While cash infusion could help, but it will still be rough weather for Jet

competitive pricing and high-cost base will mean continued losses in the short term

The stock of Jet Airways gained 5 per cent during trade on Tuesday due to lower crude oil prices as well as plans to bring in equity partners into the company. 

In addition, the company is also looking at selling six of the 16 aircraft it owns and a stake in the loyalty programme. 

Company deputy chief executive officer Amit Agarwal indicated, in an investor call, that investment bankers have been mandated to secure investors for its loyalty programme and equity infusion. 

While he declined to comment on specifics of discussions with the Tatas on stake sale, calling them speculative, he said the company is confident of its turnaround plan, aimed at cutting costs and bringing down gross debt of Rs 84 billion. While cash infusion should help the company, investors should not expect a quick turnaround given that the squeeze in revenues and surge in costs are unlikely to go away any time soon. Even as the sector moves into what is perceived as a busy season, pricing continues to remain cut throat and has hit Jet Airways the most, given the debt and a high cost base. 

With the Rs 12.6 billion loss reported in the September quarter, the company has over the last three quarters posted accumulated losses to the tune of Rs 36 billion at the consolidated level. Widening losses and the strain on cash have resulted in delays in salaries and vendor payments. 

The airline has defaulted on payments to lessors and is yet to chalk out a complete winter schedule till March. The first task of the company, according to analysts, is to bring down debt as over 60 per cent is dollar denominated. A weak rupee (down 15 per cent since the start of the year) is adding to the debt burden. With the company expected to report losses at the operating profit level, an estimated annualised interest burden of Rs 10 billion will not help.

However, the bigger problem even for a combined entity (if a merger with Vistara goes through) will be on the operational front. An analyst at a domestic brokerage says, “The problem for a combined entity is that the outlook remains hazy and losses for the entity would deteriorate before they get any better.” Vistara incurred accumulated losses of Rs 9.5 billion over FY17 and FY18.

With crude oil prices up significantly, combined losses of the two would require significant cost cutting, debt reduction and yield improvement to make things work. Garima Mishra of Kotak Institutional Equities believes that post Jet acquisition, it is likely that Vistara would want to drive profitability of the combined entity upwards, and will probably not want to compete aggressively on pricing. 

While this could be the case in theory, in practice the sector is hardly prepared for logical pricing. Market leader IndiGo is adding capacity furiously and would require to keep load factors high to spread its costs and improve efficiencies. In fact, Jet Airways is also looking at 8-10 per cent annual growth in capacity over the next five years.

High capacity addition, competitive pricing and rising costs are why Hetal Gandhi, director, CRISIL Research, expects operating margins for the sector to decline to negative 5-7 per cent in FY19 compared to 8-9 per cent estimated for FY18.

Finally on the cost front, while the company has been bringing down its non-fuel unit costs, it has still a long way to go as compared to the low-cost market leader on this front. For the September quarter, Jet’s non-fuel unit costs at Rs 3.09 are 26 per cent higher than IndiGo. This gives the low-cost carriers, who are in a better financial position and have a lower cost base, leeway to keep prices competitive and increase market share at the cost of the second largest player. 

Investors ought to be cautious as improvement in Jet Airways is some time away and a 70 per cent fall in stock price from the start of the year may not be enough to warrant an investment, given the repair work needed to put the company back on its feet.