Realist, not conformist analysis of the latest financial, business and political news

India’s Jet Airways Suspends Operations – This Is Why We Need Capital And Capitalists

India’s Jet Airways has been in trouble for months now. They’ve been losing money and banks won’t lend any more – sensibly enough, it’s a money pit. All of which is a useful lesson in why we need capital and capitalists. There’s got to be someone there able and willing to cover losses in the bad times – that’s what they get the profits for in the good.

This is the part of the system that some find so terribly hard to understand. The varied forms of socialism etc don’t change these basic facts. In any set of experiments over what should be done in the economy there are going to be some ideas that don’t work. Or even, which will take time to work and will lose money until they do. The function of the capitalist is to gamble upon the project, to carry those losses until and unless profit is made.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Troubled Indian airline Jet Airways has temporarily suspended all its domestic and international flights after failing to find fresh funding. The airline said its last flight would operate on Wednesday as it was not able to pay for fuel and other critical services. Jet Airways said it had no choice but to suspend the flights, but hopes to start flying again. It has $1.2bn (£900m) debt and has been in talks with lenders for weeks. [/perfectpullquote]

It has rather more debt than that. For it has the lease payments on the planes to cover as well. Which is why this:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]It looks like Jet Airways Ltd.’s luck has finally run out. India’s oldest privately owned airline is on the verge of shutting down all its flights — it already has perhaps fewer than 10 aircraft active — because it simply doesn’t have enough working capital. It’s more than a billion dollars in debt and has lost money for the last four quarters.[/perfectpullquote]

If the lease payments on the jet aren’t being made then it can’t be flown. So, while they might have 130 planes – or so – on the books they’re only able to operate that handful.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Jet Airways (9W, Mumbai Int’l) is facing imminent grounding unless banks release at least INR4 billion rupees (USD57.7 million) in immediate rescue funding, the Business Today has reported. A meeting between the airline and its creditors on April 16 ended inconclusively as the banks are divided on whether to release any funds without further collateral. Civil Aviation Secretary Pradeep Singh Kharola confirmed that the airline is now seeking INR4 billion rupees just to survive. [/perfectpullquote]

Collateral just means capital here. Why should a bank lend into a business unless there’s that buffer of capital which gets lost first? Why lend into something when no one else has skin in the game?

It’s also worth mentioning one other thing. So, Jet Airways is effectively bust, even if not yet entirely legally so. Who is it that has lost out here? The suppliers of capital to that business. Which is again the point of this capitalist system. Those who supply capital to something that works make profits. Those who supply to something that doesn’t lose their investments. It is by this very system that we encourage investment in things that work and discourage it in those that don’t. We thus gain more things that work, we become richer as a society.

Capitalists actually do have a function and we’d all be very much poorer without them.

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