Saturday, February 7, 2015

Baby Steps to 2017 - Jet Airways declares profit after seven quarters

This article has been jointly written by Prathamesh Kini & Ameya Joshi

Aviation industry in India is noticed more for wrong reasons than for the good reasons and thus Spicejet made most of the news in the last quarter. What the industry missed out on was the constant growth in share price of Jet Airways – in a quarter traditionally considered good for the industry and in the case of Jet Airways – the one in which it shifted to a full service model.

Net profit was a foregone conclusion since the airline had already announced that amount received by the sale of Jet Privilege – the frequent flier program, will be shown in tranches. The eyes were thus set on operating profit.

As late last evening Jet Airways announced results, it indeed report a wafer thin operating profit, its first after seven consecutive quarters of losses. Improvements came all across, however there continued to be some areas of concerns.

The airline reported an overall profit of INR 63 Cr for the third quarter of FY14-15. For the past 9 months, the airline now stands at a loss of INR 84 Cr with very slim chances of closing the year on a profitable note. The airline continued to post proceeds from the sale of Jet Privilege Frequent Flier Program to Etihad as part of its balance sheet this quarter.

The results of Q3 have a lot of positives, with the foremost being an impressive 11.5% increase in Total revenues taking it to INR 5051 Cr on a Y-o-Y basis. The operations are now sustainable on the back of this climb in revenues and lower cost due to decrease in fuel cost (11% reduction in expenditure Y-o-Y). Total Expenses have increased by 5.4% to Rs. 5014.5 Cr. y-o-y, aided primarily by drop in fuel costs and a stable currency exchange. Going forward, these costs will stabilize based on outlook for global oil prices and Indian economy. However the conversion to full service model, advertising its umpteen runs to Abu Dhabi from across the country and fleet conversion has come at a cost – which has led to an increase of expenditure by 42.8% Y-o-Y to INR 502.1 Cr.

Its time to cheer for specialists looking to make a career in Aviation, as the airline saw addition of manpower, taking the headcount to 12,897 employees an addition of 9.3%. It is good to see an operating profit of INR 36.6 Cr. (without income from Sale & Lease Back). When your core operations start making money, the signs are always bright for shareholders! This reminds of a Guy Finley quote 'Being fully present is the best guarantee for a bright future'.

While it was always believed that the investment by Etihad would be used to retire old high cost debt, the interest component paid up has reduced by just 1.6% to INR 226.4 Cr on absolute terms and this should be a concern in the longer run. However, most of this is offset by  operating profit and income from Sale & Lease Back which stands at INR 219.7 Cr. This situation should temporarily ease frayed nerves of the lenders. With a positive outlook on economy for the next few quarters, the airline looks on track to achieve an operating profit in 2017 as it has aimed for. This will come at the back of fixed or decreasing interest dates since income from Sale & Lease back will not continue for long.

Without exceptional items, the company has posted a loss of Rs. 6.7 Cr. which seems a lot more positive as compared to losses of Rs. 235.2 Cr. in Q2FY15 and Rs. 289.0 Cr. in Q3FY14. The overall rejig and stability at Jet Airways has been cheerful for the shareholders too, with Earning Per Share of INR -9.4 for the three quarters of FY15 as compared to INR -167.3 in the corresponding period last year.

Passenger growth has been phenomenal at 13.8% led by fare sales but growth in revenue has been 10.6% with RASK growing 1.7% Y-o-Y. The combined effect has led to a drop in average gross revenue per passenger by 2% to INR 8504.

While the company has managed to achieve break-even load factors (including exceptional items), in the long run we believe that the company should release break-even load factors without exceptional items, since they will not be a permanent feature on the P&L.

Jetlite operations
The operations continue to be a drag on the balance sheet. While operations are being reduced progressively that had led to a reduction of 17.5% departures yet an improvement in load factor to 82.7%, the break-even load factor continues to be very high at 97.3%. The average revenue per passenger is a meagre INR 4433, almost half of that of the parent.

The reason for the lower average revenue is also due to the sectors on which Jetlite aircraft are operating at the moment. Slowly but surely, the sub brand will be phased out and if that is going to take time, the aircraft would be repainted to remove brand confusion.

Points to Smile
  • Profits are profits and even a marginal one is a good beginning
  • 10.4% increase in passengers carried
  • Seat factor up by 5.2% to 82.1% almost equal to break-even load factor
  • Exponential increase in code share traffic

Points to ponder
  • Overall FY14-15 will be a loss when Q4 results are declared
  • Q4 is considered weak and a resurgent Spicejet will initiate a lot of sale and offers
  • Vistara is expanding on key Mumbai – Delhi route
  • Q4 will be first full quarter with Full Service Model 

Way Forward
The airline is now focusing on domestic as well as international operations. Reduction in services by Spicejet would have helped grow yields since the network overlaps at multiple stations. The shift to Full service will also distinguish itself from market leader IndiGo – which continues to grow rapidly. Vistara will take time to catch up country wide and the dual fleet strategy of Jet Airways will continue to feed its network at major metro’s.

The airline intends to return to absolute profitability till 2017 and we believe that the balance sheet will continue to be black till then, either by showing the money received on account of the strategic sale of Jet Privilege or later on Sale & Lease Back transactions.

The airline could now place an order for a mix of B737MAX and ATR72-600. Standardization is a major problem which the airline needs to come up with sooner or later. With the SAARC and Middle East flights on Narrowbody – the customer experience is paramount when competing with modern widebodies from competitors.  

Analysis of the results of last quarter can be found here

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