Jet Airways Q2 FY 2012~2013 quarterly results financial analysis

Photo © Devesh Agarwal. Used with permission.

India’s largest private carrier, Jet Airways, reported a net, post-tax loss of Rs. 99.7 Crore for the second quarter of fiscal year 2012-2013, representing a sharp improvement from the Rs. 713.6 Crore net loss recorded in the same period last year.

This 84.8% improvement in results, pushed Jet Airways’ net margin up to a very manageable (-)2.4%, that too in what is typically the worst quarter for India’s airlines.

The sharp rise in revenues is the primary driver of these improved results.

Financial and operating parameters

Jet Airways grew revenues by more than 25.8% in the last quarter buoyed by the general improvement in the revenue environment following the implosion of Kingfisher Airlines. Unit fares (revenue per available seat kilometre – R/ASK) were up more than 25.5% year over year, though this was matched by a 2.8 point drop in passenger load factor (PLF) to 75%. The fall in domestic PLF (where fares rose the most) was particularly precipitous, falling 6.5% to a low 65.6% from 72.1%.

The fact that Jet Airways still posted a loss despite close to 26% growth in unit revenues is simply proof of how far the industry had fallen and how much ground there is to still make up. Fuel expenses have finally begun to level off, though they still increased more than 14.5% on a per available seat-kilometer (ASK) basis.

In this quarter the culprits were instead the amorphous “Other Operating Expenses” line on the Profit and Loss (P and L) statement, which jumped 25.9%, but especially aircraft lease rentals, which jumped a whopping 49.3%!!!

During an analysts conference call, Bangalore Aviation raised the issue of the sharp rise in aircraft lease rental costs with Jet Airways management, and they responded:

“The lease rentals have gone up for two major reasons. We added six aircraft which were on ownership basis on the previous quarters which are now on a lease basis so effectively we did a sale and leaseback on them. We also added as compared to the last year 8 leased aircraft into the system, 6 of which were 737-800s and two of which were 737-900s and more importantly the rate of exchange impact. For the last year same quarter the rupee to dollar was largely at 45-46 to a dollar and this year it was more like a 55-56 so that is a 20 odd percent impact in terms of lease cost, which is 100% dollar denominated. So 20 plue percent is because of the rate of exchange impact, the balance is because of change in the mix of owned versus leased as well as incremental leased aircraft that we got into the fleet.”

Unfortunately, the declining performance of the Rupee, with the macro-economic and political factors behind that, represent a significant headwind that is, and will continue to, hamper the Indian airline industry for several quarters to come, though year over year comparisons will become easier assuming the Rupee stabilizes at current levels. When so much of the world economy is run on US dollars, this type of valuation for the local currency hurts airlines the most.

International Operations

Once again, the dichotomy of Jet Airways was apparent – the international operations, which had temporarily swung into a net loss during the fuel spike over the past year, swung sharply, improving 119% to a robust net, pre-tax profit of Rs. 45.2 Crore versus a net loss of Rs. 238.3 Crore a year ago. Meanwhile, the domestic operations continued to falter, posting a Rs. 153.5 Crore net loss (though this was a 67.7% improvement year over year).

Jet Airways has been aggressive in suspending non-profitable destinations, and from a pure financial perspective we applaud most of the moves that Jet Airways has made in recent months in terms of consolidating capacity on its international network and simultaneously shedding unprofitable routes while adding capacity on profitable sectors. In particular, Jet’s recent move to terminate Delhi-Milan, which has long been rumoured to have been unprofitable, and in our opinion, is superfluous to Jet ‘s core international strengths.

On the subject of Jet’s tumultuous European operations, Bangalore Aviation also queried Jet Airways management on our report of a planned Bangalore Munich flight. During the analysts call, Jet confirmed that the flight is indeed planned to operate towards the end of the winter schedule, but details are still being worked out.

Outlook

Looking forward, there are both challenges and opportunities for Jet Airways. If the general improvement in conditions for the Indian airline market hold, the traditionally strong, third fiscal quarter (October through December) should be highly profitable for Jet Airways.

We are optimistic the airline is focussing on the bottom line in many aspects, including value added income from in-flight sales of food, route rationalisation, and building flexibility in its fleet. In particular, the adding of business class in to JetKonnect which offers Jet the flexibility to shift aircraft between the low cost JetKonnect into the full-service Jet Airways will allow them to take full advantage of the temporary boom in business class demand during the next few months.

Jet will continue to face issues of brand confusion due to the common configuration of JetKonnect and Jet Airways aircraft, and the airline also risks becoming uncompetitive to the business traveller as it cuts back on routes. Jet also has to integrate the soon to be delivered A330-300s into their fleet and international operations. This will increase operational complexity, and will render the carrier’s Boeing 777-300ER fleet in to further irrelevance, both of which will increase costs and drive down profitability.

On the positive side, fuel prices are stabilising, and for the first time in the last four years, fares are rising in India. Jet Airways is poised at the cusp, it is up to the team at Jet Airways to deliver a few quarters of great results.

With inputs from Devesh Agarwal