Jet Airways has had the unique ability of getting into and out of dire financial situations. The last time it was rumoured to be going under, after it posted an EBIT loss of Rs 434 crore (that’s before interest payments) in FY2012, it managed to swing a deal involving sale of a 24 percent stake to Etihad Airways for about $380 million in 2013. Can it pull out another rabbit this time? That’s the question the street is asking, as oil continues to boil.
The promoters, one must admit, have the ability to pull rabbits out of hats when matters are pushed to the brink. The same, however, cannot be said about how the company manages costs and cash flows. To give you a sense, in FY18 for a similar range of revenues Rs 23,000-25,000 crore as IndiGo Airlines, it had employee costs that were about Rs 500 crore higher, finance costs (of course) were also about Rs 500 crore higher—even as total liabilities (debt + net payables) were at similar levels. But what’s most startling is that Jet spent near Rs 3,900 crore on selling & distribution while IndiGo spent just about Rs 735 crore. SpiceJet with revenues of about Rs 6,000 crore also spent just about Rs 210 crore in a year on driving sales.
What is even more notable is that the selling & distribution expenses for Jet have moved up from about Rs 1,500 crore in FY2012 when revenues were at Rs 16,700 crore to Rs 3,900 crore in FY2018 for revenues of about Rs 24,500 crore.
If we look at the company’s track record—it posted losses in 5 years out of 7 from FY2012 to FY2018. The stock price, naturally therefore, hasn’t fared much better. It has largely traded in a range between Rs 225 to Rs 690 since 2010. The stock hit a low of Rs 169 in January 2012 after scaling to a period high of Rs 926 in November 2010. It is now up from a new low at Rs 258 after plunging from a high of Rs 884 in January this year.
Given the track record of the airline, plans like short-term fund infusion and cost-cutting measures will hardly move the needle in the long-term. At best, the stock might move from the bottom of the range to the higher-end before new mistakes catch up.
For the Jet Airways stock to transcend into a higher orbit, the company will need to deliver consistent growth in operating profits over the next few years and a healthy return on capital. And that may require a change in the way the business is run—no other company has been in the news as much for internal issues like disagreements with pilots, et al, over the years. And while the company is now over the hump as regards ownership transparency—remember Jet was controlled by Isle of Man based Tail Winds, which eventually sold its stake to Naresh Goyal before Etihad bought in—the company now needs to demonstrate greater transparency in governance and better financial acumen.
Jet’s new cost-cutting plan, therefore, is unlikely to cut much ice. Nor is the small downtick in a few costs in the reported numbers for the first quarter of this fiscal. Jet requires a new flight plan and, perhaps, financially smarter pilots to steer the business.
First Published: IST