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Jet Airways Boeing 737-800 VT-JGA.
Jet Airways Boeing 737-800 VT-JGA.

Jet Airways Q3FY16 analysis – good results, structural challenges remain

Jet Airways reported their highest ever quarterly profits of Rs 467 crores for fiscal 2015-16 third quarter ending December 2015. The key metrics were trending in the right direction; yet, the structural challenges at Jet Airways remain and require close monitoring.

Operational performance

Operationally, Jet has clocked a utilisation of more than 13 hours, which is phenomenal by any standards, for a full service carrier. This higher utilisation has helped it increase its capacity by almost 13% (equivalent to nine Boeing 737s), as compared to the same quarter last year without any fleet additions. While the increase in capacity was 13%, passenger traffic grew by 18%, leading to higher load factor. However, the industry as a whole as witnessed increased passenger traffic simulated by lower fare levels as compared to the same period last year, along with this quarter being one of the strongest in terms of demand, traditionally.

Closer examination reveals that domestically Jet Airways witnessed a 34.1% capacity increment for only 25.1% increase in passenger traffic resulting in a decreased passenger load factor whereas its low cost counterparts witnessed an increase in their load factors compared to the same period last year. Intense competition by existing carriers and the new entrant Vistara have continued to be a challenge for the company. However, one of Jet’s advantages is its slots at the constrained Mumbai airport which can be leveraged further.

Internationally, the 5.2% increase in passenger traffic out-stripped the capacity increase 3.8% which also compensated for the 3.4% decline in the yield, resulting in a 1.6% increase in the operating revenues as compared to the same period last year.

Yet, a load factor of 82% is impressive and with an industry capacity share of 22%, Jet Airways is the second largest domestic airline after market leader Indigo.

Financial performance

Total operating revenues came in at Rs 5,444 crores for the quarter, which included Rs 201 crores from leasing of aircraft. The management expects the leasing income to remain flat in the coming quarters. The leasing income will be affected once Etihad returns the 777s back to Jet later this year. Jet will be under pressure to place these aircraft with another lessee or carrier quickly. Luckily demand for these twin jets is high at current fuel prices.

There was an additional Rs 192 crores of non-operating income which includes profit from sale and leaseback of aircraft and engines.

Jet reported EBITDAR (Earnings Before Interest Tax Depreciation Amortization and Rentals) margin of 22% at Rs 1,227 crores. The EBITDAR allows comparison of the operational performance across the companies irrespective of how the assets have been acquired (leased or purchased). Plagued with high non-fuel expenses, despite a stellar performance for the quarter, this margin is still far below its LCC peers (IndiGo operates with an EBITDAR margin of close to 40% while SpiceJet in Q3 was at 33%). The situation worsens as we compare the EBIT margins. While Jet achieved an EBIT margin of 9.1%, its LCC peers were way ahead with a margin of 16% for SpiceJet and 20% for IndiGo.

Jet’s Revenue per Available Seat Kilometre (RASK) was at Rs 4.54 while its Cost per Available Seat Kilometre (CASK) was Rs 3.96. Broadly this indicates that Jet Airways made a profit of Rs 0.58 for each seat flown for a kilometre. There has been a pressure on yield due to massive market competition. The average fare levels for the quarter were Rs 7,428 which was lower by 8.9% as compared to the same period last year. The improved performance is mainly due to decline in operating expenses which is greatly attributed to reduced fuel costs as the ATF prices are at their all-time lows.

As compared to the same period last year, finance costs remained almost constant for the nine months ending December 2015 at Rs 658 crores despite of a debt pay down of close to Rs 2,100 crores. This was partly due to weaker Indian Rupee as compared to US Dollar (almost 83% of Jet’s current debt is dollar denominated) and partly because of debt refinancing which resulted in negative net debt reduction. Jet has a current debt of around Rs 11,380 crores. Going forward, Jet needs to closely monitor this, as will investors.

JetLite on the other hand continued to be loss making and there was a provision of Rs 7.8 crores made to accommodate it.

Other factors

The code-share traffic via Etihad is starting to show results where Jet carried 534,104 passengers in Q3FY16 (28% higher than the same period last year). Yet with domestic competition and international competition intensifying additional steps will be required. With the advent of low cost long haul (Air Asia X that has started services and Scoot that is likely to start) not only the yields are likely to be affected, Jet may also lose some of its international traffic to these players.

At the end of 31 December, 2015 Jet had a fleet of 96 aircraft with an average age of 6.28 years. However, 14 of these aircraft (737s specifically) had an average age of 11.8 years which could impact the maintenance cost of the airline.

High management churn at Jet is yet another worrisome factor and is likely to affect the company’s strategy. The incumbent CEO, Mr. Cramer Ball, steps down at the end of February 2016 and a new CEO and CCO are yet to be announced – both of whom will have impact on the strategic direction the airline takes.

Overall, while the results have been spectacular, underlying challenges especially elevated debt level, high non-fuel costs, and management continue to act as headwind.

About Nupur Sarraf

Nupur writes the fortnightly column By the numbers. She is certified financial analyst (CFA), and currently an independent consultant. A self confessed technology enthusiast, she earlier held roles in Consulting and Advisory where her work involved extensive financial analysis, benchmarking and pre-IPO research, especially in the aviation sector.

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  • Parimal

    Jet airways should rename itself as Shuttle service of Etihad, LoL.

  • Parimal

    Jet airways should rename itself as Shuttle service of Etihad, LoL.