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The good and the bad in Jet Airways' Q2 numbers


Jet Airways was widely expected to report a significant loss in the September quarter, with fuel prices zooming, the airline already in a precarious financial position and much of the domestic industry’s passenger growth being cornered by market leader IndiGo.

The good and the bad in Jet Airways' Q2 numbers
Jet Airways was widely expected to report a significant loss in the September quarter, with fuel prices zooming, the airline already in a precarious financial position and much of the domestic industry’s passenger growth being cornered by market leader IndiGo.
Fuel prices rose by almost 50 percent in the quarter and consequently, while the airline barely managed to hold on to revenue from each passenger, it lost hand over fist due to rising fuel costs.
But this situation is not unique to Jet – even IndiGo reported its worst ever quarterly loss for the same three months on zooming fuel expenses and Jet was merely expected to follow with its share of damning numbers. So when the numbers did come in last evening, the only element of surprise lay in their frugality - some analysts had predicted up to Rs 2,000 crore quarterly loss for the airline when the figure reported was significantly less than that.
Jet reported net loss of Rs 1,297 crore in the second quarter against a net profit of almost Rs 50 crore in the same quarter last year. This was a marginal drop in losses sequentially, since the airline had seen net losses at Rs 1323 crore in the immediately preceding June quarter of 2018-19. In effect, Jet lost about Rs 14 crore on a average each day of the September quarter.
There are multiple issues to examine at Jet, which has seen turbulent times in the last few months. The most significant, of course, is funding and a search for money has not seen any concrete results so far for an airline that already has an investment from Etihad Airways of Abu Dhabi. There has been enough speculation about potential suitors, including Tata Sons, being interested in acquiring majority stake in Jet and some reports suggest that the Tatas have even begun due diligence. But whether this is for the frequent flyer programme only or for the airline as a whole, remains to be seen.
The Bad
The airline lost almost Rs 14 crore on an average each day of the quarter. This is almost double the daily loss suffered by IndiGo in the same quarter. The airline’s revenue per available seat km declined 0.3 percent or by two paise to Rs 4.16, costs (including fuel) jumped 12.5 percent and aircraft utilization declined by about half an hour every day of the quarter. If one were to exclude fuel, even then costs were not any significantly lower for Jet with a mere 0.7 percent improvement. This shows that while it has taken many initiatives on the cost front, this airline needs to do a lot more to achieve its goal of reducing overall costs by Rs 2,000 crore.
Jet has been losing share of the domestic market at an alarming rate even though it remained the second largest airline by passengers. It held 23 percent or close to a fourth of the domestic market in April 2015. This fell to about 20 percent or a fifth within a year. The downward spiral continued and this fiscal, Jet had 15 percent share by the end of June. It has closed September further down at 14.2 percent. In a conference call with analysts earlier, CEO Vinay Dube had mentioned that in the last two years (the period when it consistently lost market share), air fares remained flat while fuel prices doubled. Dube had also said then that the focus continues to be on the non-fuel CASK (cost per available seat kilometer). “We are on target to deliver the 12 percent to 15 percent non-fuel CASK reduction”. The timeline is 18-24 months. In the first six months of FY19, the airline claims to have saved Rs 500 crore in overall costs.
Other factors bogging down Jet include its indebtedness.
This Bloomberg analysis says current liabilities rose to Rs 16,000 crore as of September 30 against Rs 14,200 crore on March 31, while non-current liabilities jumped 30 percent during the same period. Ratings agency ICRA has already downgraded the airline’s debentures and other debt instruments citing delays in bringing in adequate liquidity, inadequate pricing power due to excessive competition in the domestic airline industry and the volatile fuel prices. ICRA had said last month that the company has large debt repayments due over FY2019 (Rs 3,120.3 crore), FY2020 (Rs 2,444.5 crore) and FY2021 (Rs 2,167.9 crore).
This state of affairs brings us back to the most important question: Is the company any closer to getting funds than it was in Q1?
ICRA noted that the proposed stake sale in Jet Privilege and the timely implementation of cost saving measures would be key to any renewal of ratings.
The Good
Jet could have done worse. Remember, Q2 is a seasonally weak quarter and analysts have already predicted that the performance of the domestic aviation sector as a whole will remain subdued. Brokerage Edeweiss had said in a note to clients last month that the combined EBITDAR for domestic airlines would fall 44.5 percent year on year amid rising ATF prices and continued yield compression. It had also warned that passenger growth has been largely one-sided with growth at Indigo, Jet Airways and SpiceJet at 30 percent, 3.3 percent and 4.0 percent year on year versus industry growth of 19 percent.
In this scenario, Jet’s cost control and nominal yield decline are on course. The second significant initiative the airline is undertaking is cutting loss making flights. This should have been done earlier but better late than never. Jet said in a statement that a comprehensive review and consolidation of its network involving routes and markets is underway. There has been some speculation about the airline cutting frequencies to some south east Asian destinations. Also, it is pertinent to note that 11 Boeing 737 Max will be inducted during this fiscal but “the overall scale of operations (ASKMs) will continue at the same level as the airline currently operates.” Some significant flight culling seems to be in the offing.
As India’s airlines fight for each passenger with lowest of the low fares and currency, fuel prices continue to be volatile, each airline needs to examine its cost structure with a microscope. Low cost carriers IndiGo, SpiceJet and GoAir are obviously at an advantage in the cost game, Jet will have a lot of catching up to do.
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