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Perspective

Jet set go?
Jet posted its best standalone quarterly profit in 9 years. Can it maintain altitude?

Himanshu Kakkar

The stock market gave a thumbs up to Jet Airways on Thursday, as it decided to merge its loss-making no-frills subsidiary — JetLite. The stock went up 4% during the day but has since given away that gain and more. JetLite was bought as Sahara Airlines in April 2007 for ₹1,450 crore. It was supposed to herald Naresh Goyal’s entry into the then unfolding low-cost carrier market. But that it did not work out as planned, and in August last year, Goyal decided to change the flight plan as the red ink was leading to turbulence.

Jet tried becoming an IndiGo and SpiceJet, alongside a full-service carrier for too long, but didn’t succeed. So Goyal went back to the basics and focus on being a full-service carrier. And its a key element of a three-year turnaround scheme that Goyal and team started implementing in 2014. “The merger will not only further strengthen the single brand initiative but will also result in more focused operational efforts, realising synergies in terms of compliance, governance, administration and costs,” said a Jet Airways spokesperson when Outlook Business quizzed him on how the merger will help Jet in its turnaround plan.

There seems to be some cause for cheer. In Q1FY16 Jet posted a profit of ₹226 crore in Q1FY16 compared to loss of ₹258 crore in Q1 FY15. Those numbers were reassuring as Jet has posted losses in every year and most quarters since FY06. The management is hard at work but fuel prices, which accounts for 40% of costs, are at a multi-year low, and that explains Jet’s quarterly recovery. But is that all or is the airline truly regaining altitude? Mahantesh Sabarad, deputy vice-president, research at SBICaps Securities feels, “Fuel costs have naturally helped.

But if you look at their fundamentals, the cost structure and their operations are far better. There has been a substantial improvement in aircraft utilisation and reduction in the maintenance cost over the quarter. Even their interest costs have been falling steadily as we noticed over the quarters”.

The company managed a life-saver in the form of Etihad Airways in 2013, which picked up a 24% stake in the airline.  Jet’s average aircraft utilisation grew by 11.5% to 12.7 hours in Q1FY16 compared to 11.4 hours in Q1FY15. The combined load factor (indicates efficiency of filling seat capacity) of Jet and JetLite, too, rose from 64% in July 2014 to 80% in July 2015 as per DGCA. Sabarad finds it reassuring and says, “for a full service carrier to draw such load factor is quite unusual in India.”

However Kapil Kaul of CAPA doesn’t see a turnaround yet. “Jet’s Q1 performance was significantly positive but largely driven by robust International operations, low fuel prices and significant other income. Jet continues to make progress in its turnaround efforts but the domestic business is critically placed. Service levels have improved but on-time performance remains a big challenge”.

On the low cost front, JetLite too staged a comeback with posting ₹4.7 crore profit in Q1FY16. But analysts say, JetLite’s size has already been reduced to a third over the years. Rashesh Shah, analyst at ICICI Securities’ wrote in his report earlier this year, “Not surprisingly Jet Airways is focusing on the more profitable international routes. Barring the March quarter in FY15, operations abroad have seen healthy margins (June quarter at 7.2 per cent) at the operating level. Domestic operations have not made money at the operating level for the past seven quarters."

In an analyst call done by Jet’s CEO and CFO to discuss Q4FY15 results, they mentioned that the share of Jet Airways’ domestic revenue to total revenue was 40.6% for Q4. The total domestic revenue stood at ₹2,136 crore up by 5.4% on a year-on-year basis. In comparison, the international revenue’s share was 59.4% for the quarter. A quarter back ICICI Securities' report pegged the share at 53%. International revenues at the end of Q4FY15 stood at ₹3,124 crore. Unlike the domestic sector, international revenue went up by 17.8% as compared to Q4 of last year.

Internationally, Jet has been aggressively pursuing code-sharing agreements, which allow an airline to book passengers on its partner airlines, enabling seamless travel. In August, it partnered with Virgin Atlantic and South African Airways. It’s code-share traffic surged by 51 % with 487,921 passengers carried in Q1 FY16. No wonder, it has been often labeled as becoming a feeder for Etihad. Naresh Goyal vehemently denied the feeder label in a post-AGM press meet last month but the Etihad management does admit the boost that Jet is providing.

A Gulf News story dated August 14, 2015 claimed that India’s Jet Airways is generating more revenue and passengers for Etihad Airways than any other airline the Abu Dhabi carrier holds stakes in. Etihad president and chief executive, James Hogan was quoted as saying, “Jet Airways is now our number one equity partner for revenue and passenger contribution on Etihad Airways. India is now Abu Dhabi’s number one source market for international visitors.” Etihad owns stakes in seven other airlines including Italy’s Alitalia, Virgin Australia and Ireland’s Aer Lingus.

In the first six months of 2015, Etihad transferred more than 2.35 lakh passengers onto Jet’s network into India through its code-share partnership, with Jet providing 1.82 lakh passengers onto the Etihad network. Kaul says, “International operations are driving Jet’s turnaround efforts but a domestic operations turnaround looks unlikely in next few years. So, I see Jet remaining challenged even though performance will improve further in the near term”. What more does it need to do then? Kaul feels that domestic operations is and will remain a barrier to turnaround, “Jet needs significant capitalisation and both partners need to be aligned strategically," he sums up.

Jet’s spokesperson believes that continued improvement in financial performance during the recent quarters gives them confidence. “It is a testimony that the three-year turnaround plan is gaining momentum”. Investors must be equally hoping that Goyal has lined up a smart strategy for the domestic market and merging JeLite with Jet is just the beginning.

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