MINT COLUMN: Jet takes off, but airpockets ahead

MINT COLUMN: Jet takes off, but airpockets ahead
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First Published: Wed, Jun 27 2007. 11 57 PM IST
Updated: Wed, Jun 27 2007. 11 57 PM IST
Jet Airways Ltd’s splendid March quarter performance proved that the turnaround in the December quarter was no flash in the pan.
It also proves that the September quarter represented the nadir in terms of financial performance. Back then, the company reported a loss at Ebitda (earnings before interest, taxes, deprecation and amortization) level for the first time ever. In the March quarter, the Ebitda margin jumped to 14.4%, up sharply from 7.3% and -7.7% in the preceding two quarters. This has led to a re-rating of the Jet stock, which has risen by nearly 50% from its lows in March this year. The National Stock Exchange’s Nifty index rose by just 15% in the same period.
Jet’s turnaround has been possible because some key factors have fallen in place for the company. Fuel costs, which accounted for as high as 42% of revenues in the September quarter, fell to just 27.9% in the March quarter—the lowest in the last seven quarters. Per unit cost of fuel fell by about 7% over the previous quarter. Besides, Jet’s international operations (they now account for 24% of total revenues) reported a profit of 5.6% at the Ebitda level last quarter, compared with a huge loss of 34.6% in the September quarter. Most of the international routes the company is now present in have reached maturity, and hence, the profit. Yields, too, have been on the rise—gross revenue per passenger has risen by more than 10% over the September quarter.
But the upturn in profitability isn’t likely to continue. To start with, the October-March period is the peak season for airline operators, which means the financials of the next couple of quarters would be less exciting. Besides, there has been a sharp drop in occupancy rates (seat factor) in Jet’s core domestic operations— from an average of 76.5% in April and May of 2006, to 71.2% in 2007. International operations could slip back into the red as a number of new routes will be launched this fiscal. (New routes typically take 12-18 months to turn profitable.) And then there’s the integration of Air Sahara/JetLite—until Jet manages to turn around its operations, consolidated numbers may not look very healthy.
But these are temporary hurdles in what seems to be a major reversal of fortunes compared to last year. Back then, capacity addition in the domestic industry was nearly 50%, which had a cascading effect on fares. In the March quarter, capacity addition was lower at 36.7%, according to numbers collated by Jet. What’s more, with increasing consolidation in the industry, there’s a greater likelihood of fares becoming rational. Further, Jet’s aggressive foray in the international space should take care of growth. The company expects international operations to account for 50% of its revenues in about 18 months’ time.
However, at about 20 times annualized March quarter earnings, Jet’s current valuations leave little room for error in terms of execution. Besides, factors such as fuel costs and industrywide capacity addition, which Jet doesn’t control, also have to continue working in the company’s favour for the good performance to continue.
Meanwhile, the turnaround in the last two quarters will aid the company’s fund-raising plans. The company plans to raise $400 million (Rs1,640 crore) through a rights issue, which will ease its debt-equity position. Jet currently has a debt of Rs6,056 crore against equity funds worth Rs2,298 crore. Its debt is expected to jump to more than Rs10,000 crore by October 2008, after it takes delivery of new aircraft.
Write to us at marktomarket@livemint.com
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First Published: Wed, Jun 27 2007. 11 57 PM IST
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