Jet Airways Q3 fiscal 2012~2013 financial and operational analysis

Late last week, Mumbai based full service carrier Jet Airways reported an excellent Rs. 85 Crore net profit for the third quarter of Fiscal Year 2012-13, mirroring the financial performance of rival low cost carrier (LCC) SpiceJet and the general resurgence of the Indian airline market as a whole.

For the quarter, Jet recorded a 6.8% growth in revenue year over year (YOY) from Rs. 3,939.2 Crore to Rs. 4,205.8 Crore, while expenses dropped more than 7.5% from Rs. ,4452.8 Crore to Rs. 4,118.5 Crore year-on-year (YOY). Fuel expenses in particular were managed well, falling 3.7% from Rs. 1,753.3 Crore to Rs. 1,688.5 Crore YOY, and represented 40.3% of total operating costs (though they were up on a per ASKM basis).

Employee remunerations fell 12.8% to Rs 367.8 Crore since the airline did not hire replacements in the high attrition cabin and ground staff segment, but inexplicably aircraft lease rental expenses jumped close to 24.1% to Rs. 306 Crore (both YOY).

For the quarter, capacity as measured by available seat kilometres (ASKMs) fell 9.1% on an 11.7% drop in number of departures YOY. Demand, as measured in revenue passenger kilometers (RPKMs) fell 11.1%, resulting in a 1.7 percentage point reduction in load factors from 77.8% to 76.1% YOY.

Company-wide passenger traffic fell 10.7% YOY to 4.05 million, but despite these demand struggles, revenues were buoyant, with passenger yield up 18.6% YOY to Rs. 8,762 per passenger, and revenues per ASKM up a remarkable 19% YOY to Rs. 3.76.

All of this contributed to the decline of Jet’s break-even load factor to a very manageable 73.2%, and the strong EBITDAR (earnings before interest, depreciation, amortization, and rents – a measure of operational profit) of Rs. 865.8 Crore, with EBITDAR margin of 20.6%.

Domestically revenues grew a modest 4.5% to Rs. 1,824.8 Crore, while expenses fell 8.9% to Rs. 1,835 Crore, including a 3.6% drop in fuel costs to Rs. 688.2 Crore. The commiserate net profit of Rs. 10.5 Crore on domestic operations was driven primarily by the strong growth in passenger yields (ticket prices) of 19.6% from Rs. 4,960 to Rs. 5,930 YOY. ASKMs fell 11.0% on a 13.3% drop in number of departures, while RPKMs dropped even more sharply by 14.0%, driving a 13.0% decline in revenue passengers to 2.76 million on the back of high ticket prices. However, the strong growth in revenue per ASKM of 18.8% to Rs. 5.06 more than offset this decline, and helped push the break even seat factor to just 71.3%, a drop of 15 percentage points YOY.

International operations once again drove the company-wide profit, with a net pre-tax profit of Rs. 81.3 Crore on 8.6% revenue growth to Rs. 2,308.9 Crore and a 6.4% drop in operating expenses to Rs. 2,283.6 Crore. Capacity, measured in ASKMs, fell 8.1% on a 5.9% drop in number of departures and demand in RPKMs fell 9.6% as the airline aggressively cut loss making routes like Mumbai Johannesburg, Delhi Milan, Chennai Brussels, and Brussels New York JFK . Once again, soaring revenues, with yields up 13.5% to Rs. 14,861 and revenue per ASKM up 20.0% to Rs. 3.07 more than offset these demand-side declines. Break even seat factor dropped 17.3 percentage points to 73.6% and partially validates the international network restructuring performed by Jet over the last several quarters.

Jet’s financial results for the third quarter are a validation of the importance of capacity discipline and the balance between capacity and demand. For the quarter, industry capacity fell 0.6% while Jet cut capacity by 11% domestically. While this led to a drop in Jet’s domestic market share, the drop in capacity drove an increase in yields (also buoyed by the increase in First Class demand thanks to the demise of Kingfisher Airlines). In an industry with high structural costs, especially in India where fuel costs are artificially high thanks to excessive government taxation, it is important for airlines to grow yields. The best way to do this is by limiting capacity, which naturally drives prices upwards thanks to the supply – demand relationship, and has the greatest effect on buoying yields as the Indian economy slows down.

It is also a validation of Jet’s international network restructuring program. Apart from terminating unprofitable routes the program also entailed a reconfiguration of the carrier’s fleet of Boeing 777-300ER into a higher density 10 abreast seating configuration in economy class, and the entry into service (EIS) of the larger Airbus A330-300, which has lower unit costs (CASK) than the existing A330-200 which forms bulk of Jet Airways’ international fleet.

These various strategic decisions proved to be beneficial for Jet, with the international operations powering the carrier’s overall financial results. And the Rs. 81.3 Crore net pre-tax profit on international operations is artificially deflated by the Rs. 24 Crore loss on foreign exchange, which would have made the result look even more positive. Jet’s load factors for Q3 by region are shown below:

US – 81.2%, UK – 82.7%, ASEAN – 77.1%, Gulf – 74.5%, SAARC – 76.4%

Cost discipline was also an important factor in Jet’s performance. Employee remunerations fell by 12.8% year over year, which Jet Airways revealed was primarily due to a decrease in the ratio of expatriate to Indian pilots (expatriate pilots cost more), as well as natural headcount reduction of 1,139 employees due to the attrition in front line employees. Jet also did an excellent job of controlling sales and distribution expenses (down 18.4%) as well as the mysterious “Other Operating Expenses” (down 15.9%). Perhaps the best way to highlight Jet’s cost discipline is through its CASK excluding fuel; basically a measure of all of the costs that Jet has some degree of control over. For Q3, Jet’s CASK ex. Fuel was down 6.3% from Rs. 1.87 to Rs. 1.75, which is indicative of excellent cost discipline from Jet Airways management.

In short, Jet Airways has made strong strides towards a profitable operation in the past 3 months. The fruits of its restructuring efforts are finally being manifested, and strong cost and capacity discipline have buoyed profitability greatly.

Kudos to Jet Airways for turning around its operations and delivering a strong financial performance in Q3.

Many analysts, including our Devesh Agarwal, are concerned about the shrinkage of Jet’s international network which restricts the airline’s usage of its excellent Boeing 777-300ER. The dilemma before Jet is network capacity vs. profitability. While we are happy Jet has chosen the latter, during a conference call with analysts, the airline revealed it will be receiving back the five 777 aircraft it has leased to Thai Airways. The question naturally arises, what will the airline do with these aircraft, given its limited network?

Another factor in the equation is a 24% stake sale to Abu Dhabi based Etihad, which just posted a US $42 million net profit for calendar year 2012 and has invested in several airlines including airBerlin, Aer Lingus, Virgin Australia, and Air Seychelles over the past year.

Based on statements and recent actions by the senior officers of Etihad, the deal appears to be settled with Etihad commencing with a 24% stake which most likely will increase to 49% in due course.

“We are doing our due diligence (on Jet Airways) in the next week. We will present it to our board and take it from there,” Etihad Chief Executive James Hogan said at the results press conference. He also explained why he visited senior ministers in India “We wanted to understand the new rules under the Foreign Direct Investment (FDI) scheme. We also wanted to understand the issues that have impacted Indian domestic aviation and how these are being addressed in the coming years.”