No clear skies yet for Jet Airways

A weak rupee, slowing demand and high interest costs weigh on the stock

Despite high load factor and fare rise, Jet Airways’ profits slipped on higher fuel cost, a depreciating rupee and high interest costs. India’s largest airline company, which saw its market share inch up to 29 per cent, also saw its consolidated loss rise to Rs 354 crore in the March quarter, as compared with Rs 188 crore in the year-ago quarter and Rs 122 crore in the December quarter. Fuel costs were up 40 per cent year-on-year and 4.2 per cent sequentially, compared to a 25 per cent and 2.4 per cent rise in revenues, respectively.

On the positive front, Jet was able to keep tight control over costs, like selling, employees and others. Thus, on a sequential basis, it managed to report a 288-basis points (bps) rise in Ebidtar (earnings before interest, depreciation, tax, amortisation and rentals) margins. These gains, largely due to international operations, are commendable as they come in a lean quarter. The airline clearly benefited from the problems at full-service rivals — Kingfisher Airlines and Air India. Ebidtar margins on international routes, aided by a record 86 per cent and load factors, were up 450 bps sequentially at 12.6 per cent, while overall they were up 300 bps at nine per cent. The improvement in international load factors is a positive, as the international business generates better margins and accounts for 56 per cent of overall revenues.

The first quarter of FY13 should also be better, as it will reflect price rises undertaken towards the end of March, as well as reduction of capacity in the industry. However, while capacity rationalisation is favourable from the operational front, the weakening rupee will partly offset the gains from the decline in fuel prices. In order to further improve operational efficiency and revenues, Jet is enhancing ancillary revenues, discontinuing loss-making international routes, restructuring commissions and looking at sale and leaseback arrangements. Nevertheless, even as analysts expect Ebidtar margins to improve substantially in FY13, they expect the company to end the year with a loss at the net level, due to high depreciation and interest costs. They are also concerned about demand due to slowing economic growth, both globally and domestically. Hence, most of them are neutral on the stock.