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Jet Airways Q3 2012 financial analysis

Once again, we will be beginning our financial analyses for Q3 of FY 2012 with an analysis of India’s largest airline Jet Airways, who posted a modest net loss of Rs. 101.2 Crore, down sharply from a net profit of Rs. 217.9 Crore in the same period last year.

Q3 is typically the best quarter for Indian carriers, so to see Jet Airways posting a net loss is a bit troubling. Moreover, the negative trends continued to emerge from the last quarter, and were even to some extent under-represented due to one-time “special” revenue gains.

  • Revenue growth for Jet Airways domestically was strong, rising 13.3% to Rs. 1,736.9 Crore from Rs. 1,533.5 Crore
  • International Revenue growth was similarly robust, rising 11.65% to Rs. 2,202.2 crore from Rs. 1,934.2 Crore
  • Passengers carried were up 15.1% to 4.53 million; beating demand growth for the overall industry by about 2%
  • Domestic Passenger Yield fell 4.8% to Rs. 4,960; even in spite of a large capacity drawdown by Kingfisher (close to 33%) since November
  • International Passenger Yield rose 3.5% to Rs. 13,092
  • Domestic absolute non-fuel costs were up 26.6% driven jointly by large increases in employee remuneration, aircraft lease rentals, and “Other Operating Expenses”, while absolute fuel costs jumped a staggering 56.3%; on a capacity increase of 14,1%, a 17.8% growth in number of flight hours flown, and a 23.2% increase in number of departures.
  • International absolute non-fuel costs were up 16.8%, driven primarily by an inexplicable 32.2 percent increase in “Other Operating Expenses,” while absolute fuel costs jumped 62.4%; on a capacity increase of 11.8%, a 9.6% growth in number of flight hours flown, and a 11.4% increase in number of departures.
  • Domestic seat-kilometer revenues were down 2.7%, while seat-kilometer costs were up 20.3%; seat-kilometer costs excluding fuel were up 10.8%.
  • International seat-kilometer revenues were up 5.5%, while seat-kilometer costs were up 29.5%; seat-kilometer costs excluding fuel were up 13.8%.
  • Domestic break even seat factor was 86.3%, international 90.9%
  • Interest expenditures on debt were down 5.3% YOY to Rs. 237.4 Crore
  • EBTIDAR Profit (which measures operating results before taxes, interest, depreciation , loan amortization, and rents) of Rs. 209.9 Crore (Rs. 844.1 Crore in Q3 10-11), EBITDAR profit of Rs. 32.4 Crore on Domestic (Profit of Rs. 348.8 Crore in Q3 10-11), and EBITDAR profit of Rs. 177.6 Crore on International (Rs. 495.4 Crore in Q3 10-11)
  • Positive Impact of Rs. 179 Crore due to currency fluctuation
  • Net Revenue of Rs. 76.1 Crore on “Sale and Lease back of engines
  • Net Profit of Rs. 102.9 Crore on “Sale of Development rights of BKC Property”
Observations:

Domestic

Despite the drawdown of capacity by Kingfisher, increased capacity from the other low cost carriers in the domestic market (chiefly SpiceJet and IndiGo) ensured that industry capacity grew ahead of demand by about 5% yet again (17% vs.12%). In the long run, this is an unsustainable situation, and should end pretty soon, as 4 of India’s 6 carriers face severe fiscal pressures. These fiscal pressures combined with a weak Indian rupee and a more sluggish domestic economy to drop yields in Rupees by 4.8%, but dollar yields by 19.9%.

Under these parameters, Jet’s performance on the domestic sector was once again quite poor, especially in terms of holding down non-fuel costs. Allowing such costs to appreciate 10.8% helped drive Jet’s break even seat factor up to 86.3%, and the carrier must take steps to alleviate such overruns if it is to succeed in returning to profitability. One of the chief culprits was employee remuneration, which shot up 38.9%, despite just 14.1% growth in capacity. In volatile or even high fuel environments, employee costs are a huge variable which must be properly controlled.

Perhaps in a related move, Jet has joined Kingfisher and Air India amongst others, in deferring payment of January salary to employees. Whether this is the first in a long line of missteps or simply a temporary hiccup remains to be seen, but the fact of the matter is that Kingfisher and Air India both took the same step on their paths to financial ruin.

The 29.9% rise in aircraft lease rentals is indicative of the rising costs of domestic expansion. The company added 4 aircraft (on average) vs. the same quarter last year, and these costs were reflected by the aforementioned number. How much longer can Jet afford to finance domestic expansion for not-so-great returns, and should it consider cutting back, even as it attempts to add 17 more Boeing 737NGs to its fleet growth plan.

Ultimately, the “dirty little secret” is that Jet would have been profitable domestically, if it had limited growth in absolute non-fuel expenditures to the same as capacity growth, or 14.1%. Poor cost control, even more so than yield pressure, drove Jet’s unprofitability within India this quarter.

International
It appears that Jet will once again be the most profitable Indian carrier on its international operations on an EBITDAR basis (though IndiGo likely has higher margins on flights abroad). But Jet has ascended to this position almost by default, given Kingfisher’s tribulations, the mess at Air India, and still limited operations at the low cost carriers.

However, unlike the previous quarter, Jet failed to maintain non-fuel cost discipline, which given the 62.4% rise in absolute fuel costs, was a recipe for disaster causing Jet’s net loss on International operations to actually rise above that of the domestic sector, primarily due to large increase in the cost of depreciation (understandable given that the fleet is beginning to age) and interest. They kept yields in Rupees relatively constant, but the weak rupee all but wiped out those gains.

Jet’s international presence on the long haul now consists primarily of mature (in service for at least two years) markets and we have yet to see the consistent appreciation in yields that typically follows market maturation. Jet plans to add ten aircraft worth of A330 flying in addition to re-integrating the remaining five 777-300ERs into the fleet over the next 2-3 years, and that casts uncertainty on their ability to sustain the 5-6% fare increases required to offset rising fuel costs.

However, as with the domestic side, the unprofitability was ultimately caused by Jet’s inability to get its non fuel costs under control. Here the primary culprit was the undefined “Other Operating Expenses” which rose 32.2% vs. capacity growth of 11.8%. We have contacted Jet’s investor relations seek clarity, but despite many follow-ups they refuse to respond.

The domestic side also saw a 48.9% rise in this category. The net sum of all these effects was a pretty handy net loss internationally (the Rs. 20 Crore difference stemmed from depreciation and interest), but a still decent EBITDAR of Rs. 177.6 Crore. Whether Jet can keep its non-fuel costs down will be the primary determinant of their performance moving forward internationally, though continued pull-downs of capacity by Kingfisher would certainly help as well.

General

In combination, the positive revenue effects of the currency fluctuation, the sale of property, and sale and lease back almost combined to mask the true extent of Jet’s financial issues, just as the currency fluctuation overestimated Jet’s true economic losses in the previous quarter. Neither currency fluctuations nor property sales are stable sources of income, but IndiGo has been making profits on the back of sale-leaseback for some time now, and perhaps Jet can translate this into a frequent income source.

For the moment, we are choosing to maintain our positive long term outlook for Jet. By integrating their two low cost brands late in Q4, they should be able to reduce overhead if the merger is done correctly. However, we will be taking a very close look at the Q4 and full year results, which will provide further indication as to whether Jet is slipping into a bad financial cycle.

About Vinay Bhaskara

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