Jet Airways Ltd’s strategy of giving profitability priority over volumes worked in the December quarter. The country’s second largest airline by passengers carried flew back to a net profit of Rs.85 crore, just ahead of a possible equity deal with Etihad Airways PJSC of United Arab Emirates. In the year-ago quarter, the airline had incurred a loss of Rs.101.22 crore, and had also turned in a loss of Rs.99.7 crore in the September quarter.
Its profit in the December quarter was also ahead of the Rs.34.01 crore consensus estimate of analysts polled by Bloomberg. The timing is right for Jet as it is in the final rounds of discussion to sell a 24% stake to Etihad Airways for around $300 million. Showing it can be profitable should give it an advantage while negotiating any such deal.
But how did Jet become profitable, despite a tough business environment that saw a consistent decline in passenger numbers? The answer may be that the phenomenon was consistent with the airline’s strategy to reduce the number of flights it operated to cut costs and, therefore, losses.
Consider these numbers: Departures in the December quarter slipped by 11.7% to 40,676 flights, against the 46,069 departures in the year-ago period. The number of seats available, or the capacity offered, was down by 9.1% in the December quarter. The number of seats offered was coming down sequentially, too. The capacity was down by 11.82% in the third quarter, compared with the first quarter of the current fiscal.
The airline has managed to cut its manpower requirements, too. The average headcount of the airline fell 9% at 12,190 during the December quarter over the year-ago period. The headcount has been falling since the first quarter.
But here’s how it all worked out for Jet. Though it carried 10.7% less passengers in December quarter, compared with the same quarter of the last fiscal, revenue per kilometre rose 21.6%. Mahantesh Sabarad, senior vice-president, equity research, at domestic brokerage Fortune Equity Brokers (India) Ltd, says that it apprears that Jet has deliberately chosen profitability over growth as a strategy.
Thus, while revenue rose by just 6.76% over the year-ago quarter, Jet said its Ebitdar margin jumped from 5.8% to 20.6%. Ebitdar, or earnings before interest, taxes, depreciation, amortization and rent, is a measure of profitability.
Jet also said its turnaround was a result of its efforts to cut costs and network capacity. The company has in the past few months pulled out of loss-making routes such as Mumbai-Johannesburg, Brussels-New York and Chennai-Brussels, and redeployed aircraft to other profitable routes.
Jet’s strategy may have worked for now in current market conditions, but the future looks tough as passenger numbers continue to decline, and the airline sector has entered the lean season (from mid-January to early-April). In addition, fuel costs and airport costs are going up. Tough competition could step up from an unexpected quarter—state-run airline Air India Ltd.
Any capacity addition by its rivals and a further burden from fuel costs are going be a headache for Jet. It is already staring at an erosion of over Rs.3,000 crore in its investment in low-fare subsidiary, JetLite (India) Ltd. Jet needs to balance its act of keeping capacity under check and attract enough passengers for it to have a safe landing in future quarters as well.