Jet: Negatives not priced in

While the improvement in revenue is a positive, costs could play a spoilsport

The Jet Airways stock has lost 24 per cent over the past two weeks and dropped  to a 13-month low. This follows a cut in analysts’ earnings estimates after the September quarter results and the market share loss in October. Going ahead, too, intensifying competition, higher non-fuel costs and limited capacity addition could impact its yields, margins and market share. All these could weigh on the Jet Airways’ stock.

In the September quarter, employee cost increased by 25 per cent from the June quarter, driven by higher pilot, crew and airport staff intake for the wide-bodied aircraft to be deployed, as well as wage increase and arrear payments. Employee costs are 15 per cent of consolidated revenue. Given the higher cost, Edelweiss Securities has cut its FY17 earnings per share estimate for Jet by 14 per cent. Yet, Santosh Hiredesai of Edelweiss believes the recent stock correction factors in these and other challenges. 

Apart from non-fuel costs, there is falling market share, given its muted volume outlook. Jet has sold three A330s which were earlier leased to Turkish Airways and had come to the airline. In the coming winter schedule, the company is reducing its number of total weekly domestic flights by 16 per cent, say analysts at ICICI Securities. Market share has declined from a peak of 18.7 per cent in January, to 14.7 per cent in October. In the same period, that of IndiGo’s market share has risen from 35.6 per cent to 42.6 per cent; SpiceJet’s fell marginally from 13.2 per cent to 12.9 per cent.

While costs continue to be a worry, the expectation of higher yield is a positive. Yield represents revenue per mile or price paid by a passenger for travelling a mile. For the September quarter, its yields for the domestic segment were down four per cent year-on-year; that for the international segment were down six per cent. Compared to this, IndiGo’s were down a steeper 14 per cent (a major chunk of revenue comes from the domestic business). Average fares for Jet increased one per cent on a sequential basis.

ICICI Securities believes the better yield is due to better quality on this front, along with that its codeshare partners, coupled with limited capacity, making yield maximisation a more profitable strategy. What could help is the higher capacity in the international segment (where yields are better) in the September quarter and more capacity to be deployed in the current one. 

Demand so far remains strong. The sector grew 22.7 per cent over a year in October, making it 12 months in a row of 20-plus per cent passenger growth. The load factors at Jet, IndiGo and SpiceJet are at over 75 per cent each. Higher demand is due to lower ticket prices and an improving economic outlook, believe JM Financial’s analysts. They believe price-based competition is likely for the rest of FY17, given fleet expansion and a low fuel price outlook. This could lead to the gains being passed on to consumers but yields could then suffer. Edelweiss’ Hiredesai says profitability improvement for Jet will hinge on yield stabilisation, with sustained reduction in non-fuel costs and debt.

While analysts continue to have a ‘buy’ rating on the stock, they have cut their price targets after September quarter results, from Rs600-610 to Rs430-530. While Jet is currently trading at Rs352,  near-term headwinds could keep the stock in check.