreneurs all over the world. In hindsight, there were several factors such as costly purchases, failure to acknowledge price-sensitive customers, poor management etc. that contributed to the downfall of the airline. However, every failure has some valuable lessons to offer. In this article, we have compiled some valuable lessons that every business can learn from the Jet Airways crisis:-
Lesson 1- Changing market dynamics and recognising potential disruptions
Lesson 2- Products don’t disrupt; business models do
Lesson 3 - Any business with a cost base which is not covered by revenues will eventually fail
Lesson 4 - A coherent strategy and a clear vision is critical to success in business
Lesson 5 - Regardless of company size a focus on the balance sheet is essential
Consumer preferences change rapidly with time, especially when it comes to B2C businesses. Those ventures that have been successful in the past get complacent and fail to adapt to the changing needs of the consumers. This indeed was the case with Jet Airways. From 1992 to 2004, Jet Airways had a strong growth and good cumulative performance with substantial cash flows and profits. However, in those days, the nature of demand was different as air travel largely catered to the business elite. However, with the entry of low-cost carriers like IndiGo and GoAir, the market dynamics changed completely. The airline market became highly price-sensitive, and Jet Airways failed to address the change. And sure enough in 2005, when the low-cost revolution began in the airline industry, the profit margins of the Jet Airways started declining.
In 2005, the low-cost carrier revolution began rapidly, and a number of carriers started launching in quick succession. Their business models were based on simplicity and efficiency, and driving a high return on assets. The key elements that enabled low-cost carriers to bring down flying costs were simple route networks, a single aircraft model, a no-frills offering and no sales on credit. Within a short span, low-cost airlines started gaining additional traffic and which indirectly affected Jet’s profits and market share. While Jet Airways did try to respond to the market disruption, it chose to play the defence strategy. Rather than cost-cutting, Jet Airways created barriers for low-cost carriers often by influencing policy towards creating a competitive barrier and making an uneconomic acquisition in buying Air Sahara for Rs 1,450 crore. Soon, the losses started, and the net worth of the airline turned negative in 2012 and never recovered. Hence, failure to adjust its own business model was responsible for the losses.
All sustainable businesses must have higher revenues and lower costs. Although some businesses may adopt strategies like loss leadership or discounts towards establishing market share, the losses incurred have to be recovered eventually. Not doing so at the right time is a recipe for disaster. For Jet Airways, the costs were 35 per cent more than its competitors while the pricing levels were the same. Hence, on the same levels of pricing, Jet’s competitors were able to make more money. Although Jet Airways did attempt to get its cost in line, the difference was so high that even breaking down the cost structure never helped it achieve desired results.
Airlines is one of the most lucrative markets, and the potential is sky-high with a 300 million-strong middle class. However, it equally difficult to manage airlines because of the high expenditure on fuel and parking, opportunity costs and management of the vast business. Jet Airways was seen struggling on all fronts right from the business model, aircraft, financing and costs. The airline kept changing its positioning; at first, it has positioned itself as a premium airline, then it shifted to being a low-cost provider while offering a full-service product. This shift in positioning complicated its cost structure. Hence, the company did not have a clear, compelling vision towards a singular goal. In trying to cater to all segments, Jet Airways ended up as just another airline, albeit with a much higher cost, which was not backed by revenues.
Capital intensive businesses like airlines are exposed to a variety of risk factors due to the very nature of business. Hence, ensuring balance sheet strength and adequate capitalisation is critical for success. Having a strong balance sheet helps businesses to withstand unpredictable events, which can have significant impacts depending on the risk exposure. However, Jet Airways lacked this discipline. For instance, the airline’s debt doubled and grew exponentially despite Initial Public Offering (IPO) proceeds of Rs 1,899 crore. Etihad acquired 24 per cent stake of Jet Airways in 2014 which helped the company to clear the existing debt. However, only 24-26 per cent of the equity infusion from Etihad was utilised for debt repayment while the rest was taken up by the enormous working capital requirements. Lack of accountability, short-term targets, and short management tenures were the major contributing factors for the Jet Airways’s poor balance sheet.
As you can see, there are plenty of valuable business lessons hidden in the Jet Airways Crisis. So make sure to be mindful of these lessons while conducting your business. While Jet Airways is still unable to secure further financing, you certainly can and scale your business to new heights. Whether you want to start your business from scratch, invest in infrastructure, expand operations, or increase your working capital, a small business loan can give your business the much-needed boost to scale new heights. What’s more, with Bajaj Finserv business loan, you can enjoy multiple benefits of business loan such as pre-approved offers, funding up to Rs 30 Lakh, online account access and collateral-free loans. To know more or apply for Bajaj Finserv business loans online, visit Finserv Markets.
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