Q1 results: Jet Airways faces headwinds, struggles to control the flight

Jet Airways, which reported a muted June quarter performance, faces further headwinds given a seasonally weak September quarter, pricing pressures, and a weak balance sheet. On the operational front, the airline is trailing peers on both the passenger load factor (PLF) as well as profitability given costs are at least 25 per cent higher than low-cost competitors. 

While its PLF is close to 80.4 per cent, peers IndiGo and SpiceJet have reported PLF higher by at least 10 percentage points. Higher competition reflected on the unit revenues that were down 3.9 per cent over the year-ago period at Rs 4.10, this was enough to cover the sharp rise in unit costs that were higher by 8.7 per cent at Rs 4.77. The increased costs were due to higher fuel, maintenance, and interest made worse by a sharply depreciating rupee. 

Though its pricing reflected on the unit revenues that were up 3.9 per cent over the year-ago period at Rs 4.10, this is not enough to cover the sharp rise in unit costs that were higher by 8.7 per cent at Rs 4.77. The increased costs were due to higher fuel, maintenance, and interest made worse by a sharply depreciating rupee. 

Though the management believes it has the levers to improve its revenue graph, competition continues to be tough, and chances of an improvement look remote. Companies are focusing more on market share, even when profitability has been impacted due to a high cost environment. 

The other worry is capacity additions. 

Before the year is out, SpiceJet is planning to add 11 Boeing 737 MAX and four Q400 aircraft, which implies a capacity addition of 26 per cent. Arvind Sharma of Citi Research believes SpiceJet — currently operating at 94 per cent load factors and a 12.3 per cent market share in the domestic sector — could cut fares when the new capacity gets added. 

This would not be good news for Jet, which is struggling to keep both its load factors and improving yields.  

The more important parameter that the Street will keep an eye out for is the balance sheet position. 

The company indicated it had a net debt of Rs 73.64 billion at the end of the June quarter. Given cash losses of Rs 10 billion a quarter, this number is only likely to increase. 

While a $300 million (Rs 21 billion) cash flow, both on account of leasing-related incentives as well as bank borrowing, could fund its operations in the near term, the company will have to quickly find additional avenues that could include its Jet Privilege its frequent flyer programme. 

This is because there are debt repayments to the tune of Rs 21 billion outstanding in the current fiscal. 

Analysts say given the pressure on revenues and the macro situation unlikely to improve any time soon, the company has its back to the wall due to the debt pile.