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Jet Airways Q1 FY2013~14 performance analysis – part 2 – JetLite, aircraft utilization, and ancillary revenues

by Vinay Bhaskara

JetLite continues to be a (modest) bright spot in Jet Airways’ broader operations. The low cost wing of Jet Airways, which was recently merged with the JetKonnect brand to streamline low cost operations, reported a net post-tax profit of Rs. 6.9 Crore, down from Rs. 11.7 Crore a year prior.

An increased proportion of JetKonnect’s fleet was contained within the mainline operation, and standalone JetLite’s fleet declined to 13 frames from 19 last year. Thanks to this reduction in fleet size, revenues declined 17.2% on a 17% decline in available seat kilometers (ASKs) and revenue per available seat kilometer (RASK) declined 0.3% with cost per available seat kilometer (CASK) increasing 1.4% year over year (YOY). CASK and RASK are used to adjust revenue and cost figures for segment length. Operating margin for JetLite stood at 5.1%, up from 3.8% the year prior.

The low cost wing of Jet Airways continues to outperform the full service wing domestically. And given the economic slowdown, weakening salary growth, and heavy inflation, customers, even business travelers are likely to pinch pennies and be more frugal in consuming air travel. At least on domestic sectors, the Indian purchasing behavior pattern has skewed more heavily towards low cost carriers. It probably makes sense for Jet to focus on expanding its low cost operations as a proportion of overall operations. For example, JetLite (and by extension JetKonnect) have unit costs that are roughly 23.5% lower than those of mainline Jet Airways; a significant advantage in challenging the low cost carriers (LCCs) who have only grown in stature as Jet has shrunk in parallel.

Turning to a structural analysis of Jet’s business, one of the key factors dragging down financial performance for Jet is now its large net debt, as we mentioned in Part 1, which stands at Rs. 12,100 Crore ($2.1 billion). Commensurately, financial charges increased to Rs. 234.13 Crore for Q1. But Jet’s problems do not necessarily end there; the network may be an even bigger challenge. On the conference call, Jet mentioned that in the domestic market, it has no immediate plans to cut capacity from its Q1 levels, on which it operated 32,500 quarterly departures utilizing 42 737s split between the 737-700/800/900 variants (12 for JetLite) and 14 ATR 72 (one for JetLite). The remaining 19 737s, 14 A330s (10 A330-200s, 4 A330-300s), and seven 777-300ERs are used to operate the 9,350 quarterly departures internationally. 

On international sectors, we asked why Jet had chosen not to operate the A330-200 on shorter haul sectors as several of the aircraft are underutilized, and their Vice President of Commercial Strategy and Investor Relations K.G Vishwanath responded by stating:

From a financial standpoint, we have always seen that the 737 or a single aisle aircraft is the most suitable airplane for any flying distance between zero to five hours. And you have been in this business for four, five years and you know very surely that the margin you are able to make on the 737 is significantly higher as compared to the A330. The A330 airplane is basically an overkill for a short-haul given that fuel costs are very expensive and the fact that the flying distance is very short, you end up running more fuel and it does not give you the right kind of revenue per RPKM to be able to make a decent margin.

In our view, under-utilization of the A330 fleet is not justified by the (slightly) higher operating margins that can be driven on the 737. When you include the financing costs (leases and/or debt costs) of the A330 fleet, the airline is likely losing more money on the underutilization of the A330s, than it is gaining from the higher margins on the 737s. Moreover, the idea that the A330 is very expensive on shorter haul routes is correct to a degree, but not overall. The A330 has lower unit costs (CASK) than the 737s, which Jet needs volume to profit on. An expensive, unused asset is more costly in the short term than imperfect alignment of asset with mission.

Mr. Vishwanath also tackled ancillary revenues during the call:

So currently our ancillary revenues appears in the other income line you will see in the P&L. We’re currently at roughly 4 to 5% of our top line revenues. We would like to take this number up to 10% of top line in the next two to three years.

This is a very positive strategy on the part of Jet. Looking at the global airline industry, the West in particular, sustainable profitability for full service carriers has occurred over the past 4-5 years primarily because of ancillary revenues; especially checked baggage fees and change fees. Growing ancillary revenue is a good way for Jet to tackle the profitability issues that have cropped up in the domestic market.

Read Part 1 of this analysis here

Stay tuned for Part 3 of this analysis, in which we tackle Jet Airways’ fleet plans and a way to reduce their debt load.

About Vinay Bhaskara

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