Pricing pressure in global operations dents Jet Airways’ Q3 numbers

Cost reduction plan of 12-15% key trigger for the company

Jet Airways’ December quarter performance did not go down well with the Street, with the stock shedding nearly 6 per cent at close on Thursday. The company had declared the results after market hours on Wednesday.

One reason for the stock fall could be the net profit decline. The bottom line, at ~1.86 billion, was down 38 per cent over the year-ago quarter. However, net profit for the year-ago period, at ~2.99 billion, included ~3.27 billion profit on sale and leaseback of aircraft. The company has restated the numbers for the third quarter of 2016-17 and nine months of 2016-17 to reconcile these with Indian accounting standards. Without the adjustment, net profit would have shown an increase of 19.2 per cent.

On the operational front, revenues increased 10.4 per cent to ~64.12 billion. This was led by a 13.4 per cent increase in passenger volumes to 7.7 million for the quarter ended December. Domestic passenger growth was even better at 17 per cent, though this was lower than the sector’s growth of 18 per cent. SpiceJet had reported 18.2 per cent growth in passenger volumes, while Indigo's volumes were up 14.1 per cent.

Increasing domestic and international capacity, coupled with higher utilisation, ensured Jet was able to meet the surge in demand. While capacity increased by 8.7 per cent, revenue passenger km (demand) was up 14.7 per cent. Given the higher demand, passenger load factor, too, rose 440 basis points to 84 per cent over the year-ago quarter.

While volumes were strong, the company continued to face pressure on the yield front. Average fare per passenger was down 1.5 per cent to ~7,195. Analysts said pricing pressure would largely be due to international operations, as demand continues to outpace supply in the domestic market. SpiceJet had reported a yield growth of 8.8 per cent, while Indigo's number for this metric was higher by 6 per cent.

Jet Airways has been struggling with weak demand from the Persian Gulf for a few quarters, though the management indicated that might change soon. Any improvement in the international segment pricing will boost yields.

The Street will keep an eye on how the company tackles costs. The company’s unit costs were 16-26 per cent higher than its domestic peers. Other costs — be it sales and distribution or administration expenses — were also higher than peers. For the quarter, the company reported per-unit cost of ~4.33, 2.6 per cent higher than the previous quarter, largely due to hardening crude oil prices. Excluding the effect of fuel prices, unit costs fell 2.6 per cent.

The company said it planned to reduce unit costs, excluding fuel, by 12-15 per cent over 12-18 months. This was on the back of a reduction in maintenance cost from January 2019, led by renegotiation of contracts, reduction in sales and distribution cost, better capacity utilisation of B777 planes and induction of the fuel-efficient B737 Max from June 2018. Increasing ancillary revenues was another area Jet said it was keen to improve. From ~3.27 at the end of the March 2017 quarter, unit costs were down to ~3.02, a fall of 6 per cent. Analysts said while lower fuel costs would be positive for all airlines, cost reduction was the single biggest trigger for the company.