Mumbai: A tough economy is taking its toll on the plush in Indian skies. Jet Airways (India) Ltd, the country’s second largest airline group by passengers carried, plans to turn two-thirds of planes in its fleet into an all-economy and low-fare operation by October in an effort to stay afloat as passenger volumes contract and a glut continues in the number of commercial planes in India.
“Currently, one-third of Jet Airways capacity is operated under the brand of Jet Airways Konnect. By October, we will be increasing it to two-thirds by deploying 19 Boeing 737 planes and 10 ATR planes,” the airline’s chief executive officer Wolfgang Prock-Schauer said on Friday, adding that some international routes will be added to the low fare service.
Lean season: Jet Airways (India) Ltd’s chief executive officer Wolfgang Prock-Schauer. Thomas Engstrom / Bloomberg
Jet Airways currently operates a fleet of 83 aircraft in a full-service operation, while its low fare unit JetLite (India) Ltd runs 23 planes in an all-economy configuration. With a total 449 flights a day, the group recorded a 23.9% share of domestic air passengers in June.
With corporate traffic slowing and ticket yields coming under pressure, the Mumbai-based airline group has reported a Rs225.31 crore loss for the quarter to 30 June against a net profit of Rs143.38 crore for the year-ago quarter. The profit in the quarter to June 2008, however, was boosted by a reversal of depreciation.
Sales in the latest quarter slumped by 26.35% to Rs2,085.04 crore from Rs2,830.82 crore in the June quarter a year ago.
“There are no surprises in the Jet results. This is as per our estimates. The airline cannot do much since the passenger growth is falling down, except shift more planes to no-frill segment,” said an analyst with a domestic brokerage. He is not authorized to speak to the media.
According to the ministry of civil aviation data, passengers carried by domestic airlines in the first half of 2009 (January-June) stood at 21.09 million compared with 22.94 million in the same months of 2008—a contraction of 8.05%.
For the quarter as a whole, traffic fell by 5% compared with the same period last year.
“There is an excess capacity in the domestic market, at least 20%. We had done our bit by reducing 20%. Since it is lean season ahead, it is going to be very tough for airlines,” said Prock-Schauer.
However, the Jet chief executive said his airline would continue to offer its two-class (economy and first class) product on services between key metros and other select routes.
The logic behind Friday’s decision is reflected in the higher costs at Jet Airways, which needs 84.9% seat occupancy, or number of tickets sold as a percentage of seats on a plane, to make profits, while JetLite requires just 73%.
Rival carrier Kingfisher Airlines Ltd, too, has moved half its capacity to an all-economy and low-fare segment with its Kingfisher Red brand. State-owned National Aviation Co. of India Ltd, which runs Air India, is bringing its low fare product Air India Express on domestic routes.
Still, there remains a ray of hope. Low input costs are helping airlines reduce losses. For instance, Jet Airways reported an operating profit for the June quarter at Rs181.79 crore, which is 7.67% of its revenues. In the year-ago quarter, the carrier had an operational loss of Rs392.51 crore. The latest operating profit included other income of Rs286.17 crore (versus Rs36.34 crore in the comparable quarter of fiscal 2009).
K.G. Vishwanath, vice-president of commercial strategy and investor relations, told Mint that this other income came from leasing planes to international carriers.
The jet fuel cost for the airline for the reporting quarter was Rs637.49 crore against Rs1,539.23 crore in the year-ago period, lower by 58.58%.
Cost overheads such as salaries, sales and distribution cost, and other operating expenses too have come down.
The operating losses at its low-fare unit JetLite, too, has show improvement: It has come down to Rs25.03 crore in the June quarter compared with Rs205.61 crore in the April-June months last year.
The quarter ahead will, however, challenge Indian carriers, including Jet Airways, as the July-September months are considered as lean season for carriers.
“The yield environment in the domestic business is very challenging and is expected to stay this way for the next few months until we see any improvement in the economic environment and its impact on growth in traffic. However, we do expect certain improvements in the upcoming peak season (starting third quarter, or October-December),” Jet Airways said in a statement.
Further, the airline has a debt-equity ratio of eight times, which is a compelling reason to raise equity from the capital market.
“On Friday, the board directors have taken an enabling resolution to raise up to $400 million (Rs1,936 crore). We are considering all options to raise this fund,” Prock-Schauer said. Jet Airways earlier had also attempted to raise up to $800 million, but could not do it because of weak capital market conditions.
Kingfisher Airlines, which will announce its financial results for fiscal 2009 and first quarter of the current fiscal on 28 July, had also taken an enabling resolution to raise Rs500 crore.
Shares of Jet Airways rose 0.43% to Rs247 each on the Bombay Stock Exchange.