The desert Sun Shine - Analyzing Q2 results of Jet Airways

“If Jet Airways would have reported operational profits, they would not have reported results post-closing hours on Friday” quipped Prathamesh Kini, a fellow aviation enthusiast with whom I’m writing this blog post. This was within minutes of my tweet indicating that Jet Airways have reported profits in Q2 – traditionally a weak quarter for Indian aviation.

The quarter was eventful for Jet, a joint press conference with Etihad - in which the airline announced its move to Full Service, being part of Etihad partners, announcing next round of Abu Dhabi feeders, facing flak for frequent exits at top level, having to deal with pilot shortage and facing DGCA rap for training issues.

The July – September quarter saw Jet Airways reduce its market share in the domestic market, and was down to 20.2% (9W+S2), which has been the lowest in three quarters of the calendar year. Jet & JetKonnect carried 33.76 lakh domestic passengers, a little higher than Spicejet but much lower than market leader IndiGo which carried 53.66 lakh in the same period. However, Jet was not the major benefiter of the 20%+ market growth, which was driven majorly by Spicejet, and the frequent discounted fares on offer. The same has also been acknowledged in the Jet Airways results presentation, which indicates the drop in capacity by 11.1% while the industry capacity has grown by 9.6%, and passengers flown down by 8% for the airline, while the market growth has been 14%.

A closer look at the profits, indeed indicate an operational loss and the reported profits of INR 69Cr because of the fund infusion due to sale of Jet Airways Frequent Flier Program. The majority stake sale of Jet Airways Frequent Flier program for over INR 900 crore, has been debated over. We look at this sale, as just another way to fund the airline, and being worked out to bypass regulatory issues due to selling additional equity to Etihad and increasing its stake in the Indian airline.

The airline has shown an impressive 16.4% revenue growth in Y-o-Y figures for corresponding Q2 quarter, seen traditionally as a weak quarter. This growth stands out because of the slight de-growth reported from Q2 FY13 to Q2 FY14. This revenue growth has come on the back of a notable increase of 13.6% in gross revenue per user to INR 9145 comparing Y-o-Y figures but a miniscule drop from INR 9158 figures quoted in Q2 FY 2013.

Though insignificant in absolute terms, the growth of non-operating revenue is another positive and certainly shows that Jet Airways is back in business.

The 33% increase in Selling & Advertising expenses to INR 496.6 Cr. seems to be driven by the numerous competitive sales promotions. Interestingly, the absolute increase of INR 120 Cr. translates to about 44% of the operating loss of INR 266 Cr. The management also seems to have had a firm control over fuel expenses which has registered a minimal increase, though the recent cut in ATF prices in India aided by drop in crude prices should aid the company improve operating ratio significantly in near future. This comes at a time when the aircraft utilization is reaching historical highs, on the back of additional flights to Abu Dhabi and the entire Gulf Region.

The management has started efforts to target both the top line and bottom line over the past year & efforts could lead positive operating values soon. Peter Lynch once said " The simpler it is, the better I like it" and hence we chose to ignore the complexities arisiing out of exceptional items.

The Average Gross Revenue per Passenger which has been wavy over the last few quarters should now stabilize and then grow as more and more Abu Dhabi and Gulf Feeders are introduced by next May. Thanks to the partnership with Etihad, the initial period in which the airline incurs losses on the new routes, would be minimal.

Points to Smile

Non-operating revenue up 146%

Average revenue per user up 13.6%

Breakeven load factor reduced to 83.4% from 98.2%

Points to Worry about

Salary Arrears of INR 63.6 Cr, which is nearly equal to the profits reported. The Management has not clarified on this and would possibly happen during the investor call.

Lower yields due to frequent sale by competition

Accumulated loss of INR147 Cr this year

Shifting significantly lower yielding routes of JetKonnect to mainline and pushing yields upwards

Outlook for Q3

Shifting to Full Service model

Brand confusion to continue till aircraft are repainted / rebranded

Few additional services in winter scheduled deferred due to pilot shortage