Bankruptcy courts not a good option for Jet Airways, says top due diligence expert

In a few hours, deadline for submitting bids for Jet Airways will expire, and SBI Caps, which is overseeing the bidding process, is expected to make a statement on the same, if any.

But with speculation rife that none of the shortlisted bidders may submit their bids, the question is will Jet Airways' lenders tow the company to the bankruptcy courts.

While State Bank of India - the lead lender - had in past maintained that the decision hasn't been made, there is a view that taking the airline to the National Company Law Tribunal will be detrimental.

"While the Insolvency & Bankruptcy Code (IBC) solves a number of problems, it is not a solution for every distress. It is more relevant for hard assets and not as much for the service industry," said Tarun Bhatia, Managing Director and Head of South Asia in the Business Intelligence and Investigations practice of Kroll, a division of global valuation and corporate finance advisor of Duff & Phelps .

"In a service industry, time is of essence. With every passing day, there is erosion of value," Bhatia added.

Insolvency cases under IBC have a resolution window up to 270 days, within which the bankrupt company is expected to get a new owner. "In effect, it is like saying that it will take that many days to arrive at a solution, and it is like self-destruct for a company in the service industry," he said.

Elaborating on the same, Bhatia, who was earlier Senior Director for Business Development at CRISIL Ratings, compares the aviation industry with its steel counterpart. "While a steel company has a visible hard asset, for instance a steel plant that can be restarted by a new owner, in the case of an airline it keeps losing assets with each passing day. As time elapses, there is a further value disruption. So, how will a new owner manage," he quipped.

In the case of Jet Airways, which suspended operations on April 17, it has lost airport slots, aircraft to lease owners and most of its employees to competition.

This, experts said, would make the carrier less of an attractive prospect for investors. Four bidders have been shortlisted to bid for the airline -- Etihad Airways, TPG Capital, Indigo Partners and National Investment and Infrastructure Fund (NIIF).

"Investors will be thinking of starting small, retaining some of the routes and probably add more after a few months. Loss in the airline's assets will concern investment firms more than an airline like Etihad Airways. Investment firms look at a shorter horizon to recoup their investments. A company will look to own Jet Airways for perpetuity and thus has a longer investment horizon," Bhatia reasoned.