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Financial Headwinds

Facing a cash crunch and having posted losses for the second successive quarter, Jet Airways is now aiming for a turnaround

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India’s second-largest airline by market share Jet Airways is not the only airline facing financial woes. It may well be the one with higher debt but just like it, its peer group airlines too are impacted by surging fuel costs, competitive fares, loss of foreign exchange and higher operating costs. Yes, it is true that the board of Jet Airways deferred announcing the first quarter results earlier in the month of August. It is also true that various news reports suggested that the airline was running low on cash and was mulling cutting salary, amongst other measures to stay afloat. But when finally on the evening of 27 August the board of Jet Airways did announce its Q1 results (April-June), the picture was somewhat clear. The airline, partly-owned by Etihad Airways, posted a loss of Rs 1,323 crore in the three months ended June 30 compared with a profit of Rs 53.5 crore a year earlier. Why? One of the reasons was higher fuel cost for the quarter. In fact for Jet Airways, the aircraft fuel expenses for the quarter surged 53 per cent to Rs 2,332 crore. A depreciating rupee and an about 36 per cent rise in global oil prices also dented the company’s profitability, it said in the statement. But it is not alone among its peer group airlines to have posted dismal financial results. Mid-August, low-cost carrier SpiceJet also reported a net loss of Rs 38.1 crore in the June quarter (against a net profit of Rs 175.2 crore in the year-ago period) on the back of higher fuel cost, weak rupee and a one-time provisioning of Rs 63.5 crore. Before that, IndiGo, the leader by market share, reported a 97 per cent erosion in net profit to Rs 27.8 crore from Rs 811.1 crore a year ago.

If most India-based carriers have suffered setbacks in the first quarter then why is the financial performance of Jet Airways under greater scrutiny? “It is because of couple of reasons. Amongst its peers, Jet has a high debt of around Rs 9,000 crore. Airlines’ operation is cash-intensive. Jet is not generating enough cash to sustain its day-to-day operations , which reminds of the days when Kingfisher Airlines was showing similar symptoms before it shut down operations. But by no means are both situations similar,” says a senior aviation expert requesting anonymity. The airline had a debt burden of Rs 8,424 crore at the end of March this year. In fact, Jet promoter Naresh Goyal had apologised to investors earlier this month as the airline’s shares plummeted. “Lots of shareholders have lost money, I feel guilty and embarrassed,” Goyal said. The airline has been the least preferred aviation bet among investors, with the stock declining over 66 per cent in the year so far.

On its part, the board of Jet Airways has outlined a number of steps for course correction. The airline will be looking at raising funds apart from undertaking several cost cutting measures. “The company has incurred a loss during the current quarter and has a negative net worth as of June 30. It has undertaken various initiatives in relation to saving cost, optimising revenue management opportunities and enhancing ancillary revenues. These initiatives are expected to result in improved operating performance,” Jet Airways said in a regulatory filing on August 27. “The two significant proposals considered by the Board of Directors today — infusion of capital and monetisation of the airline’s stake in its Loyalty programme bode well for the long term financial health and sustainability of the airline,” said Goyal, chairman of Jet Airways.

The company aims to introduce fuel and cost-efficient B737 MAX aircraft to aid its 8-10 per cent growth plan and simplify its fleet by sub-leasing excess ATR aircraft to improve its profitability. Jet, which cut its non-fuel expenditure by 1.5 per cent in the June quarter, plans to further reduce such costs by 12-15 per cent in the next 8-10 quarters, it said. It also plans to monetise some of its assets, including the Jet-Privilege programme, which has 8.5 million members.

Area  of concern
According to aviation experts, six out of 10 flights of Jet Airways are on overseas routes. In the domestic market, while the average traffic growth was around 19 per cent, Jet Airways domestic traffic growth was in the region of 14 per cent. Why? Because of intense competition and competitive fares offered by rival airlines. Jet Airways also lost market share to rivals during the last one year period. On the overseas trip business, Jet Airways’ market share has stayed stagnant at around 14 per cent, says another aviation expert. “The Middle East routes, on which Jet has deployed half of its capacity, is also facing a slowdown due to a variety of reasons including increased competition. Therefore, the airline is facing competition on all fronts,” the expert said. To add to the woes is depreciating rupee which means more forex outgo. Rupee has weakened by virtually 8 per cent in 2018, which is high when compared to other Asian currencies.

Getting funds from lenders is also a challenge for the airlines though Jet Airways has informed the stock exchanges that it’s been evaluating funding options to meet liquidity requirements “on priority” and proactively working on multiple revenue enhancement and cost-cutting measures. In May, the credit ratings agency ICRA said in a report that Jet Airways has Rs 3,120 crore worth of loan repayments due in the year through March 2019. Together, all these signals have spooked the investors, a fact the board of Jet Airways is aware of. That is why it has listed out certain specific measures that the airline will undertake to improve its financial situation. Among the measures listed include undertaking a comprehensive cost reduction programme, induction of fuel and cost-efficient B737 MAX aircraft, undertaking revenue enhancement programme and balance sheet restructuring and fleet simplification measures. Will these measures bring about a turnaround? Watch this space for more.


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