Jet Airways: Lower crude oil prices key

Merger of Jet Lite, Jet Airways a positive, but lower costs important for sustainable earnings growth

The decision of Jet Airways to merge its 100 per cent subsidiary, Jet Lite, with itself is in line with the company’s focus to move away from a dual brand, duel offering (full-service as well as low cost) system to a single brand and its goal of offering a seamless experience to the customer.

Analysts said the decision was on expected lines. While the stock was up 1.8 per cent on the news, analysts have not revised their targets and would like to await cost and integration benefits to come through before re-rating the scrip.

Though the merged entity will continue to operate under two permits, the positioning, according to analysts, is that of a full-service carrier.

While the restructuring has been at the domestic level, the focus for Jet is clearly international routes which are more profitable and currently contribute 55 per cent of revenues. However, growth in recent months has largely come from the domestic operations (up 20 per cent in June’15 quarter), while international growth has been at just under 10 per cent. Given Jet’s international focus, expect the 55 per cent metric to move up going ahead. While cost synergies will help, the key factor, according to analysts, is the way crude oil prices behave.

Any further increase in prices would hurt the revenue. Earlier, given competitive pricing and higher crude oil costs, airlines required higher load factor to make money. But lower prices has seen the breakeven number for Jet Airways in the June quarter come at 75 per cent from 86 per cent in FY15 and 91 per cent in FY14.

The other area of concern is aggressive pricing, which, analysts say, is likely to stay given high load factors.

  Lower fuel costs has also helped improve profits for Jet, which enabled it to bring down its gross debt by Rs 990 crore in June quarter to Rs 11,000 crore. Given the Rs 1,500 crore of cash and Rs 300 crore of quarterly operational cash-flow, expect debt to fall further.

Favourable macro and operational parameters of airlines have been good. Led by strong passenger growth and lower fares brought on by fall in oil prices, load factors at about 84 per cent in H1’CY2015 are at multi-year highs. Passenger growth was a healthy 21.5 per cent during April-July’15 versus 16 per cent in FY15. Clearly, lower fuel price and Jet’s ability to improve financials hold key.