Can Etihad's money save Jet Airways?

Sept quarter loss of Rs 891 crore has been more than its loss in FY13 which stood at Rs 779 crore

Coming from a land which strongly believes in bad luck, Jet Airways' losses seems to be increasing post its stake sale announcement with Etihad.

Jet Airways announced a 24% stake sale to Abu Dhabi based Etihad on April 24, 2013. Unfortunately the company has posted three straight quarters of losses since then and the latest one in September 2013 has been its largest ever. In fact the September quarter loss of Rs 891 crore has been more than its loss for the full year period in FY13 which stood at Rs 779 crore. But these losses have more to do  with the current environment rather than any bad luck theory.

 

Cumulative losses for the last three quarters stands at Rs 1,752.88 crore. Etihad's deal by way of equity is expected to bring in Rs 2,057 crore. One way of looking at the numbers is that most of the money that Etihad brings in will be used to fill up the newly created craters in Jet Airways' books. There will be little money available for growth.

 

But Jet Airways does not need money for growth, it needs money to survive, to fund its daily operations. The recent results shows that the company, operating in an extremely competitive environment is finding it difficult to make ends meet.

 

This quarter, the company started a predatory pricing environment when it launched sale of seven lakh tickets at a discount of 15-20%. Their competitors followed suit which resulted in a major part of the quarter being lost to low prices. This unfortunately happened in a quarter which is considered to be the leanest. Other one-time costs like Aircraft Maintenance Charge (AMC), currency depreciation, aircrafts lying unused and fuel rise led to its losses ballooning.

 

This quarter, the company says, will be better as festive season would mean more traffic and also tariff rates are higher by 25%. But higher tariffs also means lower traffic. Initial trends shows that traffic has in fact slowed down in October. One has to wait and see how much it picks up during the remaining part of the quarter.

 

AMC and unused aircraft is the only variable that will be missing in the coming quarters (unused aircraft will be there in this quarter too). Fuel prices and currency fluctuations are here to stay for some more time. With new and deep pocket airlines expected to be launched in the near future, one can expect rate wars to continue. In other words, results in the future will continue to remain poor.

 

So will the deal with Etihad help. It's money, it seems is unlikely to be of much help. What can probably help is the synergy. But with its balance sheet going weaker over the last three quarters, any delay would only deteriorate it further, Jet Airways will increasingly be depended on Etihad.

 

Irrespective of how the deal is structured to evade the controlling stake clause, it is clear that the person controlling the purse strings will control the airline. Etihad would use the infrastructure of Jet Airways more to its benefit rather than the other way round.

 

What's in it for the shareholders of Jet Airways. The stock is presently trading at nearly half the price at which Etihad is buying the stake. The effect of synergy on the numbers will be slow, if at all. Shareholders need to decide if it's time to exit or to pray.