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

Revised Policy on 5/20 and Route Dispersal Guidelines

 Last week the Ministry of Civil Aviation (MoCA) discussed revised policy on regional connectivity with all stakeholders and came up with a middle path to address the issue which has been awaiting reforms for a long time.

In 2012, a leading consulting firm submitted report to MoCA on revamping the existing Route Dispersal Guidelines (RDG) but these suggestions were never implemented. The government now is looking to club the famous 5/20 rule with RDG. This comes at a backdrop of airlines making full use of Regional Airline policy with Air Costa scaling up operations, Air Pegasus setting up shop soon and Air Asia India – working like a regional airline operator.

New proposals in classification of airlines

The new proposal looks at abolishing the Regional Scheduled Airline status to an airline and converting it to a regular scheduled airline status. Currently, the regional status is helpful in the south, where Air Costa operates and Air Pegasus is coming up. This policy gives access to one metro in the area and other non metros across the country, except for south where an airline has access to Hyderabad, Chennai & Bengaluru, making it possible to fly in the golden triangle in the south.

This proposal also looks at creating three categories viz. Scheduled Airlines, Scheduled Commuter Airlines and Charter Operations.

The scheduled commuter airlines and charter operations will see reduction in paid up capital – thus encouraging newer entities to set up businesses. These operators would be allowed to publish their schedule and would have a cap on minimum number of movements per week to continue holding this status with a restriction of operating at one metro airport only.

The scheduled commuter airlines will be allowed to enter into a code share arrangement with a scheduled airline, thus making it viable for smaller airplanes to fly on thin routes and get paid for by the larger airlines who will shy away from plying here, but continue to provide seamless connectivity, including baggage and passenger transfers at major airports.

Route Dispersal Guidelines

When the Revised draft of Civil Aviation Policy was released in November’2014 I had written on how the Route Dispersal Guidelines (RDG) need to be looked at in detail and what changes are essential. The blog post is available here. I am not sure if the letter was read by the ministry or not, but a lot of things have been incorporated in the revised policy in line with the recommendations which I had sent. 

Category - I

The number of Cat – I routes increased from 12 to 26, where the additional 14 routes are those which saw traffic of more than 5 lakh passengers in 2013. The additional routes are – Mumbai – Goa, Mumbai – Ahmedabad, Delhi – Lucknow, Delhi – Pune, Delhi – Ahmedabad, Bengaluru – Pune, Mumbai – Kochi, Bengaluru – Hyderabad, Hyderabad – Chennai, Delhi – Patna, Mumbai – Jaipur, Delhi – Goa, Chennai – Pune, Mumbai – Chandigarh. ( Cities in BOLD are those which were not part of Cat I before)

I am surprised to see continuation of Mumbai – Trivendrum into Cat – I. Interestingly, IndiGo has maximum presence on the list of routes proposed for inclusion in Cat – I and is a capacity leader on most of the routes, if not all.

Category – II

The existing definition would continue, with routes connecting North – Eastern region, J&K, Andaman & Nicobar and Lakshadweep but there is a proposal to add Dehradun, Shimla, Kulu & Dharamshala to this list.

Currenly, only Dehradun supports narrowbody operations and Shimla & Kulu are restricted to ATR-42 operations with load restriction.

Currently, an airline has to deploy 10% of Category – I ASKMs on Category II routes. The proposal if accepted would mandate the airlines to deploy 20% of Category – I ASKMs on Category – II routes.

Category – II A

The existing definition of this would continue the way it is with inter – Category II flights considered for calculation of ASKM and it being mandatory to operate 1% of Category I ASKM in Category II A.

However, the flights get restricted to inter north east and between Jammu – Srinagar – Leh since there is no other airport in Andaman & Nicobar which is open for commercial operations or at Lakshadweep.

Category – III

Currently it is mandatory for airlines to operate 50% of Category – I ASKMs on Category – III routes. This condition will be dropped completely in the new policy. Traditionally airlines have been making money on these routes and offer more than double the mandatory ASKM’s.

Revision of 5/20 rule

The famous 5/20 rule refers to requirement of 5 years of domestic operations and a fleet of 20 aircraft to be eligible for international operations. As newer airlines like Air Asia India and Vistara entered Indian market, there is renewed push and focus on this requirement. While there is a valid argument that an airline which starts operations in foreign land can fly to India in its first year of operations, subject to bilateral arrangements, Indian carriers cannot reciprocate this due to this rule.

While Spicejet has scaled back operations to international stations in recent past, IndiGo has not expanded beyond certain routes and infact discontinued flights on certain sectors in the past.

The 5/20 rule will make way for a prima facie complex system which will be based on Domestic Flying Credits (DFC) which will be earned by airline by deploying capacity on domestic routes

The calculation would be as below,

       1)      Deployed ASKMs in updated Cat – I  ( x 1)

       2)      RPKMs deployed in updated Cat II ( x 3)

       3)      RPKMs deployed in updated CAT IIA ( x 5)

       4)      ASKMs deployed in updated CAT III  ( x 1)

There will also be a grant of 5 times the ASKMs deployed on currently un serviced airports for a period of 5 years. This will be exclusive for an operator along with having Right of First Refusal for 2 years from the start of operations.

The domestic flying credits thus accumulated will allow an airline to offer equivalent ASKMs on international routes. These criteria will be applicable to new airlines and new routes of existing airlines when the policy comes into effect.

The differentiation of ASKMs ( Available Seat Kilometers ) and RPKMs ( Revenue Passenger Kilometers ) is well thought out for the above calculation.

Change in criteria

The change in criteria would mean that the existing rules of 5 years of operation will be over ridden by requirement of minimum 200 crore DFC for designation as an international carrier and the fleet size requirement of 20 is reduced to 5, which is the minimum prescribed to get a scheduled airline status.

The policy also allows purchase of DFCs from another airline to gain the status quickly. This will get the rule from 5/20 to 1/5.

Comments

This policy is a sensible shift from existing to the new by factoring in remote connectivity, international operations and creating a balance between the two. Established airlines will face issues with the revision of Category – I routes and fulfilling revised ASKM criteria. However, with cities like Pune, Lucknow and Goa seeing rapid expansion of traffic over the last decade and half, it was prudent that these cities and certain routes from here would be included in the revised definitions.

This proposal looks viable and acceptable as compared to dealing with the RDGs and 5/20 rule in isolation 

Draft Civil Aviation Policy - Another policy without substance

The draft Civil Aviation Policy was released by the Honorable Minister of Civil Aviation – Ashok Gajapathi Raju Pusapati yesterday. I had a lot of hopes from the policy since the last decade was plagued with policy paralysis in the Indian government. There is a stiff competition between which sectors suffered the most – Coal, Telecom, Industry or Aviation. The perceived scam in purchase of Air India aircraft, merger of Air India & Indian Airlines, lack of efforts to abolish the 5/20 rule( airlines require minimum 20 aircraft and 5 years of domestic operations to start flying international), non-classification of ATF (Aviation Turbine Fuel) into declared goods category attracting uniform 4% tax across the country, decision to go ahead with redevelopment of Chennai & Kolkata airports by AAI – leading to the disaster that they are today, as compared to world class facilities at Delhi, Mumbai, Hyderabad & Bengaluru, and many more. The list is unending.

However, prima facie the draft policy looks like listing of all problems that need to be resolved and have been in that state for a long time. The policy only highlights the problems without laying down the solutions or ways & means to tackle the problems. It promises to look after taxation issues on ATF, the 5/20 rule and route dispersal guidelines, but gives little on how and when this will be addressed.

There is a common saying – “The more things change, the more they remain the same”. Unfortunately I do not know who this saying is attributed to, but when you see the Strategic 5 year plan of the past government presented by the then MoCA (Minister of Civil Aviation) in 2010 and the Draft Civil aviation policy of this government, one tends to agree with the statement. Both start with quoting ICAO (International Civil Aviation Organization) statistics of generation of 610 indirect jobs for every 100 direct jobs in aviation.

The Strategic Plan 2010-2015 talks about Indian being recognized as a role model by FAA, which today has downgraded the safety rating to Category 2, Inclusion of 500 more aircraft in Indian skies and 300 more helicopters, One helipad every 100kms on highways, and many more, most of which continue to be Aspirational – similar to the section under which it is quoted in the Strategic Plan.

The new Draft policy talks about having airports as integrated multi-modal hubs with Rail / Road / Metro connectivity, access to manufacturing, business & tourism areas, up-gradation of 18 airports which amount to 86% of traffic, developing the 6 metro airports to have a hub & spoke model, Rationalization of ATF costs by having uniform taxes, Development of 6 metro airports as cargo hubs, Listing of AAI & Pawan Hans, changing the regional connectivity policy and reviewing the 5/20 rule, Air Navigation System & up-gradation of DGCA.

While these are welcome moves, the Revised Route Dispersal guidelines, which were formulated by a leading consulting firm are pending implementation for over two years, due to disagreement between carriers on the nature of the requirements. The airport at Bengaluru located about 40kms away from the city center recently got decent road connectivity. The rail connectivity envisioned while construction of airport is still elusive, many of the 35 non metro airports which saw modernization are already facing shortage of space (Eg: Jaipur) or are white elephants and AAI is incurring huge losses at these places (Eg: Aurangabad, Indore).

The Hub & Spoke model has been a success as Delhi – since there is no other airport in the vicinity which can attract so much traffic, but the same does not work well in the south, where Bengaluru, Chennai & Hyderabad compete fiercely with each other. So while SpiceJet based their Q400s in Hyderabad, a lot of the destinations are connected from Bengaluru and Air Asia changed plans and moved to Bengaluru from Chennai, yet there is no perfect Hub & Spoke at either of these places like there is at Delhi.

However, all has not been bad, implementation of GAGAN, changes in Air Navigation System and subsequent trials at Jaipur, up-gradation of ATC infrastructure at Mumbai and increase in runway capacity, are some of the silver linings.

One can only hope that the draft Civil Aviation policy gets into some tangible project plan, which is implemented phase wise with bounded timelines and the next 3-5 years, would see a serious change in the infrastructure & policy in Indian civil aviation. As more airlines take to skies, the pressure on infrastructure would be immense and similar to the boom in 2005-6 which most of us remember well and would hope is not repeated.