Jet Airways' cost problem continues

While operating profits doubled over a year before, they would have been higher had it not been for an increase in non-fuel expenses

Jet Airways had a strong standalone operational performance for the quarter ended September, normally a weak one for domestic airlines.

Revenue at Rs 5,258 crore was up 10 per cent year on year and even higher on a sequential basis, though the June quarter is normally stronger in terms of demand than the September one. Despite a rise in available seat-kilometres or capacity by 16 per cent over a year before, load factors were up by two percentage points, to 82.5 per cent. On a sequential basis, while capacities were similar, the company improved its load factors (showing capacity utilisation) by 50 basis points (bps).

Analysts say unlike other home-focused carriers, where weakness in September quarter performance is normally visible, Jet fares better with the higher demand from international routes. About 60 per cent of Jet’s revenue comes from the international segment.

The higher top line, driven by increase in volumes (32 per cent), coupled with a 27 per cent decrease in fuel costs, led to a 122 per cent increase in earnings before interest, taxes, depreciation, amortisation and rentals or Ebitdar. Contribution from the top line increase and fuel cost decrease, of Rs 500 crore each, helped the company achieve an Ebitdar of Rs 881 crore.

Lower fuel costs and the higher demand doubled the Ebitdar margins over a year before to 16.8 per cent in the September quarter. In fact, margins were 20 bps higher than in the June quarter, despite the seasonality factor. The company had Rs 87 crore profit against Rs 70 crore last year.

The strong performance, say analysts, has not been fully reflected in the financial performance, as cost discipline continues to elude it. There was no reason for non-fuel costs to move up, especially over the June quarter and also year on year, says an analyst at a domestic brokerage. Maintenance, employee, sales & distribution (S&D), and other expenses were up 12-35 per cent over a year and four to seven per cent on a sequential basis.

There were no exceptional items in the quarter. The management indicated that rupee weakness (maintenance), coupled with pro-rating of productivity-linked bonus to agents (earlier bunched and given in the March quarter) led to some of the increase in S&D costs. Maintenance costs were up 35 per cent and S&D by 28 per cent over the year-ago period. Had it not been for the cost inflation in these items, the Ebitdar would have been about Rs 1,000 crore, rather than the Rs 881 crore reported. The stock lost two per cent at the close, to end at Rs 299.

Improving performance and benign crude oil prices also provide comfort, given that Jet’s net worth is at a negative Rs 3,900 crore and debt at Rs 10,400 crore.

The December quarter is also expected to be strong, given the high seasonal demand. The company is increasing the capacity by optimising its network and is looking at tighter integration between domestic and international operations. However, expect no major gains on yields, with the management indicating that pricing continues to be under pressure. However, if the company can manage some reduction in debt, expect the stock to do well.