Jet Airways: weakness in global skies, higher costs make for uneasy flight

The current environment is likely to be turbulent and airlines including Jet Airways will have to bear the brunt of it


Jet Airways’ consolidated operating revenue for the December quarter increased just 1.4% over the same period last year. Photo: Abhijit Bhatlekar/Mint
Jet Airways’ consolidated operating revenue for the December quarter increased just 1.4% over the same period last year. Photo: Abhijit Bhatlekar/Mint

The Jet Airways (India) Ltd stock declined 1.2% on Monday, a day when the benchmark Sensex rose by 0.7%. Investors’ disappointment appears to be stemming from the worse-than-expected December quarter earnings announced on Friday, after the stock markets closed.

To be sure, nobody expected a great quarter from Jet Airways especially after InterGlobe Aviation Ltd’s (that runs IndiGo) numbers had already disappointed.

According to Ansuman Deb of ICICI Securities Ltd, like IndiGo, Jet Airways too is vulnerable to the pressures of the domestic aviation market (such as pricing issues, competition) and that was evident in the December quarter performance. “However, Jet also faced pressure in the international segment this time around,” said Deb, adding that on a consolidated basis, nearly 60% of its capacity is deployed in the international markets. In particular, the airline was impacted on account of demand problems from the Gulf Cooperation Council countries during the quarter. The muted economic activity in the Gulf region took a toll on traffic.

As a result, Jet Airways’ consolidated operating revenue for the December quarter increased just 1.4% over the same period last year. Average fare per passenger fell 1.6%. Ebitdar (earnings before interest, tax, depreciation, amortization and lease rentals) came in at Rs946 crore, lower than analysts’ estimates. Operating costs including fuel, employee costs, selling and distribution expenses, and other operating expenses rose at a much faster clip. Fuel costs expressed as a percentage of operating revenue increased 353 basis points to 26.7%. A basis point is 0.01%.

Jet Airways’ revenue per available seat kilometre fell 7% while cost per available seat km (excluding fuel) decreased 1.56%. But that’s not all. One of the airline’s key problem areas has been the high proportion of finance and depreciation costs, which erode operating profit. Those concerns persist. Moreover, analysts reckon that a rising interest rate environment is a further negative, as Jet Airways has substantial US dollar debt.

After outperforming the BSE 200 index for a bit initially this fiscal year, the Jet Airways stock has underperformed substantially after that. Unfortunately, the outlook doesn’t get any better from now on. Directorate General of Civil Aviation data shows that passengers carried by domestic airlines increased 23% year-on-year, for calendar year 2016. But what’s to say this will sustain? Attractive fares will play a key role in keeping the passenger traffic momentum. This is also at a time when crude oil prices are expected to be firmer. In short, the environment is likely to be turbulent and airlines including Jet Airways will have to bear the brunt of it.

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