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We ended our Q4FY18 analysis for Jet by indicating that, “Going forward, it seems that Jet Airways is headed for a turbulent ride. Debt will grow for the short-term. The revenue pressures are intense and the cost base is high. Addressing both these elements is critical to success.”
While we forecast a result that would reflect ongoing challenges, little did we know about the brouhaha that would ensure prior to the results being announced. An extremely intense annual general meeting, tough questions and significant media speculation were all precursors to Jet Airways announcing their Q1FY19 results and posting a loss of ₹1,326 crores for the quarter. Or as some analysts calculated – a cash burn of 14.7 crores per day! If that still doesn’t seem too bad, this was during the quarter that is usually one of the strongest for the industry.
Bangalore Aviation presents our analysis of what seems to be the root cause(s).
The challenging environment
To be fair, Jet’s results are reflective of the overall environment where costs have risen and continue to rise while fares remain flat. As such, all of the industry with the exception of Indigo is bleeding (Indigo is helped by its capacity dominance, low cost and also non-operational income streams from sale and leasebacks).
In the case of Jet, it may have to re-think its full-service model. As one airline executive put it, “when costs rise and budgets are tight, business travellers move to low cost; and when costs are low and budgets are relaxed – more people are attracted to lower fares. In both cases, a full-service carrier loses out!”
For Jet Airways its debt levels, foreign exchange exposure, full-service business model compound the problem as the consumer is increasingly using price as the sole-determinant for air travel.
Key performance numbers Q1FY19
- Passenger Revenue – ₹6,257 crores
- Operating Cost – ₹7,638 crores
- Net (loss) – ₹(1,326) crores
- RASK*: ₹4.10
- CASK*: ₹4.77
- Loss per ASK: ₹(0.67)
- Passengers carried – 7.4 million
- Capacity – 15 billion ASKs
- Load factor: 80.4%
The challenge continues to be costs
For Jet the clear challenge is costs. Its cost per available seat kilometer at 4.77 is not covered by its revenue per available seat. Additionally Jet is selling fewer seats reflected in its load factors of 80.4%. This the troika of weak revenues, high costs and inability to drive large volumes (where part of weaker yields is made up by higher load factors) is combining to produce net losses.
To add to this, the year on year impact of increase in fuel prices of INR 675cr. The weaker rupee led to another exposure of INR 366 crores.
If that wasn’t enough, with continuous capacity addition, the Indian aviation market is witnessing intense fare pressure and numerous fare sales. In such a market, the cost base is critical to success and this is where Jet Airways is most disadvantaged.
In what is also not seen very favourably, Jet’s cost per available seat kilometre (CASK) was up 8.7% for the quarter (compared to the same quarter last year). This cost base just cannot hold up as LCCs with their low cost base can yet turn a profit while forcing Jet to match fares making them unable to cover costs.
Jet’s position in the international market also weakened
The brouhaha over Jet not announcing its results and announcing them later combined with the intense media speculation has also presumably had an impact on revenues.
Industry sources reveal that when negative news hits aviation markets, there is an impact on forward sales. And to combat falling sales, the airline has to resort to additional marketing and discounting measures (a.k.a. higher costs)
The average ticket fare for Jet Airways across the network was ₹7,312 per passenger for the quarter. Given that 55% of Jet’s revenue comes from international operations, these figures are far too low.
Key reasons for these low fares were weakness in the Middle East market (traditionally a strong revenue source) witnessing significant yield declines due to general weakness in their economies, and additional capacity from LCCs.
Additionally, the premium passengers gravitated towards foreign carriers which offered a superior product on wide-body aircraft (Jet primarily uses narrow-body 737s on middle-eastern routes) and better connections.
Rising costs compounded financial impact
Against a falling yield environment, costs grew 24% to ₹7,638 crores compared to the same quarter last year. The largest contributors to the increases were:
- Fuel – increase of 50% yoy
- Maintenance – increase of 20.7% yoy
- Other operating expenses – increase of 34.7% yoy
- Selling and distribution costs – decrease of 17.9% yoy
- Interest cost – increase of 27.7% yoy
While fuel and maintenance are largely out of the control of the airline, items such as selling and distribution should be addressed.
At a time when Jet should be focusing on increased marketing, one sees a reduced expenditure on this account – which again shows that efforts are being put wherever possibe to reduce costs. It is for the same reason that Jet initially played head-count reductions but had to back-track after a tough stance from pilots.
JetPrivilege continues to be a core differentiator and may a source of funding
The one bright spot for the quarter and the year is that Jet Airways’ frequent flyer program continues to grow and help retain a corporate traveller base. As of the end of the year it had eight million members up 30% compared to last year.
The program continues to be a favorite amongst corporate travellers and helps Jet Airways command higher premiums. In the domestic market it is being challenged by Vistara, though in a limited fashion given Vistara’s small network.
This program will be critical to success going forward and indeed Jet Airways has started to leverage analytics to further gain revenue advantages from it.
Jet has indicated that sale of the program may be one of the avenues for recapitalization.
The 737 MAX – critical to both lower operating costs and funding
Jet flew a mixed fleet of 737s, 777s, A330s and ATRs for the year. In April 2018, it entered an agreement to purchase an additional 75 737 MAX aircraft to the existing 75 737 MAX ordered. Apart from helping Jet with vastly improved operating economics, it will aid in fleet and hard cabin product modernization.
Additionally, the market indicates that Boeing will return a portion of the payments made towards the aircraft. Why Boeing would do this is that Jet Airways is a critical part of the Indian market and one of only 2 airlines in the country that uses the 737 for short-haul flying (all others are using the Airbus reflecting the European OEM’s dominance in India’s domestic short-haul market).
The wide-bodies too at some point will have to be phased out to arrive at a single widebody fleet type (Airbus or Boeing) as an effort towards cost reduction. The airline has the Boeing 787-9 on order which will fit the bill, but has been deferring deliveries till now.
Regarding the ATR fleet, we mentioned last time that market sources indicate that evaluations have been underway on whether to remove the fleet, contract it to a third party, or to refresh the fleet. This was confirmed by Jet and a wet-lease most likely to a regional operator is in the works.
Outlook
Jet’s promoter indicated that they completed 25 years and intend to be around for another 25. For that to happen, a recapitalization in the short term followed by cost reduction in the medium term are critical. Recapitalization plans are underway and everything will be explored including additional loans, the sale of privilege program, subleasing of ATRs and sale-and-leaseback of the 737s. Additional equity from a strategic partner may also be an option.
In the medium term, Jet has to address its unit cost economics. A negative RASK-CASK equation cannot hold for a long period of time. Thus either that CASK has to be reduced or the RASK increased (ideally both). To put it simply, Jet has to sell more, sell higher and ensure that its flying costs lower. These three things will take up most of its efforts in the quarters to come.
As always, we will keep you posted.
