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Jet Airways Q2 FY 2012 financial analysis – costs up on fuel and currency, yields down due to Air India price cuts

Note: JetLite financial results will be analyzed separately

For the first financial analysis of Q2 FY 11-12, we will be taking a look at India’s largest international carrier, Jet Airways, who posted a net loss of Rs. 713.57 crore in the quarter, down sharply from a net profit of Rs. 12.43 crore during the same period last year. Jet posted a net loss of Rs. 157 crore in Q1 of FY 11-12.

Unlike the previous quarter, Jet showed a few surprisingly negative trends in its performance metrics over the 90 day period.

  • Revenue growth for Jet Airways domestically was weak, rising just 1.45% to Rs. 1,245.43 Crore from Rs. 1,227.62 Crore
  • International Revenue growth was more robust, rising 11.65% to Rs. 2,086.34 crore from Rs. 1,868.60 Crore
  • Passengers carried were up 12.6% to 3.86 million; beating demand growth for the overall industry by about 2%
  • Domestic Passenger Yield fell 3.7% to Rs. 4,330; while the airline is silent on this issue, sources indicate this is due to the price slashing by Air India.
  • International Passenger Yield rose 0.8% to Rs. 12,930
  • Domestic absolute non-fuel costs were up 9.29% primarily driven by depreciation in the Indian rupee, while absolute fuel costs jumped a staggering 46.60%; on a capacity increase of 7.0%, a 15.5% growth in number of flight hours flown, and a 18.2% increase in number of departures.
  • International absolute non-fuel costs were up 5.88%, while absolute fuel costs jumped 52.20%; on a capacity increase of 9.5%, a 9.1% growth in number of flight hours flown, and a 11.8% increase in number of departures.
  • Domestic seat-kilometer revenues were up 2.0%, while seat-kilometer costs were up 23.5%; seat-kilometer costs excluding fuel were up 15.7%.
  • International seat-kilometer revenues were up 6.0%, while seat-kilometer costs were up 19.1%; seat-kilometer costs excluding fuel were up 0.7%.
  • Domestic break even seat factor was 95.2%, international 85.9%
  • Interest expenditures on debt were down 14.5% YOY to Rs. 214.01 Crore
  • EBTIDAR Profit (which measures operating results before taxes, interest, depreciation , loan amortization, and rents) of Rs. 172.9 Crore (Rs. 642.1 Crore in Q2 10-11), EBITDAR Loss of Rs. 111.2 Crore on Domestic (Profit of Rs. 155.8 Crore in Q2 10-11), and EBITDAR profit of Rs. 281.4 Crore on International (Rs. 486.2 Crore in Q2 10-11)
  • Loss of Rs. 275.7 Crore on currency fluctuation
Observations:

The Air India effect
by Devesh Agarwal

The unsaid 23,000 kg gorilla in the room is national carrier Air India. In an effort to show their government bosses a recovery in passenger load factors and recovery of constantly eroding market share, the carrier went on a tear, slashing fares on domestic sectors to unsustainable levels.

With massive amounts of government bailouts, and a monstrously dismal performance pre-existing, the disasterous effects of this strategy does immediately manifest itself in the results of Air India, but has already shown itself on the results of both Jet and SpiceJet. One can expect a similar disaster at Kingfisher when its results are disclosed.

Industry sources inform that the private carriers are unable to do anything about this, and have been “advised” by civil aviation officials “not to bring up this issue for now.” One can only hope that Air India’s new Chairman and Managing Director, Mr. Rohit Nandan is more pragmatic and understands that a domestic fare war only weakens Indian aviation, at a time when all Indian carriers should be coming together and taking on the threats from the Gulf and South East Asian airlines. 

International

Once again, it appears that Jet will be the most profitable Indian carrier on an operating basis (EBITDAR), a situation driven almost solely by its international operations. Despite the rise in fuel prices, Jet’s international operations showed significant strength during the quarter. Demand growth slightly outpaced capacity growth, and passenger yield (in INR) did not fall off a cliff despite the sharply weaker Rupee. More importantly, they kept non-fuel costs relatively flat; showing a discipline that helped keep their international operations (relatively) profitable. In fact, they would have made a net loss of just Rs. 100.8 Crore, obviously not optimal, but still far better than the Rs. 337.5 Crore net loss excluding currency effects that was posted by the domestic segment.

Moving forward, the international results should get even better. Remember, the comparisons versus the previous year for Q2 include the flights to Milan and Johannesburg which are still relatively new, and thus not performing as well as more established flights. The figures for these two flights should continue to improve in Q3, and by Q2 of next year, they should be full contributors. Furthermore, Jet will be re-introducing the 777-300ERs with First Class on a couple of new routes in Q3 (Mumbai Hong Kong and Mumbai Brussels Newark), which could help revenue generation and the overall results. Because Jet will not be receiving any new A330s in Q3, expect the majority of Jet’s international expansion to be into the Gulf, though a new route to Manila and possibly Vietnam are also on the cards.

Domestic

In stark contrast to the optimism on the international front, Jet’s domestic operations performed pretty abysmally in Q2. Demand growth actually outpaced capacity growth for Jet, but rising fuel costs and poor non-fuel cost discipline pushed them to a sharp operating loss. Case in point, their break even seat factor is now 95.2%, meaning that they can only have 7-10 empty seats per flight in order to break even on the 737s; 3-4 on the ATRs. Current seat factor is 72.1%. The biggest cause for concern from a cost perspective is that employee renumeration and benefits jumped 41% on just 7% capacity growth; with already razor-thin margins, Jet can ill-afford such large outlays. Seat-Kilometer revenue growth of just 2.0% is troubling; oil costs are on enough of an upward trend that consistent seat-kilometer revenue growth of 5-10% will be necessary for positive performance.

Sadly, it does not appear that the domestic operating environment will be getting better any time soon. While the industry finally matched capacity growth to demand growth in Q2 (20% for both figures), passenger yield was sharply down across the industry. Negative pricing pressure from LFCs SpiceJet, IndiGo, and Go Air has driven fares down to unsustainable (for full-service carriers) levels. And, as SpiceJet’s 30% capacity growth indicates, these carriers are unwilling at the moment to practice capacity discipline. Moreover, perhaps Jet’s most profitable domestic routes (regional ones on the ATRs) are under attack. SpiceJet recently inaugurated Q400 service with a base in Hyderabad (coincidentally also a Jet Airways ATR base), and has plans for rapid regional growth in cities like Ahmedabad and Chennai. Regional routes are often amongst the most lucrative for Jet and Kingfisher, but with SpiceJet offering fares at more than 30-40% discount versus Jet, margins on regional routes are being eroded. The one corollary to the downward trend of Jet’s domestic operations is the actions of Kingfisher. Last week, Kingfisher announced the temporary cancellation of more than 50 daily flights. If these flights remain cancelled for a large part of Q3, the resulting rise in fares could push Jet’s business back towards profitability, assuming no capacity additions to offset the cancellations.

Other

Beyond the operating environment, the currency fluctuations are a big threat to Jet’s overall finances. The Dollar to Rupee conversion factor quoted by Jet in their results is 1 US$ per 48.875 INR, however, at the moment the trading rate is around 1US$ : 49.30 INR. Given that a large chunk of the fall in the Rupee’s value has occurred during FY 11-12, currency fluctuations could have a strong negative effect on Q3 results, and potentially even into Q4. However, these effects should not be allowed to obscure the fact that Jet’s operations have better margins than most of the other Indian carriers; which is the most important predictor of longer term profitability. At the very least, we can be assured that Jet will not fall into a Kingfisher-esque debt sinkhole, as they have done a good job of managing capital expenses (note the 14.5% drop in interest payments).

About Vinay Bhaskara

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