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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Kingfisher Airlines Q3 FY2012 financial analysis

The past few days have been admittedly brutal for Kingfisher. Whether it was suspending flights entirely from Kolkata, or dealing with a particularly critical journalist, the events that befell Kingfisher stopped just short of catastrophic.

The immediate pressure appears to have been relieved by loans from State Bank of India, which will go further onto the hook for Kingfisher to the tune of Rs. 1,500 Crore, apparently on the premise that India’s government may finally release its vice-like grip around the Indian airline sector’s neck.

Given this rush of news from Kingfisher, we felt that it would be helpful to analyze the carrier’s Q3 FY 2011-2012 results, and in highly disappointing results, Kingfisher has outdone its domestic rivals in losing a ton of money, Rs. 442.6 Crore, which is up from Rs. 253.7 Crore in the year prior.

• Revenue growth for Kingfisher domestically was very weak, falling 3% to Rs. 1,184 Crore from Rs. 1,227 Crore
• International Revenue growth was even worse, falling 9% to Rs. 363 Crore from Rs. 398 Crore
• Passengers carried fell 15% to 2.63 million; antithetical to general market trends.
• Domestic Passenger Yield fell 3% to Rs. 3,804 despite capacity discipline.
• International Passenger Yield rose 5% to Rs. 10, 864
• Domestic absolute non-fuel costs fell 17.8% driven primarily by a large decrease in “Other Operating Expenses” (to a large extent aircraft maintenance; resulting in just 25-35 Kingfisher aircraft currently operating out of a fleet that numbered 64 in October 2011 and once had as many as 80 aircraft), while absolute fuel costs jumped a relatively modest 37%; on a capacity decrease of 5%, a 14% fall in number of flight hours flown, and a 15% decrease in number of departures, perhaps due to the drawdown of the ATRs.
• International absolute non-fuel costs were down 1.7%, driven primarily by cost discipline in employee remuneration (in certain cases not paying salaries at all),” while absolute fuel costs jumped 37%; on a capacity decrease of 4%, a 2% decline in number of flight hours flown, and a 6% increase in number of departures that was driven by a shift in capacity towards short-haul international markets.
• Domestic seat-kilometer revenues were up 2%, while seat-kilometer costs were up 9%; seat-kilometer costs excluding fuel were down 7%.
• International seat-kilometer revenues were down 5%, while seat-kilometer costs were up 22%; seat-kilometer costs excluding fuel were up 6%.
• Domestic seat factor was 79.1%, international 68.2%
• Interest expenditures on debt were up 2.2%% YOY to Rs. 347.2 Crore, which thanks to revenue declines represents a crippling 25.9% of total recenues
• EBTIDAR Profit (which measures operating results before taxes, interest, depreciation , loan amortization, and rents) of Rs. 125 Crore (Rs. 284 Crore in Q3 10-11), EBITDAR profit of Rs. 161 Crore on Domestic (Profit of Rs. 225 Crore in Q3 10-11), and EBITDAR loss of Rs. 36 Crore on International (Rs. 59 Crore profit in Q3 10-11)
• Kingfisher deferred almost 213.4 Crores worth of losses into future taxes under “Deferred Tax Asset”
• There was a onetime special item of almost Rs. 79.25 crore that contributed to the loss.

Observations:

Domestic:

Almost paradoxically despite their continual shrinkage in the domestic market, Kingfisher has continued to post solid, if unspectacular operating figures in the domestic market. Remember, Q3 includes most of the November flight cancellations and the resultant issues, and yet despite these effects and huge capacity increases from the other carriers, they managed to prevent yields from falling off a cliff domestically, riding this decent revenue performance to yet another EBITDAR profit, which beat both Jet Airways and SpiceJet (in all likelihood Air India and Go Air) in terms of margin.

This EBITDAR profit was also enabled by discipline in employee remuneration, which was of course achieved in large part by simply neglecting to pay employee salaries. It is almost tragically comical that the only carrier to actually listen to my mantra of limiting the rise in employee costs was only able to achieve that by not paying any salaries at all.

The growth in costs was also limited by their approach to maintenance, which was to ground any and all aircraft that they were unable to adequately pay for parts and service for. While this course of action has been met with predictable teeth gnashing and hyperbole from certain members of the Indian press, in our opinion it is far preferable to the scenario where Kingfisher flies planes that are unfit for flight.

The outlook moving forward is sadly far, far worse. Kingfisher will essentially be flying at 55% of its average Q3 capacity in Q4, and domestic and international travelers continue to book away from Kingfisher on even the shortest of flights. These drops in revenue will likely place enough pressure on Kingfisher to swing them to negative EBITDAR domestically in Q4, especially if they are unable to reverse the trend of business traveler and frequent flyer outflow.

International:

Kingfisher’s international results meanwhile, are an illustration and manifestation of the full swath of issues facing Kingfisher. That they managed to keep revenues from tanking after pulling out of high-demand routes to Bangkok, and the increase in passenger yield of close to 5% was probably the last vestige of the respect Kingfisher has from the international business traveler.

That being said, we suspect that on the revenue side, October was unusually strong, November exceedingly weak, before a slight recovery in December that produced the overall slightly positive performance.

But as with the company in whole, these moderately positive trends were unable to outweigh the continuing rise in costs, both fuel, and aircraft lease rentals. Maintenance costs did not fall at the same level as they did domestically, which is indicative of a troubling decision on Kingfisher’s part.

Given that Kingfisher had a pressing need to reduce maintenance costs, it was ultimately necessary to ground certain aircrafts. Yet, what is not clear is why Kingfisher did not choose to ground more of its A330s (4 of 5 remain flying) during the quarter. If they had grounded all 4 aircraft, that could have paid for the maintenance of almost eight A320 family aircraft.

Considering that Kingfisher’s domestic operations are far more profitable, this would have been a far more sensible decision, even if it necessitated the cessation of flights to London and Hong Kong. Kingfisher appears to have made this decision as much for prestige as for economics, and it has certainly contributed to their accelerating losses.

General:

What is Kingfisher’s loss is the other airlines’ gain; Air India with its near-incompetent revenue management system has posted huge gains in January revenues, meaning that Jet Airways is likely to have a very strong (perhaps even profitable) Q4 along with the beleaguered national carrier. If India’s other airlines do not blindly rush to backfill the lost capacity from Kingfisher, these events might even have a positive effect on the Indian market as a whole.

To those who claim that Kingfisher’s losses go beyond the government I agree wholeheartedly but caution that government is still the largest factor. If the sales tax on jet fuel, which ranges from 4-29% in India and nets to about 20% for Kingfisher’s ops, were set to zero, Kingfisher would have more than doubled their EBITDAR profit, and achieved an EBITDA profit (which accounts for rentals) as well as pushed the net loss to closer to Rs. 250 Crore.

Meanwhile the near term prospect for Kingfisher are not great, with the carrier likely to post large losses in Q4 and the full year despite the slight narrowing of losses from Q2 to Q3. The SBI equity has given Kingfisher a small “margin of error” so to speak, it will be interesting to see how well the airline can

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SpiceJet Q3 Fiscal 2012 financial analysis: Q400 operations cushion the loss

The second financial analysis for the third quarter in India is of low fare carrier SpiceJet, who mirrored the performance of the industry by losing Rs. 39.26 crore in Q3 of Fiscal Year 2011~2012 (FY2012).

• Revenue growth for SpiceJet was strong, rising 41% to Rs. 1,175.8 Crore from Rs. 759 Crore
• Passengers carried were up 29.2% to 3.08 million; beating demand growth for the overall industry by about 17%
• Passenger yield grew 9.7% to Rs. 3,816; despite a large increase in capacity
• Absolute non-fuel costs were up 49.7% driven jointly by large increases in employee remuneration, aircraft lease rentals, and maintenance costs, while absolute fuel costs jumped a staggering 90%; on a capacity increase of 32%, a 52.8% growth in number of flight hours flown, and a 60.1% increase in number of departures.
• Seat-kilometer revenues were up 7.2%, while seat-kilometer costs were up 26.8%; seat-kilometer costs excluding fuel were up 14%.
• Load factor slipped 8.8% to 80.1%
• EBTIDAR Profit (which measures operating results before taxes, interest, depreciation , loan amortization, and rents) of Rs. 14.7 Crore (Rs. 22.7 Crore in Q3 10-11), resulting In fall of EBITDAR margin from 27.3% to 12.5%
• Net margin of -3.3% vs. 11.3% in same period last year, but up from -32% in Q2 of this fiscal year

Analysis

Considering that Q3 is typically the best quarter for India’s airlines, this performance from SpiceJet is somewhat disappointing. However, SpiceJet has managed to reverse some of the negative trends from the previous quarter, while displaying some positive trends as well.

Particularly important was that they managed to increase passenger yields despite a huge rise in capacity, both from SpiceJet and the market as a whole. SpiceJet has also managed to outstrip demand growth for the market as a whole. The combination of these two effects really reflects in our opinion, the stunning success of SpiceJet’s Q400 operations, which have achieved better unit revenues and superb loads, and served to prop up SpiceJet’s overall revenue figures.

On the expenditures side, two particularly troubling figures were aircraft maintenance and employee remuneration both of which saw increases that far outstripped the increase in capacity (implying an unnatural rise in costs). The former is probably a direct response to the ever increasing utilization and flying from SpiceJet as well as the additional costs of starting up a Q400 operation and adding a second fleet type, which will be mostly accounted for during Q3.

Meanwhile, the employee remuneration increase is something that India’s airlines apparently just do not understand the necessity of controlling. SpiceJet’s employee costs rose a mind-blowing 82.2% in Q3, and this sort of situation simply is not sustainable moving forward. Employee costs are the single biggest portion of an airline’s expenditures that it can control, and the real story here is that if SpiceJet had limited the increase in employee remuneration to 32%, it would have made a net profit this quarter.

So given this mixed bag of performance in Q3, the main question that remains is should these accumulated losses erode SpiceJet’s net worth as a recent article in the Business Standard newspaper claims they have?

At the moment, I will say no, simply because they have done a good job of minimizing their losses after a disastrous Q2. Moreover, the Q400 has been a fantastic success, and with more of these aircraft on the way in 2012 (plus 15 options), its not hard to see a scenario under which SpiceJet’s losses narrow this calendar year.

India’s legacy carriers still charge an arm and a leg for some short turboprop flights, and SpiceJet’s ability to enter these markets and stimulate them with low fares, especially in light of Kingfisher’s continual draw down in regional capacity, should boost profitability moving forward.

That being said, the fact that SpiceJet has failed to make a profit despite insanely strong (given current market dynamics) revenue performance is another black mark against the poor environment for airlines in India, which continues to strangle this vital sector.

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Jet Airways Q3 2012 financial analysis

Once again, we will be beginning our financial analyses for Q3 of FY 2012 with an analysis of India’s largest airline Jet Airways, who posted a modest net loss of Rs. 101.2 Crore, down sharply from a net profit of Rs. 217.9 Crore in the same period last year.

Q3 is typically the best quarter for Indian carriers, so to see Jet Airways posting a net loss is a bit troubling. Moreover, the negative trends continued to emerge from the last quarter, and were even to some extent under-represented due to one-time “special” revenue gains.

• Revenue growth for Jet Airways domestically was strong, rising 13.3% to Rs. 1,736.9 Crore from Rs. 1,533.5 Crore
• International Revenue growth was similarly robust, rising 11.65% to Rs. 2,202.2 crore from Rs. 1,934.2 Crore
• Passengers carried were up 15.1% to 4.53 million; beating demand growth for the overall industry by about 2%
• Domestic Passenger Yield fell 4.8% to Rs. 4,960; even in spite of a large capacity drawdown by Kingfisher (close to 33%) since November
• International Passenger Yield rose 3.5% to Rs. 13,092
• Domestic absolute non-fuel costs were up 26.6% driven jointly by large increases in employee remuneration, aircraft lease rentals, and “Other Operating Expenses”, while absolute fuel costs jumped a staggering 56.3%; on a capacity increase of 14,1%, a 17.8% growth in number of flight hours flown, and a 23.2% increase in number of departures.
• International absolute non-fuel costs were up 16.8%, driven primarily by an inexplicable 32.2 percent increase in “Other Operating Expenses,” while absolute fuel costs jumped 62.4%; on a capacity increase of 11.8%, a 9.6% growth in number of flight hours flown, and a 11.4% increase in number of departures.
• Domestic seat-kilometer revenues were down 2.7%, while seat-kilometer costs were up 20.3%; seat-kilometer costs excluding fuel were up 10.8%.
• International seat-kilometer revenues were up 5.5%, while seat-kilometer costs were up 29.5%; seat-kilometer costs excluding fuel were up 13.8%.
• Domestic break even seat factor was 86.3%, international 90.9%
• Interest expenditures on debt were down 5.3% YOY to Rs. 237.4 Crore
• EBTIDAR Profit (which measures operating results before taxes, interest, depreciation , loan amortization, and rents) of Rs. 209.9 Crore (Rs. 844.1 Crore in Q3 10-11), EBITDAR profit of Rs. 32.4 Crore on Domestic (Profit of Rs. 348.8 Crore in Q3 10-11), and EBITDAR profit of Rs. 177.6 Crore on International (Rs. 495.4 Crore in Q3 10-11)
• Positive Impact of Rs. 179 Crore due to currency fluctuation
• Net Revenue of Rs. 76.1 Crore on “Sale and Lease back of engines
• Net Profit of Rs. 102.9 Crore on “Sale of Development rights of BKC Property”

Observations:

Domestic

Despite the drawdown of capacity by Kingfisher, increased capacity from the other low cost carriers in the domestic market (chiefly SpiceJet and IndiGo) ensured that industry capacity grew ahead of demand by about 5% yet again (17% vs.12%). In the long run, this is an unsustainable situation, and should end pretty soon, as 4 of India’s 6 carriers face severe fiscal pressures. These fiscal pressures combined with a weak Indian rupee and a more sluggish domestic economy to drop yields in Rupees by 4.8%, but dollar yields by 19.9%.

Under these parameters, Jet’s performance on the domestic sector was once again quite poor, especially in terms of holding down non-fuel costs. Allowing such costs to appreciate 10.8% helped drive Jet’s break even seat factor up to 86.3%, and the carrier must take steps to alleviate such overruns if it is to succeed in returning to profitability. One of the chief culprits was employee remuneration, which shot up 38.9%, despite just 14.1% growth in capacity. In volatile or even high fuel environments, employee costs are a huge variable which must be properly controlled.

Perhaps in a related move, Jet has joined Kingfisher and Air India amongst others, in deferring payment of January salary to employees. Whether this is the first in a long line of missteps or simply a temporary hiccup remains to be seen, but the fact of the matter is that Kingfisher and Air India both took the same step on their paths to financial ruin.

The 29.9% rise in aircraft lease rentals is indicative of the rising costs of domestic expansion. The company added 4 aircraft (on average) vs. the same quarter last year, and these costs were reflected by the aforementioned number. How much longer can Jet afford to finance domestic expansion for not-so-great returns, and should it consider cutting back, even as it attempts to add 17 more Boeing 737NGs to its fleet growth plan.

Ultimately, the “dirty little secret” is that Jet would have been profitable domestically, if it had limited growth in absolute non-fuel expenditures to the same as capacity growth, or 14.1%. Poor cost control, even more so than yield pressure, drove Jet’s unprofitability within India this quarter.

International
It appears that Jet will once again be the most profitable Indian carrier on its international operations on an EBITDAR basis (though IndiGo likely has higher margins on flights abroad). But Jet has ascended to this position almost by default, given Kingfisher’s tribulations, the mess at Air India, and still limited operations at the low cost carriers.

However, unlike the previous quarter, Jet failed to maintain non-fuel cost discipline, which given the 62.4% rise in absolute fuel costs, was a recipe for disaster causing Jet’s net loss on International operations to actually rise above that of the domestic sector, primarily due to large increase in the cost of depreciation (understandable given that the fleet is beginning to age) and interest. They kept yields in Rupees relatively constant, but the weak rupee all but wiped out those gains.

Jet’s international presence on the long haul now consists primarily of mature (in service for at least two years) markets and we have yet to see the consistent appreciation in yields that typically follows market maturation. Jet plans to add ten aircraft worth of A330 flying in addition to re-integrating the remaining five 777-300ERs into the fleet over the next 2-3 years, and that casts uncertainty on their ability to sustain the 5-6% fare increases required to offset rising fuel costs.

However, as with the domestic side, the unprofitability was ultimately caused by Jet’s inability to get its non fuel costs under control. Here the primary culprit was the undefined “Other Operating Expenses” which rose 32.2% vs. capacity growth of 11.8%. We have contacted Jet's investor relations seek clarity, but despite many follow-ups they refuse to respond.

The domestic side also saw a 48.9% rise in this category. The net sum of all these effects was a pretty handy net loss internationally (the Rs. 20 Crore difference stemmed from depreciation and interest), but a still decent EBITDAR of Rs. 177.6 Crore. Whether Jet can keep its non-fuel costs down will be the primary determinant of their performance moving forward internationally, though continued pull-downs of capacity by Kingfisher would certainly help as well.

General

In combination, the positive revenue effects of the currency fluctuation, the sale of property, and sale and lease back almost combined to mask the true extent of Jet’s financial issues, just as the currency fluctuation overestimated Jet’s true economic losses in the previous quarter. Neither currency fluctuations nor property sales are stable sources of income, but IndiGo has been making profits on the back of sale-leaseback for some time now, and perhaps Jet can translate this into a frequent income source.

For the moment, we are choosing to maintain our positive long term outlook for Jet. By integrating their two low cost brands late in Q4, they should be able to reduce overhead if the merger is done correctly. However, we will be taking a very close look at the Q4 and full year results, which will provide further indication as to whether Jet is slipping into a bad financial cycle.

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