Jet Airways

After a long time in the wilderness, the Indian aviation sector has staged a comeback over the past six to nine months, primarily on the back of a growing economy and improving industry dynamics. Jet Airways, with the largest share in the domestic market, has been a key beneficiary.



A lot of things are going right for the company — it has turned bottom-line positive, improved its load factors significantly, and increased its market share. Not surprisingly, the stock has outperformed the Sensex with a 88 per cent return over the past year. The current market price of Rs 819 (translating into an EV/EBITDA of 19 times (FY10 consolidated EBITDA) seems to have factored in most positives, at least for the near to medium term.

Also, while Jet may well improve its performance, it continues to face headwinds. The very high leverage , recent roadblocks to fund-raising plans, and risk of resurgence in fuel cost, may yet dent profitability. Investors need to watch for concrete progress on Jet's debt restructuring exercise to determine the direction of the wind for the stock.

Strong comeback

After being in the red for several consecutive quarters, Jet Airways has been turning in net profits for the last three quarters. The company has been able to capitalise on an improving demand environment, and favourable industry dynamics (where passenger traffic growth is running ahead of capacity expansion). Despite route rationalisation last fiscal, the number of revenue passengers carried by Jet and Jetlite grew by 8.7 per cent and 6.1 per cent respectively in 2009-10, helped by a low-fare focus. This surged to 37 per cent and 29 per cent in the latest quarter.

Also, Jet's passenger load factor improved sharply from 67.7 per cent in FY09 to 77.4 per cent in FY10, and further to 79.7 per cent in the latest quarter. In the case of JetLite too, load factor has risen to a healthy 82.5 per cent in the latest quarter.

That Jet (along with JetLite) has also been successful in increasing its share of the growing domestic pie is seen in its market share improving to 26.2 per cent in Q1 FY11, up from 23.7 per cent in Q1 FY10. Latest August numbers (27 per cent) reflect continuation of this trend.

However, given increasing competition, and the inevitable trade-off between yields (revenue per passenger) and load factors, especially in the price sensitive economy class, yields for Jet and JetLite declined quite sharply (22.2 per cent and 13 per cent respectively) in FY10. While yields have continued to be under pressure in the latest quarter, they may increase, going forward, with improving economic growth and demand pick-up for premium travel.

Jet converted a part of its fleet to Jet Airways Konnect (JAK) to address the increasing shift for low cost travel during difficult economic conditions. This enabled the company (along with JetLite) to offer meaningful competition to other low-cost players. Now, with the pick-up in demand for premium class travel, the introduction of a full-service cabin on JAK flights should also bode well.

Route and fleet rationalisation led to a a fall in consolidated revenues in FY 10 (9 per cent lower y-o-y to Rs. 11,876 crore). Improvement in operating metrics in the latter half of the year and cost-control measures however helped prune consolidated losses by 56 per cent to Rs 420 crore.

Restructuring measures also helped JetLite turn profitable (Rs 462 crore) in FY10.

Improving financials

Consolidated operating margins before aircraft lease rentals(EBITDAR) improved significantly to around 19 per cent, up from 1.4 per cent in FY 09.

The latest quarter results have also been good with Jet's standalone revenues growing by 24 per cent y-o-y to Rs 2,965 crore. Net profit at Rs 3.5 crore was a marked improvement over the Rs 225 crore loss posted in the same quarter last year; although on a sequential basis it declined from the Q4 2010 level of Rs 59 crore, mainly due to exceptional items. Revenues and profits at JetLite grew at 13 per cent and 124 per cent respectively to Rs 476 crore and Rs 49 crore.

A domestic economy on a growth path and improving demand for air travel in general and premium travel in particular bode well for Jet. This should help it further improve its operating metrics, including yields. Also, initiatives such as fleet standardization (phasing out of JetLite's remaining CRJ aircraft) and leasing out of additional aircraft to other players in the international route (3 B777s to Thai Airways) should help improve profitability.

Risks

The good tidings notwithstanding, Jet's bloated leverage position (consolidated debt of more than Rs 14,800 crore, and debt to equity of around 10 times as of June 30) continues to be a matter of concern. While the performance turnaround eases things to some extent, concern still remain, especially given the delays being faced by the company in its fund raising plans.

Continuing litigation with Air Sahara on the tax dispute pertaining to the 2007 merger obviates Jet from using JetLite's aircraft for sale-and-leaseback. Also, FIPB's recent decision deferring Jet's proposal to raise $400 million through the qualified institutional placement route, delays fund-raising by the company. Rejection of the proposal may pose a downside risk for the company.

Also, in this context, Indigo's proposed IPO expected later this fiscal could set a valuation benchmark for incumbent listed players, including Jet.

Other risks include a deterioration in economic conditions or a sustained up-tick in crude oil prices (currently above $80/barrel), which could derail the nascent recovery.