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

Fiasco at induction - what went wrong when the Q400s landed ?

A lot is being written and discussed about Spicejet and its strategy for dual fleet. While a parallel is being drawn with successful western carriers to push forward the argument of a single fleet, the successful western carriers – RyanAir, EasyJet or Southwest operate in an environment which has umpteen airports with supporting infrastructure for the B737 or A320 family unlike India where there would only be a handful of airports and most of which have some or the other constraint.

Personally, I believe the differentiator for Spicejet always was to have a dual fleet and move from a pure play LCC to a value based LCC which will help passengers reach airports which are not covered by market leader IndiGo and is cheaper than Full Service carrier Jet Airways.

The question that needs to be asked is – Was Q400 right for Indian conditions or the proven ATR72 would have been a better bet? Going by the teething troubles for the Q400 and the engineering issues which the airline is believed to have faced – yes the proven ATR72 would have been better.

If the promise to do one more flight a day than the ATR72 cannot be met because the operator needs a break in schedule in the middle of the day for engineering reasons, the spending on Q400 is not justified.

Today I am going to take a look at what went wrong at the time of induction of the Q400s and how the legacy cost which the current management has to handle is in addition to the legacy deals and aircraft like the Q400.

This only highlights how important fleet selection is, in addition to planning the network and pricing your tickets.

What exactly went wrong with the Q400?

A realization had dawned upon Spicejet after the first set of aircraft were to arrive in India that at all places where ATR-72s operate, a Q400 may not operate? And why is that so?

In April 2012, I had written a piece on the induction of Q400s by Spicejet on this blog.

What had I not mentioned in this article was the lack of planning while inducting the Q400s. When the schedule was initially filed, regulatory authorities rejected the filing for quite a few airports and expressed inability to support the Q400 operations.

The answer lay in the Airport Rescue and Fire Fighting Services (ARFF) category. At a length of 32.84m and a fuselage diameter of 2.89m, Q400 required Category VI firefighting equipment at airport as compared to category V of ATR 72 with a length of 27.2m and 2.57m fuselage diameter.

The difference is huge, since Category I – V required one vehicle for ARFF and Category VI & VII require 2 vehicles. This meant that while Q400 could operate to airports like Jaipur, Indore, Bhopal, Lucknow and many others which see regular narrow body operations, it could not operate to Dharamshala, Allahabad, Gorakhpur and many others which saw ATR 72 operations and were potential stations for the Q400. The story was same in the south, with Rajamundry, Vijaywada having similar problems.

So the Q400s started with operations to town and cities which saw narrow body operations by other carriers and the planned shock and awe of induction and expansion had to wait.

This certainly would have hit the revenues since typically the revenue on competitive routes is lesser at unit basis than those to monopoly or duopoly routes where the airline intended to fly. Besides, the whole marketing idea of taking on the ATR by a faster Q400 did not take place since the Q400 started competing with the B737s or A320s which are preferred by passengers over the turboprops.

Unfortunately, I have not had a chance to fly the Q400 ever and thus I will not comment on how the aircraft fares with the ATR from the user experience perspective but will only hope that the airline gets a good deal to continue using the Q400s and develop a unique model between the Full Service carriers and the market leader!