 "Jet Airways: On course to improved performance")
Expectations of a further fall in fuel costs and a rise in passenger growth has seen the Jet Airways stock gain 25 per cent since the start of October.
The seven per cent fall in jet fuel prices this month (11 per cent since August) and expectations of further cuts in both aviation turbine fuel and local taxes would be a major positive for Jet and its smaller listed peer, SpiceJet. This should aid the airlines in turning profitable, as jet fuel cost was about 40 per cent of net sales in FY14.
The other positive for the sector is the higher passenger volumes in September and October. The number being flown has increased 18-27 per cent year-on-year, boosting the April (when the financial year began) to October growth number to nearly 14 per cent. Volume growth between April to August was 10 per cent.
As the December quarter is seasonally the strongest, lower fuel costs are likely to improve the profit. However, as in the past, competition and higher supply are the biggest challenge for Jet and SpiceJet, and can negate any cost benefits. What continues to be a cause for concern, according to HSBC analysts, is that pricing indiscipline in a highly fragmented and competitive market could offset fuel cost gains.
Though Jet turned profitable in the September quarter, (first quarterly profit of Rs 70 crore since the December quarter of 2012-13), the improvement was largely due to the sale of its frequent flyer business to Etihad. The company had a loss of Rs 891 crore in the same quarter a year before.
The improved performance was also due to higher yields (up six per cent), lower costs (down five per cent) and better utilisation. The operational performance would have been better but for Jetlite, which fared worse than the standalone entity. Jet fuel as a percentage of sales remained constant, however, at 39 per cent on a sequential basis (down 400 basis points year-on-year) and analysts believe lower fuel costs will start reflecting from the December quarter.
A 15 per cent fall in interest costs also helped improve the year-on-year bottom line. Jet's board of directors recently approved raising long-term funds of up to $300 million via redeemable preferential shares or non-convertible debentures. Raising of additional funds (likely from partner Etihad) is expected to strengthen its financials and help restructure its debt, of just under Rs 10,000 crore.
Like Jet earlier, auditors have again raised doubts about the ability of SpiceJet to continue as a going concern and highlighted delayed payments to vendors. SpiceJet ended the first half of 2014-15 with a negative net worth of Rs 1,493 crore and loans of Rs 1,507 crore. The company, however, indicated it was looking at recapitalisation as a first step to turn around. The market remains cautious and SpiceJet’s stock has lagged, gaining about 13 per cent since the start of October.
Jet has prepared a strategy to return to profitability by FY17, on the back of an expanding international presence (which enjoys higher margins), a rebranding exercise (JetKonnect phased out from December 1) and capacity rationalisation. Edelweiss analysts believe the focused expansion in international routes, single brand strategy, synergies from the Etihad deal and similar configuration in planes should help Jet deliver better performance.
The seven per cent fall in jet fuel prices this month (11 per cent since August) and expectations of further cuts in both aviation turbine fuel and local taxes would be a major positive for Jet and its smaller listed peer, SpiceJet. This should aid the airlines in turning profitable, as jet fuel cost was about 40 per cent of net sales in FY14.
The other positive for the sector is the higher passenger volumes in September and October. The number being flown has increased 18-27 per cent year-on-year, boosting the April (when the financial year began) to October growth number to nearly 14 per cent. Volume growth between April to August was 10 per cent.
As the December quarter is seasonally the strongest, lower fuel costs are likely to improve the profit. However, as in the past, competition and higher supply are the biggest challenge for Jet and SpiceJet, and can negate any cost benefits. What continues to be a cause for concern, according to HSBC analysts, is that pricing indiscipline in a highly fragmented and competitive market could offset fuel cost gains.
Though Jet turned profitable in the September quarter, (first quarterly profit of Rs 70 crore since the December quarter of 2012-13), the improvement was largely due to the sale of its frequent flyer business to Etihad. The company had a loss of Rs 891 crore in the same quarter a year before.
The improved performance was also due to higher yields (up six per cent), lower costs (down five per cent) and better utilisation. The operational performance would have been better but for Jetlite, which fared worse than the standalone entity. Jet fuel as a percentage of sales remained constant, however, at 39 per cent on a sequential basis (down 400 basis points year-on-year) and analysts believe lower fuel costs will start reflecting from the December quarter.
A 15 per cent fall in interest costs also helped improve the year-on-year bottom line. Jet's board of directors recently approved raising long-term funds of up to $300 million via redeemable preferential shares or non-convertible debentures. Raising of additional funds (likely from partner Etihad) is expected to strengthen its financials and help restructure its debt, of just under Rs 10,000 crore.
Like Jet earlier, auditors have again raised doubts about the ability of SpiceJet to continue as a going concern and highlighted delayed payments to vendors. SpiceJet ended the first half of 2014-15 with a negative net worth of Rs 1,493 crore and loans of Rs 1,507 crore. The company, however, indicated it was looking at recapitalisation as a first step to turn around. The market remains cautious and SpiceJet’s stock has lagged, gaining about 13 per cent since the start of October.
Jet has prepared a strategy to return to profitability by FY17, on the back of an expanding international presence (which enjoys higher margins), a rebranding exercise (JetKonnect phased out from December 1) and capacity rationalisation. Edelweiss analysts believe the focused expansion in international routes, single brand strategy, synergies from the Etihad deal and similar configuration in planes should help Jet deliver better performance.