Jet Airways Q1 FY2013~14 performance analysis - part 1 - Financials

by Vinay Bhaskara and Devesh Agarwal

Earlier this week, Mumbai based Jet Airways announced a net post-tax loss of Rs. 355.4 Crore (US $ 59.8 million) for the first quarter of Fiscal Year 2014, reversing from a Rs. 24.7 Crore net profit during the same period a year prior.

Total revenues declined a whopping 12.3% to Rs. 4, 064.4 Crore on a 15.0% decline in revenue passengers to 4.13 million, and an 11.3% capacity decline measured by available seat kilometres (ASKs) to 9.13 million ASKs. Seat factors cratered to 78.4% from 82.7% year-over-year (YOY).

Jet Airways recorded a large operating loss of Rs. 111.2 Crore in Q1 versus an operating profit of Rs. 223.5 Crore the year, translating to an operating margin of -2.8% versus +4.9% in Q1 of Fiscal Year 2013.

The nominal average fare paid by Jet Airways customers rose 2.3% to Rs. 8,278, but fell 4.2% on an inflation adjusted basis. Revenue per available seat kilometer (RASK) fell 0.8% year over year to 3.60 Rupees from 3.63 Rupees a year prior while cost per available seat kilometer (CASK) increased 8.7% to 3.92 Rupees. CASK and RASK are used to adjust revenue and cost figures for segment length.

Looking segment by segment, Jet Airways’ full service domestic operations once again performed abysmally, with a net pre-tax loss of Rs. 263.0 Crore versus a profit of Rs. 16.8 Crore the year prior. Operating margin domestically was an astoundingly poor -7.9% versus +6.8% a year prior – a swing of 14.7 percentage points! Domestic revenues fell 13.1% year over year to Rs. 1763.5 Crore, and while domestic RASK actually increased by 0.9% (down 3.3% on an inflation-adjusted basis), it was more than offset by a 17.6% increase in CASK.

Domestic operations continued to suffer from the poor Indian macroeconomic environment, as growth for Fiscal Year 2014 is projected to fall to 5.5% by the Reserve Bank of India. India’s growth prospects seem doveish for the next few years and airline will see growth plateauing over the next few months.

Importantly, fuel is not a major contributor to Jet Airways’ woes, as moderating fuel prices around the globe in Q1 meant that fuel cost per ASK fell 7.5% year over year. Despite the slowing economy, domestic capacity amongst Indian carriers was up 0.1% in Q1 and passenger demand rose 1%.

Low Cost Carriers (LCCs) SpiceJet, GoAir, and IndiGo have continued their rapid expansion despite slowing Indian growth, which has put increased fare pressure on Jet Airways at the lower end. At the same time, the expected fare bump amongst high yield business travellers and first class passengers after the demise of full service rival Kingfisher Airlines largely has not materialized thanks to aggressive pricing on the part of beleaguered national carrier Air India. Despite spotty operational reliability, LCC SpiceJet has continued to profit (Rs. 55 Crore in Q1 of FY14) and its maturing Q400 operation is taking away business from Jet Airways’ regional ATR operations, especially in the South.

International financial performance also weakened year over year, falling to a Rs. 92.4 Crore pre-tax loss from a Rs. 16.5 Crore pre-tax profit the year prior. Revenues fell 11.7% to Rs. 2300.9 Crore as Jet Airways continues to restructure its international operations in advance of the implementation of the newly designed Jetihad partnership with Etihad Airways. Revenue per available seat mile fell 2.1% (7.8% on an inflation adjusted basis), while cost per available seat kilometer grew 2.3%. The operating margin on international operations fell to 0.8%, from 5.6% in Q1 of Fiscal Year 2013.

Despite all the hubbub and media drama surrounding Jet Airways’ international operations, they are actually the better performer within the company on an operating and net basis. International operations came under some pressure thanks to the continued de-valuation of the Indian Rupee since many costs on international operations are accrued in US dollars. That pressure, which contributed nearly a third of Jet Airways’ losses in Q1 at Rs. 134.3 Crores, looks like it should subside to some degree as the Indian government is taking steps to increase in-flow of US dollars.

Bulk of Jet Airways' A330-200 fleet idle at New Delhi

The airline withdrew from many international routes like Mumbai Johannesburg, Chennai Brussels, Brussels New York JFK, and New Delhi Milan. The contraction in operations led to a severe under-utilisation of Jet Airways’ wide body fleet, especially the Airbus A330-200s, (as captured by Devesh Agarwal at New Delhi IGI airport), which led to a Rs. 128.2 Crore adverse impact on finances.

During the analysts earnings call, Jet Airways management indicated that the airline had already leased two A330s to investor Etihad Airways PJSC of Abu Dhabi, and is "close to signing" a deal with another west Asian carrier for five A330s. So the cost impact will reduce in the quarters moving forward.
 

During the call, the airline announced “load factors for the North American routes were at 79.1%, the UK routes were at 84.1%, Asian routes were at 82.1%, Gulf routes were at 83.4%, SAARC routes were at 75.1%.” However, thanks to its contraction on long haul routes, Jet has been unable to capitalize on recovering Western economies in the United States and in the European Union. Still, the outlook moving forward for the international operations. from a purely financial perspective (ignoring strategic considerations), the feeder operation with Eithad, which appears likely to be Jet Airways’ plan as the carrier undertakes a 10 year network planning study, is likely to return Jet to profitability on its international operations at least.
But the domestic operations remain challenging. In our opinion, from a financial perspective, Jet must solve its lagging domestic revenue and market share before the company as a whole can return to profitability. Structurally, the debt load facing Jet Airways, including US $300-400 million in high-cost shorter term debt, is the major challenge. Finance charges stood at Rs. 234.1 Crore in Q1, and with Jet Airways recently committing to order 50 737 MAX, as per a report in the Live Mint, the capital expenditures plan over the next 10 years only looks set to exacerbate that.

Stay tuned for Parts 2 and 3 of our analysis coming later this week, covering JetLite results, analysis of fleet and network plans, and a plan to tackle the debt load.

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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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