US airfares down 3.6% in second quarter 2013

By BA Staff

The average domestic air fare decreased to $378 in the second quarter of 2013, down 3.6 percent from the average fare of $392 in the second quarter of 2012, measured in constant 2013 dollars, the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS) reported.

Huntsville, Ala., had the highest average fare, $547, while Atlantic City, N.J., had the lowest, $159.

BTS, a part of the Research and Innovative Technology Administration (RITA), reports average fares based on domestic itinerary fares. Itinerary fares consist of round-trip fares unless the customer does not purchase a return trip. In that case, the one-way fare is included. Fares are based on the total ticket value which consists of the price charged by the airlines plus any additional taxes and fees levied by an outside entity at the time of purchase. Fares include only the price paid at the time of the ticket purchase and do not include other fees, such as baggage fees, paid at the airport or on-board the aircraft. Averages do not include frequent-flyer or “zero fares” or abnormally high reported fares.

The second-quarter 2013 fare was down 18.4 percent in constant 2013 dollars from the average fare of $463 in 1999, which was the highest average fare of any second quarter, adjusted for inflation. The 18.4 percent decline took place while there was an increase in overall consumer prices of 40.5 percent. In the 18 years since BTS began collecting air fare records in 1995, inflation-adjusted fares declined 16.9 percent compared to a 53.1 percent increase in overall consumer prices.

U.S. passenger airlines collected 70.6 percent of their total revenue from passenger fares during the second quarter of 2013, down from 1990, the earliest year for which airlines’ revenues and expenses are available, when 87.6 percent of airline revenue was received from fares.

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July 2013 U.S. airline traffic data shows system passengers unchanged from 2012

By BA Staff

Courtesy of Bts.gov

The U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS) reported that U.S. airlines carried 69.2 million systemwide (domestic + international) scheduled service passengers in July 2013, the same as in July 2012. The systemwide total was the result of a 0.7 percent decrease in the number of domestic passengers (59.3 million) and a 4.3 percent increase in international passengers (9.9 million).

BTS, a part of the Department’s Research and Innovative Technology Administration, reported that U.S. airlines carried 0.4 percent more total systemwide passengers during the first seven months of 2013 (435.0 million) than during the same period in 2012. Domestically, U.S. airlines carried 377.2 million passengers, 0.1 percent more than 2012. Internationally, they carried 57.8 million passengers, up 2.7 percent from 2012. See Tables 2, 8 and 14 of Air Traffic Press Releases for previous-year data.

The July 2013 international load factor of 86.9 percent was a record high for the month of July as year-over-year growth in revenue passenger-miles exceeded international capacity expansion. Systemwide and domestic load factors remained below the all-time July highs reached in 2011. Load factor is a measure of the use of aircraft capacity that compares Revenue Passenger-Miles (RPMs) as a proportion of Available Seat-Miles (ASMs).

 

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Alaska Air group reports record third quarter fiscal 2013 results

By BA Staff

Alaska Air Group, Inc., reported third quarter 2013 GAAP net income of $289 million, or $4.08 per diluted share, compared to $163 million, or $2.27 per diluted share in the third quarter of 2012. Excluding the impact of mark-to-market fuel hedge adjustments of $20 million ($12 million after tax, or $0.17 per diluted share), and a one-time special revenue item of $192 million ($120 million after tax, or $1.70 per diluted share) that primarily resulted from the application of new accounting rules associated with the modified affinity card agreement, the company reported record adjusted net income of $157 million, or $2.21 per diluted share, compared to adjusted net income of $150 million, or $2.09 per diluted share, in 2012.

Alaska Air Group CEO Brad Tilden said:

"These results represent our best quarter ever and mark Alaska's 18th consecutive quarterly profit. This is noteworthy given significant additional competition in some of our core markets. The balance and strength of our network combined with the ability of our people to respond quickly to changing business conditions are enabling us to succeed in this highly competitive industry."

The following table reconciles the company's reported GAAP net income and earnings per diluted share (EPS) during the third quarters of 2013 and 2012 to adjusted amounts:

	Three Months Ended September 30,
(in millions, except per share amounts)	Dollars	Diluted EPS	Dollars	Diluted EPS
Reported GAAP net income	$289	$4.08	$163	$2.27
Mark-to-market fuel-hedge adjustments, net of tax	-12	-0.17	-13	-0.18
Special revenue item, net of tax	-120	-1.7	----	----
Non-GAAP adjusted income and per-share amounts	$157	$2.21	$150	$2.09

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Boeing reports robust third quarter fiscal 2013 results. Raises full year earnings guidance

by Devesh Agarwal

Chicago based, US aerospace and defence giant The Boeing Company reported earnings of $1,160 million, a massive 12% jump in its third-quarter profit compared to $1,030 million from the same period a year ago. The company has also raised its 2013 financial performance outlook, based on an increase in commercial aircraft deliveries.

Key highlights of the quarter

• Core Earnings Per Share (non-GAAP)* rose 16% to $1.80 on strong operating performance; GAAP EPS of $1.51
• Revenue increased 11% to $22.1 billion reflecting higher commercial deliveries
• Backlog grew to a record $415 billion, including $27 billion of net orders during the quarter
• Operating cash flow before pension contributions increased to $4.3 billion
• 2013 Core EPS guidance increased to between $6.50 and $6.65 (previously forecast of $6.20 to $6.40); GAAP EPS to between $5.40 and $5.5

Boeing Chairman, President and CEO Jim McNerney said

"Consistently strong operating performance is driving higher earnings, revenue and cash flow as we deliver on our record backlog and return increased value to shareholders,"  "During the quarter, Commercial Airplanes completed the first flight of the 787-9 and delivered 170 airplanes, while Defense, Space & Security maintained solid performance and captured $7 billion in new orders. Despite the uncertainty of the U.S. defense market, overall our customer-focused business strategies and disciplined execution on our programs are producing the results we expect, and our strong year-to-date performance and positive outlook allow us to increase our 2013 guidance for earnings and operating cash flow."

Boeing Commercial Airplanes was the star performer with third-quarter profits of $1,620 million, up 40%, on revenue of $14 billion, and operating margin improving to 11.6%. During the quarter, the 787-9 completed first flight. The company intends to increase the 787 production rate from 10 to 12 per month in 2016, and to 14 per month before the end of the decade. The division booked 200 net orders during the quarter with a backlog of nearly 4,800 airplanes valued at $345 billion.

Boeing Defense, Space & Security's third-quarter revenue was $8 billion ($8,000 million), while operating margin was 8.4%. Profits fell by 19%, mainly due to a profit fall of 48% in Boeing Military Aircraft (BMA) whose third-quarter revenue was $3.5 billion, primarily reflecting lower delivery volume. Operating margin at BMA decreased to 6.2%, impacted by mix and one-time charges on the F-15 and C-17 programs. During the quarter, BMA was awarded a low-rate initial production award for 13 P-8A Poseidon aircraft.

Network & Space Systems (N&SS) third-quarter revenue was $2.2 billion, reflecting higher sales of Delta inventory and revenue in the Space Launch System program, and operating margin was 8.7%. During the quarter, N&SS was awarded a contract by Mexico's Satmex for an additional 702 small satellite.

Global Services & Support (GS&S) third-quarter revenue was $2.3 billion, due to higher volume in maintenance, modifications and upgrades. Operating margin was 11.4%. During the quarter, GS&S achieved first flight on the QF-16 unmanned aircraft and was also awarded a contract by the U.S. Air Force for 56 additional replacement wings for the A-10 aircraft.

Backlog at Defense, Space & Security was $70 billion, of which 38% represents orders with international customers.

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Air India to receive another Rs. 5000 Cr. equity infusion in fiscal 2013~14

by Devesh Agarwal

As per the budget for fiscal 2013~14, presented yesterday in parliament, the Indian government has earmarked another Rs. 5,000 crore (about $900 million) for equity infusion into ailing national carrier Air India.

This is the second tranche of a nine year, Rs. 30,000 crore (about $ 5.5 billion) tax-payer funded equity infusion, which is part of a turn-around plan for the carrier. The current budget initially provided Rs. 4,000 crore, which has been subsequently increased to Rs. 6,000 crore in the revised estimates. In fiscal 2011~12 the carrier was given Rs. 1,200 core as extra-budgetary support. The budget documents also claim that Air India will additionally generate Rs. 1,318.60 crore through internal and extra budgetary resources in 2013~14.

Civil aviation minister Ajit Singh informed the Indian parliament via a written reply that Air India has turned EBITDA (Earnings Before Interest, Depreciation, Taxes and Amortization) positive of Rs. 48.75 crore between April and December 2012. A drop in the ocean of red, as the carrier had annual losses of Rs 7,853 crore in fiscal 2011~12, has debt exceeding $10 billion, and current operating losses of Rs. 2,554.02 crore for the period from April to December 2012. (Air India has operating revenues of Rs. 11,400.44 crore and operating expenses of Rs. 13,954.47 crore).

The Economic Survey for 2012-13, tabled in Parliament yesterday, claimed that Air India is expected to achieve positive EBITDA in the current fiscal, and the carrier has registered performance improvement such as on-time performance at 85 per cent, passenger load factor at 70.9 per cent and yield at Rs. 4.31 per revenue passenger kilometre during the April~October 2012 period.

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Jet Airways Q3 fiscal 2012~2013 financial and operational analysis

by Vinay Bhaskara and Devesh Agarwal

Late last week, Mumbai based full service carrier Jet Airways reported an excellent Rs. 85 Crore net profit for the third quarter of Fiscal Year 2012-13, mirroring the financial performance of rival low cost carrier (LCC) SpiceJet and the general resurgence of the Indian airline market as a whole.

For the quarter, Jet recorded a 6.8% growth in revenue year over year (YOY) from Rs. 3,939.2 Crore to Rs. 4,205.8 Crore, while expenses dropped more than 7.5% from Rs. ,4452.8 Crore to Rs. 4,118.5 Crore year-on-year (YOY). Fuel expenses in particular were managed well, falling 3.7% from Rs. 1,753.3 Crore to Rs. 1,688.5 Crore YOY, and represented 40.3% of total operating costs (though they were up on a per ASKM basis).

Employee remunerations fell 12.8% to Rs 367.8 Crore since the airline did not hire replacements in the high attrition cabin and ground staff segment, but inexplicably aircraft lease rental expenses jumped close to 24.1% to Rs. 306 Crore (both YOY).

For the quarter, capacity as measured by available seat kilometres (ASKMs) fell 9.1% on an 11.7% drop in number of departures YOY. Demand, as measured in revenue passenger kilometers (RPKMs) fell 11.1%, resulting in a 1.7 percentage point reduction in load factors from 77.8% to 76.1% YOY.

Company-wide passenger traffic fell 10.7% YOY to 4.05 million, but despite these demand struggles, revenues were buoyant, with passenger yield up 18.6% YOY to Rs. 8,762 per passenger, and revenues per ASKM up a remarkable 19% YOY to Rs. 3.76.

All of this contributed to the decline of Jet’s break-even load factor to a very manageable 73.2%, and the strong EBITDAR (earnings before interest, depreciation, amortization, and rents – a measure of operational profit) of Rs. 865.8 Crore, with EBITDAR margin of 20.6%.

Domestically revenues grew a modest 4.5% to Rs. 1,824.8 Crore, while expenses fell 8.9% to Rs. 1,835 Crore, including a 3.6% drop in fuel costs to Rs. 688.2 Crore. The commiserate net profit of Rs. 10.5 Crore on domestic operations was driven primarily by the strong growth in passenger yields (ticket prices) of 19.6% from Rs. 4,960 to Rs. 5,930 YOY. ASKMs fell 11.0% on a 13.3% drop in number of departures, while RPKMs dropped even more sharply by 14.0%, driving a 13.0% decline in revenue passengers to 2.76 million on the back of high ticket prices. However, the strong growth in revenue per ASKM of 18.8% to Rs. 5.06 more than offset this decline, and helped push the break even seat factor to just 71.3%, a drop of 15 percentage points YOY.

International operations once again drove the company-wide profit, with a net pre-tax profit of Rs. 81.3 Crore on 8.6% revenue growth to Rs. 2,308.9 Crore and a 6.4% drop in operating expenses to Rs. 2,283.6 Crore. Capacity, measured in ASKMs, fell 8.1% on a 5.9% drop in number of departures and demand in RPKMs fell 9.6% as the airline aggressively cut loss making routes like Mumbai Johannesburg, Delhi Milan, Chennai Brussels, and Brussels New York JFK . Once again, soaring revenues, with yields up 13.5% to Rs. 14,861 and revenue per ASKM up 20.0% to Rs. 3.07 more than offset these demand-side declines. Break even seat factor dropped 17.3 percentage points to 73.6% and partially validates the international network restructuring performed by Jet over the last several quarters.

Jet’s financial results for the third quarter are a validation of the importance of capacity discipline and the balance between capacity and demand. For the quarter, industry capacity fell 0.6% while Jet cut capacity by 11% domestically. While this led to a drop in Jet’s domestic market share, the drop in capacity drove an increase in yields (also buoyed by the increase in First Class demand thanks to the demise of Kingfisher Airlines). In an industry with high structural costs, especially in India where fuel costs are artificially high thanks to excessive government taxation, it is important for airlines to grow yields. The best way to do this is by limiting capacity, which naturally drives prices upwards thanks to the supply – demand relationship, and has the greatest effect on buoying yields as the Indian economy slows down.

It is also a validation of Jet’s international network restructuring program. Apart from terminating unprofitable routes the program also entailed a reconfiguration of the carrier’s fleet of Boeing 777-300ER into a higher density 10 abreast seating configuration in economy class, and the entry into service (EIS) of the larger Airbus A330-300, which has lower unit costs (CASK) than the existing A330-200 which forms bulk of Jet Airways' international fleet.

These various strategic decisions proved to be beneficial for Jet, with the international operations powering the carrier’s overall financial results. And the Rs. 81.3 Crore net pre-tax profit on international operations is artificially deflated by the Rs. 24 Crore loss on foreign exchange, which would have made the result look even more positive. Jet’s load factors for Q3 by region are shown below:

US - 81.2%, UK - 82.7%, ASEAN - 77.1%, Gulf - 74.5%, SAARC - 76.4%

Cost discipline was also an important factor in Jet’s performance. Employee remunerations fell by 12.8% year over year, which Jet Airways revealed was primarily due to a decrease in the ratio of expatriate to Indian pilots (expatriate pilots cost more), as well as natural headcount reduction of 1,139 employees due to the attrition in front line employees. Jet also did an excellent job of controlling sales and distribution expenses (down 18.4%) as well as the mysterious “Other Operating Expenses” (down 15.9%). Perhaps the best way to highlight Jet’s cost discipline is through its CASK excluding fuel; basically a measure of all of the costs that Jet has some degree of control over. For Q3, Jet’s CASK ex. Fuel was down 6.3% from Rs. 1.87 to Rs. 1.75, which is indicative of excellent cost discipline from Jet Airways management.

In short, Jet Airways has made strong strides towards a profitable operation in the past 3 months. The fruits of its restructuring efforts are finally being manifested, and strong cost and capacity discipline have buoyed profitability greatly.

Kudos to Jet Airways for turning around its operations and delivering a strong financial performance in Q3.

Many analysts, including our Devesh Agarwal, are concerned about the shrinkage of Jet's international network which restricts the airline's usage of its excellent Boeing 777-300ER. The dilemma before Jet is network capacity vs. profitability. While we are happy Jet has chosen the latter, during a conference call with analysts, the airline revealed it will be receiving back the five 777 aircraft it has leased to Thai Airways. The question naturally arises, what will the airline do with these aircraft, given its limited network?

Another factor in the equation is a 24% stake sale to Abu Dhabi based Etihad, which just posted a US $42 million net profit for calendar year 2012 and has invested in several airlines including airBerlin, Aer Lingus, Virgin Australia, and Air Seychelles over the past year.

Based on statements and recent actions by the senior officers of Etihad, the deal appears to be settled with Etihad commencing with a 24% stake which most likely will increase to 49% in due course.

"We are doing our due diligence (on Jet Airways) in the next week. We will present it to our board and take it from there," Etihad Chief Executive James Hogan said at the results press conference. He also explained why he visited senior ministers in India “We wanted to understand the new rules under the Foreign Direct Investment (FDI) scheme. We also wanted to understand the issues that have impacted Indian domestic aviation and how these are being addressed in the coming years.”

Future international expansion of Jet Airways' international network will be mostly done with strong inputs and in close cooperation with Etihad.

Jet simply does not have the network capacity to use the 777-300ER aircraft. It is almost certain, the five 777s will be leased out to another airline. It could be Turkish Airlines, which had first leased four 777 from Jet in 2008/9, but given that Jet is re-configuring its 777s to a 10 abreast economy configuration, similar to Etihad, the planes just might head to Abu Dhabi.

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Spicejet reports profit in Q3 FY2013 - Financial and operational analysis

By Vinay Bhaskara and Devesh Agarwal

In a result that represents a positive sign for the prospects of the Indian airline industry moving forward, Gurgaon based low cost carrier (LCC) SpiceJet reported a Rs. 102 Crore (US $19 million) net profit for the third quarter of fiscal year 2012-13 (FY 12-13), a sharp improvement from the results in both the second quarter of FY 12-13 (Rs. 169.8 Crore net loss) and in the same period a year ago (Rs. 39.3 Crore net loss).

SpiceJet financials at the end of the article.

The move represents a sharp turn towards profitability for SpiceJet, and when combined with a previous profit in Q1 of FY 12-13, brings their year to date (YTD) net result to essentially break even (loss of Rs. 53.5 Lakh on revenues of Rs. 4282.5 Crore). Factors contributing to SpiceJet’s resurgence include the strong performance of the regional Q400 operation, as well as that of new international routes, manageable fuel prices, and a better revenue and capacity environment within the domestic Indian airline industry.

Looking at some of the specific metrics provided by SpiceJet, the airline recorded a 7% growth in passengers carried, 18% growth in capacity as measured by available seat kilometers (ASKs), and a 25% growth in number of departures or frequencies.

At first glance, it would seem that this performance completely contradicts our standard mantra of "capacity discipline and restraint at all costs", but a detailed look at at the composition of these growth figures shows out the strategy.

On the heavily saturated mainline domestic flights (basically flights in-between Metros/Tier I cities operated with the 737 fleet), passenger traffic actually fell by 2% and ASK growth was measured in the single digits.

At the same time, international passenger traffic grew by 80% and regional passenger traffic, serviced by the Q400 turbo-prop operation to Tier II and Tier III cities, saw a massive 82% growth in passenger traffic.

These latter two categories are the market sectors with limited competition, enabling SpiceJet to achieve better profitability. The buoyancy in passenger yields helped SpiceJet record a superb 29% increase from Rs. 3,421 to Rs. 4,412, the best quarterly revenue performance from SpiceJet in the last 18 months.

To clarify our views on capacity discipline are that growth for growth’s sake should not be pursued; simply throwing capacity onto the high competition routes between Metros so that aggregate passenger figures grow is a meaningless strategy that some of the Indian carriers (and airlines in general) fall into from time to time. Profitable growth opportunities in under-served or un-served markets should be pursued. Indian airlines should never abandon profitable growth opportunities; rather they should be smart and prudent about where, when, and how they grow. Just as growth for growth’s sake is pointless, so is capacity discipline for capacity discipline’s sake.

Getting back on topic, an important factor in a successful quarter for SpiceJet was, cost discipline. On a per ASK (Available Seat-Kilometre) basis, normalising for increased size of operations, cost growth was a very manageable 4.4%, and much of the increase can be attributed to the initiation costs and added complexity of new international routes. One of the other factors that contributed to the relatively modest rise in costs is the growing maturity of the Q400 operation. Much of calendar year 2012 was spent integrating the Q400s into the fleet and this temporarily increases an airline’s costs as new and existing personnel must be hired and retrained for the new aircraft type, new infrastructure put in place, and generally operational complexity increases in the short term; but these are all temporary costs, as the Q400 operation matures, SpiceJet will see a steady reduction in costs of the Q400 operations, as well as demand side market maturation i.e. increased fares and market penetration.

This effect has already begun to take hold, ergo the rise in yields, and the maturation driven cost-reduction will benefit SpiceJet over the next few quarters.

Equally important is the flattening of fuel costs, which had been the most significant driver in SpiceJet’s poor financial performance for the past two years. Once again, fuel costs rose a manageable 4.5% on a per-ASK basis year over year, which given SpiceJet’s extraordinary revenue performance was more than adequate performance. Part of the moderation can of course be traced to the stabilization of oil prices around US $90 per barrel (West Texas Intermediate measure), another part also stems from SpiceJet’s increased international and Q400 operations. Fuel purchases for all international flights do not suffer the usual exorbitant average 24% sales tax, that varies by state. Similarly, to promote regional connectivity, the Government of India mandates a uniform 4% sales tax instead of the average 24% for sub-80 seat aircraft, which covers the 78 seat Q400 operations. For example, in Delhi fuel prices for international flights are roughly 23% lower than domestic ones. In Kolkata it is 30% lower, in Mumbai 26%, and 29% lower in Chennai. Given that fuel represents over 50% of costs for most Indian airlines, these discounts are a serious boon for SpiceJet.

As SpiceJet increased its international flying and regional Q400 operations, as a proportion of total capacity, the relative fuel burden decreased thanks to the lower level of taxation. This saving in fuel costs will continue to improve as international and Q400 operations continue to increase as a proportion

As a whole, SpiceJet put in a very strong third quarter of FY 12-13. It will be interesting to see if this was a one-off occurrence, or if SpiceJet can sustain profitability moving forward. But in the present, SpiceJet CEO Neil Mills put it best

SpiceJet financial statement Q3 FY 2013

Download here.

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Jet Airways Q2 FY 2012~2013 quarterly results financial analysis

Photo © Devesh Agarwal. Used with permission.

India’s largest private carrier, Jet Airways, reported a net, post-tax loss of Rs. 99.7 Crore for the second quarter of fiscal year 2012-2013, representing a sharp improvement from the Rs. 713.6 Crore net loss recorded in the same period last year.

This 84.8% improvement in results, pushed Jet Airways’ net margin up to a very manageable (-)2.4%, that too in what is typically the worst quarter for India’s airlines.

The sharp rise in revenues is the primary driver of these improved results.

Financial and operating parameters

Jet Airways grew revenues by more than 25.8% in the last quarter buoyed by the general improvement in the revenue environment following the implosion of Kingfisher Airlines. Unit fares (revenue per available seat kilometre – R/ASK) were up more than 25.5% year over year, though this was matched by a 2.8 point drop in passenger load factor (PLF) to 75%. The fall in domestic PLF (where fares rose the most) was particularly precipitous, falling 6.5% to a low 65.6% from 72.1%.

The fact that Jet Airways still posted a loss despite close to 26% growth in unit revenues is simply proof of how far the industry had fallen and how much ground there is to still make up. Fuel expenses have finally begun to level off, though they still increased more than 14.5% on a per available seat-kilometer (ASK) basis.

In this quarter the culprits were instead the amorphous “Other Operating Expenses” line on the Profit and Loss (P and L) statement, which jumped 25.9%, but especially aircraft lease rentals, which jumped a whopping 49.3%!!!

During an analysts conference call, Bangalore Aviation raised the issue of the sharp rise in aircraft lease rental costs with Jet Airways management, and they responded:

“The lease rentals have gone up for two major reasons. We added six aircraft which were on ownership basis on the previous quarters which are now on a lease basis so effectively we did a sale and leaseback on them. We also added as compared to the last year 8 leased aircraft into the system, 6 of which were 737-800s and two of which were 737-900s and more importantly the rate of exchange impact. For the last year same quarter the rupee to dollar was largely at 45-46 to a dollar and this year it was more like a 55-56 so that is a 20 odd percent impact in terms of lease cost, which is 100% dollar denominated. So 20 plue percent is because of the rate of exchange impact, the balance is because of change in the mix of owned versus leased as well as incremental leased aircraft that we got into the fleet.”

Unfortunately, the declining performance of the Rupee, with the macro-economic and political factors behind that, represent a significant headwind that is, and will continue to, hamper the Indian airline industry for several quarters to come, though year over year comparisons will become easier assuming the Rupee stabilizes at current levels. When so much of the world economy is run on US dollars, this type of valuation for the local currency hurts airlines the most.

International Operations

Once again, the dichotomy of Jet Airways was apparent – the international operations, which had temporarily swung into a net loss during the fuel spike over the past year, swung sharply, improving 119% to a robust net, pre-tax profit of Rs. 45.2 Crore versus a net loss of Rs. 238.3 Crore a year ago. Meanwhile, the domestic operations continued to falter, posting a Rs. 153.5 Crore net loss (though this was a 67.7% improvement year over year).

Jet Airways has been aggressive in suspending non-profitable destinations, and from a pure financial perspective we applaud most of the moves that Jet Airways has made in recent months in terms of consolidating capacity on its international network and simultaneously shedding unprofitable routes while adding capacity on profitable sectors. In particular, Jet’s recent move to terminate Delhi-Milan, which has long been rumoured to have been unprofitable, and in our opinion, is superfluous to Jet ‘s core international strengths.

On the subject of Jet’s tumultuous European operations, Bangalore Aviation also queried Jet Airways management on our report of a planned Bangalore Munich flight. During the analysts call, Jet confirmed that the flight is indeed planned to operate towards the end of the winter schedule, but details are still being worked out.

Outlook

Looking forward, there are both challenges and opportunities for Jet Airways. If the general improvement in conditions for the Indian airline market hold, the traditionally strong, third fiscal quarter (October through December) should be highly profitable for Jet Airways.

We are optimistic the airline is focussing on the bottom line in many aspects, including value added income from in-flight sales of food, route rationalisation, and building flexibility in its fleet. In particular, the adding of business class in to JetKonnect which offers Jet the flexibility to shift aircraft between the low cost JetKonnect into the full-service Jet Airways will allow them to take full advantage of the temporary boom in business class demand during the next few months.

Jet will continue to face issues of brand confusion due to the common configuration of JetKonnect and Jet Airways aircraft, and the airline also risks becoming uncompetitive to the business traveller as it cuts back on routes. Jet also has to integrate the soon to be delivered A330-300s into their fleet and international operations. This will increase operational complexity, and will render the carrier's Boeing 777-300ER fleet in to further irrelevance, both of which will increase costs and drive down profitability.

On the positive side, fuel prices are stabilising, and for the first time in the last four years, fares are rising in India. Jet Airways is poised at the cusp, it is up to the team at Jet Airways to deliver a few quarters of great results.

With inputs from Devesh Agarwal

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SpiceJet Q2 FY2012~2013 quarterly results financial analysis

Earlier this week, Indian low cost carrier SpiceJet posted a Rs. 163.5 Crore net loss for the second quarter of fiscal year 2012-13. While this represented a 32% better result than the same period last year, it is still a heavily disappointing result, giving the recent surge in the fortunes of India’s airlines after the shut-down of full service carrier Kingfisher and the corresponding rise in fares.

Revenues grew a robust 57% to Rs. 1207 Crore, but even still, a net margin of -13.5% is almost flipped 180 degrees from the ideal result.

Revenues were certainly buoyed by general fare increases and the continued maturation of Q400 markets.

What makes the quarterly results particularly abysmal is that SpiceJet has finally gotten its primary challenge of the past few quarters, fuel costs, under control thanks to the general global stabilization in oil prices. Year over year gas prices grew by a relatively modest though still challenging 11.6% on a per seat-kilometre basis.

What is concerning is that the dizzying rise in fares over the past quarter, over 30% on some sectors, should have more than outweighed the fuel price growth. There seems to be poor cost discipline in the airline's other cost-line items, primarily aircraft maintenance, which grew more than 17% on a per seat kilometre basis, and aircraft lease rentals, which jumped a staggering 26.2% percent year-on-year per seat kilometre.

These two cost line items, and indeed the fuel expenses as well, help drive home an essential point – SpiceJet’s losses are driven by capacity growth; i.e. poor capacity discipline by SpiceJet.

While a small part of SpiceJet’s maintenance cost increases are due to the natural aging of their 737NG fleet, the primary driver behind increased maintenance costs is the high rate of growth that SpiceJet continues to pursue. For the quarter, SpiceJet recorded a whopping 20% increase in available seat kilometers – and the increase in fleet size and aircraft utilization due to this capacity are the drivers behind the rise in maintenance and aircraft lease costs, as well as a primary factor in the 600% rise in depreciation costs.

Given the current environment in India, where fares are finally enjoying the sort of sustained quarterly fare increases necessary to overcome the ludicrous policy of over-taxation which double the impact of persistently high fuel prices, why is SpiceJet pursuing a 20% capacity growth?

Part of the answer is, undoubtedly, that their outstanding order for 20 737NGs, which locks them into almost continual route and fleet growth, at least for the next few quarters. But another part is what I see as the mentality that is prevalent amongst all of the Indian carriers, a market-share chasing mentality that values profitless growth over the profitable status quo. While there are exceptions to this rule, GoAir being the chief amongst them, Indian carriers have over the past decade consistently pursued growth at any cost.

Now this pathway has come back to haunt SpiceJet. Don’t get me wrong, there are profitable avenues of growth available to SpiceJet, chiefly on under-served regional sectors using the Q400, and on regional international routes out of Delhi. However, thanks to the over-commitment to new aircraft, SpiceJet’s strategy has instead been to add new routes and frequencies on heavily competitive domestic sectors, primarily on inter-Metro sectors. Then the accumulated losses on these flights simply add to SpiceJet’s debt load, making it harder for them to find financing for the Q400s and reinforcing the negative feedback cycle of profitless growth.

It is also interesting to note that SpiceJet has seen the steadily creeping interest expenditures. While SpiceJet is far away from the interest burden that crippled Kingfisher, and bankrupt US carrier American Airlines, and have hamstrung Jet Airways in recent months, this should be a cause for long term concern and constant observation.

Current finance charges are close to 4.8% of revenues, up sharply from less than 1% just a year ago. It is important to note, SpiceJet actually had Rs. 747.10 lakhs worth of interest costs, it has not accounted for, in this quarter, stating ongoing litigation at the Bombay High Court – a charge that would have made the already dismal results look even worse.

Moving forward, there is undoubtedly potential for SpiceJet to grow and improve its financial performance, especially if it can find financing for the next set of Q400 deliveries. The key for SpiceJet is capacity discipline – they need to find some way of bringing revenues in line with costs.

Cost-cutting is difficult since more than 75% of their costs are effectively fixed in the short to medium term. The easiest way to do this is by holding your supply (capacity) constant, which will in turn drive an increase in fares and thus increased revenues. However, this strategy will be tested by the constant fleet additions by competitors IndiGo and Jet Airways, as well as a constant observation by the government to keep fares "in check", a populist interference that will only grow as elections get closer.

A more plausible strategy would be the Blue Ocean growth being driven by CEO Neil Mills. The carrier is applying and getting route permissions for un-served and under-served international routes like Kabul, Guangzhou, etc. SpiceJet has to follow a similar strategy for the domestic market too. SpiceJet is gradually serving tier two and three cities from Bangalore, but is still not basing a full Q400 fleet here. Bangalore Aviation is given to understand that the airline is looking for a "good deal" from BIAL, the airport operator, but is not finding one, since the airport is under-capacity at present.

Given these macro-economics, for the short term, SpiceJet may continue to pursue a aggressive capacity growth path of more than 15% per quarter, and this will keep pressure on profitability. The faster the airline shifts strategy the faster the chances of it flying out of the trap.

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Kingfisher's Q2 FY13 record loss of Rs. 1,115 crore is more than five times its revenue

One of the many Kingfisher aircraft stripped and left

Financial beleaguered Kingfisher Airlines saw its second quarter revenue for fiscal year 2012~2013 plunge a massive 87% to just Rs. 200 crore (Rs. 2 billion) from almost Rs. 1,553 crore in the same quarter a year ago.

The airline which has not operated a single flight since October 1, due to strikes and a suspension of its operating license saw its quarterly losses before tax, balloon by over 60% to Rs. 1,115.5 crore, compared to losses of Rs. 693.8 crore from the same quarter last year.

Clearly the claimed "holding plan" of the airline is not working. The first quarter results earlier this year saw quarterly revenue plunging 84% from the same quarter a year earlier, and the quarterly pre-tax losses were almost Rs. 694 crore. Large at that time itself, but diminutive by this quarter's numbers.

In the first quarter, losses at the airline were 3x the revenue, this quarter, the losses have jumped to 5.5x i.e. the airline lost Rs. 5.50 for each rupee it earned.

The leader of the lending consortium, State Bank of India (SBI), which has an estimated exposure in excess of Rs. 1,200 Cr. to Kingfisher Airlines, yesterday, is almost begging the airline's promoters to inject a minimum of $ 1 billion (approx. Rs. 5,500 crore) before this month's end for its revival.

The airline released essentially the same statement as from last quarter

Kingfisher Airlines has been in a holding pattern, operating a limited schedule since March 2012.

Kingfisher Airlines is preparing a comprehensive plan for re-start of operations which will be shared with the DGCA and bankers.

The airline is in discussion with various stakeholders to ensure that there are no future disruptions. Kingfisher Airlines expects to resume operations in the near future.

If the airline had an investor, don't you think it would have put out some plans till now?

Share your thoughts via the comment system.

You will observe, Bangalore Aviation has not done any analysis per se on the results. What can we analyse?

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Air traffic plunges 11.5%, as air fares rise. Jet Airways group crashes almost 21%, IndiGo down 11%.

Talk about irony. In March this year, Dr. Dinesh Keskar and Bangalore Aviation were discussing the double digit, yet profitless growth occurring in the Indian airline industry.

Less than six months later, air traffic continues its fifth consecutive month of decline. Within, just the third calendar quarter, (second quarter of the fiscal year 2012~13), air traffic plunged over 11.5%, from 4.537 million passengers in July, to 4.018 million in September. August at 4.369 million passengers was down 3.7% from July, and September was down 8.03% from August.

No airline could avoid the contagion. Jet Airways group is down a whopping 20.63% for the quarter, dropping from 1.207 passengers in July to 0.958 passengers in September. Even market leader IndiGo which is steadily growing its fleet, is down a significant 10.77%. SpiceJet is down 8.04%, Air India down 5.95%, and Kingfisher down 9.62%. GoAir performed the best, losing 2.85% of its passengers.

Year on year for the nine month period January to September this year 43.839 million passengers travelled by air domestically, compared to 44.218 million last year. Down 0.9%.

For the month of September, IndiGo continued its market leadership, but it appears the fare war unleashed by Air India has gained it passengers at the expense of all other airlines. Air India even beat Jet Airways, carrying 0.775 million passengers compared to 0.729 million by Jet Airways.

Put the blame for this contraction on the significant increase in airfares over the last six months, driven by the collapse of Kingfisher Airlines. Airlines are reducing the excess capacity, which has already increased fares over 20%. For the winter schedule which commences October 28, Indian carriers will fly 20% less flights than last year. 10,935 vs. 13,541 flights per week. Experts, expect air fares to rise another 10%~15% during the winter season which is also highest in terms of demand.

No airline crossed a passenger load factor of 70%, even the traditional leader IndiGo which used to regularly be in the top of the eighties or low nineties.

How will this capacity decrease impact passenger numbers? What is your view? Share a comment.

Also, do you think such major fare increases bodes well for the Indian consumer? Share your thoughts.

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Jet Airways Q1 FY 2012-2013 analysis - prudent cost cutting leading to profits

When Mumbai based full service carrier Jet Airways reported a Rs. 33.3 Crore net pre-tax profit in the first quarter of fiscal year 2012-2013, it represented a resounding statement that the Indian airline industry may have finally found its footing.

Photo copyright Devesh Agarwal.

Having slipped to net losses in each quarter last year due to the near constant rise in fuel prices, insufficient control of other operating costs, and poor capacity discipline, Jet Airways swung to a profit due to increased profits from sale-leaseback of aircraft, stronger unit revenues thanks to increased capacity discipline in the market, and a boost from cutting underperforming international routes.

Digging into some of the specific trends for the quarter, (relatively) low fuel prices were certainly a huge factor in the quarterly improvement. Versus the fourth quarter of FY 2011-2012, the overall fuel bill increased just 7.9% against a 1.5% increase in available seat kilometers (ASKs), yielding a 6.3% rise in unit fuel costs (the more important measure in the aviation industry). This may seem like a big jump, but it is in fact very tame given that Jet over the past 4 quarters has been routinely recording jumps of between 12-17% in that very same metric. Year over year, fuel cost per ASK did jump more than 20%, but this increase was more than offset by Jet’s superb revenue performance; the first time Jet has achieved such growth during my entire tenure here at Bangalore Aviation.

For the quarter, Jet recorded an incredible 16.66% growth in unit revenue Revenue per Available Seat Kilometre, or RASK), despite 10.4% growth in ASKs and a whopping 29% increase in passengers carried to 4.82 million (both figures year over year). The RASK growth was particularly good on the international front, where Jet achieved an absolutely incredible 30.0% growth in unit revenues despite 7.8% growth in ASKs.

This growth was buoyed in part by the first part of Jet’s international capacity cuts taking place. During the quarter, Mumbai-Riyadh (1 of 2 daily frequencies), Trivandrum-Sharjah, Delhi-Colombo, Mumbai-Johannesburg, Chennai-Dubai, and Chennai-Kuala Lampur were all cut. These routes were all poor performers (especially Mumbai-Johannesburg), and pulling this capacity has definitely yielded benefits to Jet.

It is equally clear that Jet, along with all other Indian airlines, has benefited immensely from Kingfisher’s demise and the resultant capacity reduction. The environment also offered Jet an additional benefit from Kingfisher's withdrawal from the long distance international market. IndiGo and SpiceJet are operating only on shorter distance routes to the Gulf, SAARC, and ASEAN markets. Air India's long distance international operations were virtually closed, thanks to the pilot's strike; and the benefits flowed to Jet’s London, Hong Kong, and Bangkok routes.

Of course the proverbial “elephant in the room” when considering this quarter’s results is in fact the growing sale leaseback income recorded by Jet. For the quarter sale-leaseback income recorded was Rs. 128.46 Crores, of course an integral part in Jet’s overall net profit. It is true to some degree that this sale-leaseback income masked Jet’s true performance in the quarter, but it should not overshadow the very real progress made. Jet broke even on an operating cost basis both domestically and internationally, and this is ultimately the most important metric. Furthermore, it is important to ask; why does it matter that Jet used sale-leaseback so shrewdly?

India’s largest domestic airline, IndiGo, has been using this strategy for several years now to increase cash on hand and lower operating costs by leveraging faster payments to obtain better discounts from vendors including airports. One could even make an argument that IndiGo has artificially lowered its fares by using sale-leaseback revenue to fund operations. Why should Jet be derided for taking advantage of the same? Jet meanwhile has built a fleet of more than 100 aircraft without using sale-leaseback excessively, but it has slowly caught on, and you should expect most of Jet’s narrowbody fleet growth and even non-leased widebody deliveries to occur with sale and lease-back.

Looking forward for Jet, the second quarter results should continue to be strong as the airlines have tempered capacity growth and Kingfisher continues to slide. On the downside, SpiceJet’s new Q400 operation in Delhi and the growing maturity of their other regional operations will put downwards pressure on domestic yields. Internationally, Jet will get positive yield growth as the second half of their cuts (including Brussels-New York) start to really kick in.

On the revenue side, Jet is re-configuring its Boeing 777-300ER (77W) fleet to increase economy class seating from 274 to 310. From a comfortable 9-abreast 3-3-3 18.5" width, Jet is mimicking Emirates and Etihad to go 10 abreast in a cramped 3-4-3 17" width seating. Jet's 77Ws are primarily deployed on Jet's London Heathrow routes, where Emirates flies Airbus A380 super-jumbos equipped with far more comfortable 19" width seats in economy class.

The deployment of these re-configured aircraft will commence in 15 day intervals starting from October 16, in time for the winter rush traffic. It remains to be seen if passengers continue to pay the premium fares commanded by Jet on its London flights, for this cramped seating.

Right now, Jet Airways stock is trading roughly in the 370s, and the long term play looks relatively attractive. Assuming that the airline continues to leverage sale-leaseback shrewdly, earnings potential looks good over the next few quarters. While the current price to earnings (P/E) ratio is relatively high, it is important to note that Jet’s share price is more than 56% off its November 2010 peak. Especially if the airline can return to paying dividends (which it would in the case of sustained profits), Jet Airways stock looks like a smart long term buy.

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Kingfisher Q1 FY2013 analysis - losses exceed three times the revenue. Is the end near?

Beleaguered full service carrier Kingfisher Airlines has served notice of its dire straits, by reporting a massive Rs. 963.3 Crore net pre-tax loss in the first quarter of fiscal year 2012~2013. Even as Kingfisher Airlines chairman Vijay Mallya wrote a controversial letter to Kingfisher’s employees asking them to work without pay for the next few months, it appears that Kingfisher may not even have that much time.

The actual numbers paint a grim picture for Kingfisher. Unlike its full service rival Jet Airways and low far competitor SpiceJet, both of whom have declared profits in Q1 FY 2013, Kingfisher was unable to parlay the fall in fuel prices from the fourth quarter of FY 2011-2012 to Q1 of FY 2013 into any sort of positive trend.

What really created the decline was Kingfisher’s general deterioration in terms of revenue and passengers. Kingfisher’s revenues in Q1 have shrunk by 84% and were just 1/6th of what they were in the same quarter a year ago, mirroring the decline in Kingfisher’s domestic market share from just over 25% to less than 5% today.

What is particularly scary is that Kingfisher's losses are more than three times its REVENUE i.e. net margin is an incredible -319.6%!!!! This is just not sustainable, now or ever.

As a point of comparison, when US based full service carrier American Airlines filed for Chapter 11 bankruptcy protection (through its parent company AMR), its net margin never crossed -15% in the last four quarters before its filing.

Despite the loss being the biggest factor, a couple of things did strike me as being odd on Kingfisher’s Profit and Loss report as well as on its balance sheet. The first was that despite reportedly not paying a dime in employee salaries for several months now, Kingfisher incurred Rs. 58.8 Crore in employee costs. Another interesting note was that Kingfisher is now planning to purchase several aircraft back from lessors after it defaulted on the payments for those aircraft; this comes even as the aircraft continues to pay for more than 20 aircraft (the price tag is over Rs. 130 Crore), even when its operations only require ten or so. There are no clear cut explanations from the company.

Unfortunately, at this point, we just don’t see a way that Kingfisher can survive. While the airline maintains that it is currently in a “holding operation,” and operating its current 20 airplane operation is a temporary measure until it can restore its former glory, the simple reality is that Kingfisher’s operations have become too fiscally unsustainable. The "holding plan" at Kingfisher is just not working, and we doubt it ever did.

Were Kingfisher run by a rational player, from an economic perspective, the airline would have already shut down. Typically speaking, a business should only stay open so long as its marginal costs are being matched by revenues. For an airline, that in effect means that its EBITDAR (earnings before interest, taxes, depreciation, amortization, and rents) should be at least zero (break even). Kingfisher has posted an EBITDAR loss that we do not even want to hazard an estimate of, given the completely tangled set of accounts presented. (See the Q1 FY2013 financial numbers here.)

Unquestionably, Kingfisher has some very important stakeholders, including several large government owned banks. But is it really better for these investors to continue throwing money at a broken airline, than to simply cut their losses and move on?

A similar explanation applies to the prospect of foreign direct investment (FDI), which many people claim would bolster Kingfisher. One has to ask the question, is entry in to the Indian market so valuable that a foreign airline would want to invest in Kingfisher and take own such a faltering operation? At this point, such an investment appears to be the equivalent of taking your money, and setting it on fire.

Even Vijay Mallya, for whom Kingfisher Airlines was supposed to be the crowning achievement, may no longer be able to fund Kingfisher. Buried in the earnings release was the fact that "UB Group provided over Rs. 750 Crore in cash support to the airline to meet its cash flow requirements". (Read the cover note here.)

There is no explanation on the nature of the support, nor how is this cash infusion accounted in the financial statements. Is this an accounting trick masking the true extent of Kingfisher’s net loss? If one keeps the cash infusion as a separate amount, is the real loss closer to Rs. 1,500 Crore?

The UB Group makes a quarterly profit in the range of Rs. 200 Crore and that will be nowhere enough to fund Kingfisher over an extended period of time without bankrupting the entire group.

One possible, yet perverse reason, for keeping Kingfisher Airlines flying, is all the corporate and personal guarantees given by various companies of the UB Group and Dr. Mallya himself. Closure will cause banks and investors to invoke these guarantees. It is doubtful, the UB Group itself, will be able to survive the impact?

It is crunch time for Dr. Mallya. Sustaining the airline will bankrupt the UB Group in quick time, but shutting the airline will shatter the UB Group. It appears that the “King of Good Times”, stands to lose any which way he goes.

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SpiceJet Q1 FY 2013 financial and operations analysis

When Gurgaon based low cost carrier (LCC) SpiceJet reported a net, pre-tax profit of more than Rs. 56 Crore in the first quarter of fiscal year 2012-2013, it represented a huge positive step for the Indian airline industry.

After SpiceJet had slipped to a large net loss for fiscal year 2011-2012, mirroring the performance of the industry as a whole thanks to sharply rising fuel costs, additional costs due to the integration of the Bombardier Q400 turboprop into the fleet, and depressed fare levels that arose because there was too much capacity in the Indian market. But with the effective demise of full service carrier Kingfisher and its low cost subsidiary Kingfisher Red and their subsequent capacity drawdown, much capacity has been pulled from the market, supporting fares and pushing not only SpiceJet but even full service rival Jet Airways and its low cost wing JetKonnect into profitability.

Looking specifically at some of the information from SpiceJet’s first quarter, once again their growth was quite impressive. They added seven new aircraft to the fleet, including five more Bombardier Q400 turboprops, and grew their market share in the Indian domestic market 18.6%. 26% passenger traffic growth for SpiceJet is pretty much the trendline over the past five to six quarters but importantly, traffic growth significantly outpaced capacity growth as SpiceJet’s seat load factor nudged above 80% for the first time in more than a year and a half. This paid dividends for SpiceJet, as the higher fares thus translated to larger revenues.

More specifically, unit revenue growth for the quarter was superb, RASK (Revenue per Available Seat Kilometre) growing an incredible 36.6% to Rs. 3.97. In fact, this 36.6% growth in RASK on a year over year basis was the highest I've ever seen recorded by a publicly traded Indian airline after reviewing more than four years worth of financial results. What created this excellent revenue performance was actually what one would call a "perfect storm," of events during the first quarter.

On one side, you had LCC rivals IndiGo and GoAir not significantly expanding their domestic operations during the quarter (on an aggregate basis), as IndiGo set its sights on international growth and GoAir performed a pair of aircraft swaps and route swaps (bringing Chennai online into the network). Simultaneously, Kingfisher was entering into its "death by a thousand cuts routing," chopping off most of its low cost Kingfisher Red network as well as its regional network of destinations with ATR 72 turboprops. Given that Jet Airways was happy to benefit from the higher fares as well, this created a situation for SpiceJet where its chief LCC competitors were showing unusual capacity restraint, and they were entering into monopolies or duopolies on a lot of their Q400 regional routes thanks to Kingfisher's cuts. Add in the fact that the initial Q400 operations from Hyderabad, Chennai and the like have begun to mature (build up a customer base) and the recipe was set for unprecedented unit revenue growth at SpiceJet.

While the revenue gains were important to the result (it can never hurt to record 55.1% top-line revenue growth), SpiceJet's results were unquestionably supported by the moderate decline in fuel prices over the quarter. In fact, their fuel costs on a per available seat kilometer (ASK) basis (given ASK growth of 16.7% in the quarter) increased just 13.4% YOY (the smallest increase of the last 5 quarters), which finally allowed SpiceJet's revenue and traffic growth to "catch up" to previously runaway fuel price inflation. However, it was troubling to note that SpiceJet's non-fuel cost per available seat kilometre (CASK) was up more than 30.7% YOY. While this can be partly attributed to the acquisition and leasing costs of 5 more Q400s, as well as to the large increase in fees at Delhi Airport by airport operator GMR since SpiceJet has more exposure (proportionally) to Delhi Airport than the rest of India's airlines. But it is the more than 40% rise in the accounting category "other operating expenses" that is most troubling. Despite multiple efforts, SpiceJet did not provide any explanation of the costs in this category.

SpiceJet must keep its costs down, even in a favorable revenue environment like we have today. Revenue gains are typically temporary, and if any new entrant comes into the Indian market, then we are back to square one with capacity discipline (or in that case lack thereof). But low costs are low costs regardless of the competitive environment, and they are critical to SpiceJet's continued financial success.

Looking forward for SpiceJet, it will be interesting to see if they can sustain this kind of revenue growth and profitability moving forward. But even this one profitable quarter has made SpiceJet a hot commodity for potential foreign direct investment (FDI) assuming government approval. With SpiceJet set to add service abroad over the next few quarters, perhaps they can improve these revenue and profit figures even further. SpiceJet, for the time being, is the best performing Indian airline (if only by default because IndiGo's results are not clear. Congratulations are due to the fine team at SpiceJet who did not allow a temporary lapse into unprofitability in FY 2011-2012 taint the overall business, and who had the vision to take on India's airline "giants" in the regional airline field.

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