Jet Airways: Weathering the storm

The airline survived rising competition and predatory pricing to post good results

Given the turbulence in India's aviation industry, the market was not expecting Jet Airways to post great results for the March 2007 quarter.

But a five per cent rise in blended yields, savings on commissions and advertisements, and a marginally better blended passenger seat factor of 72.6 per cent have helped the airline turn in surprisingly good numbers,including a small net profit of Rs 88 crore, for the quarter.

With the airline's international operations turning profitable "" almost every route makes money - Jet has posted an EBITDAR margin (earnings before interest, depreciation, tax and rentals) of 23.2 per cent, a jump of 400 basis points y-o-y.

However, despite the industry adding lower capacity during the quarter (36.5 per cent y-o-y), the airline was not able to bring down the share of discounted tickets which remained high at 70 per cent. This restricted the top line growth to a modest 23 per cent y-o-y at Rs 1,978.2 crore.

For the full year, which has seen severe competition leading to predatory pricing and could result in collective losses for the industry of between Rs 1,650- 2,000 crore, Jet has posted a loss of Rs 182 crore.

With the passenger load factor falling by 200 basis points to 70 per cent, the EBITDAR margins for FY07 were lower by about 1000 basis points y-o-y at 14.3 per cent. Revenues increased by 25 per cent y-o-y to Rs 7,057.7 crore.

The highlight of the results is that the company's international operations are gaining momentum. International revenues account for a fourth of Jet's total revenues at present, but could contribute half of Jet's top line in less than two years.

This year, the airline plans to start operations to the US, Canada and the Gulf and should be able to gain market share with some competitive pricing and good service.

However, the launch of these new routes would make the international operations unprofitable for about a year, keeping the bottom line under pressure.

Also, till the operations of Air Sahara are turned around-which could take at least six months-Jet cannot be said to be out of the woods.

At Rs 808, the stock appears to have priced in most of the near-term upsides, especially better yields resulting from consolidation in the industry. The company plans to make a rights issue to raise $400 million and that could result in an overhang of the stock.