At Jet Airways, things getting worse before they get any better

Jet Airways reported a pre-tax profit of Rs186 crore last quarter, but this was thanks to non-operating income such as gains from forex fluctuations.

Jet Airways (India) Ltd was supposed to be a turnaround story. Its shares have risen more than 60% from its lows in October, backed by the company’s comments that it plans to cut operational costs by a wide margin.

But things are getting worse before they get better. In the December quarter, the airline made Rs4.28 in revenue for every available seat kilometre (RASK) it flew. But thanks to higher fuel expenses, it spent Rs4.33 available seat kilometre in costs (CASK). Operationally, the airline is bleeding. It reported a pre-tax profit of Rs186 crore last quarter, but this was thanks to non-operating income such as gains from forex fluctuations.

A year ago, things were barely better. RASK and CASK had both amounted to Rs4.22. But the fact that things have worsened is clearly matter of concern. Unsurprisingly, Jet Airways’ shares fell by over 5% after Q3 results were announced.

“The fact that core operations continue to be a drag is worrying; profit has been accruing either from sale-and-leaseback deals or from other one-off income sources,” says an analyst at a domestic brokerage firm.

But the fact that Jet Airways’ shares are neck and neck with SpiceJet Ltd with respect to one-year returns suggests that investors are keeping the faith. This is largely based on the fact that Jet Airways’ margins are meaningfully below that of its peers, which leaves ample scope for improvement.

While this remains the hope and expectation in the case of Jet Airways, peers InterGlobe Aviation Ltd (that runs IndiGo) and SpiceJet are already growing profits at a brisk pace. While both airlines were hit by an increase in costs, it was more than compensated by a 10.3% and 8.7% increase in RASK, respectively. The spread between RASK and CASK jumped 57% year-on-year in the case of IndiGo, and rose 17% for SpiceJet.

Of course, it isn’t entirely fair to compare Jet Airways with these airlines, as the former gets over 50% of its revenues from international operations. As pointed out in this column earlier, yields in routes involving Middle East destinations have been under pressure and have been dragging down overall performance.

Whatever the underlying reasons, the proof of the pudding is in its eating. And Jet Airways’ financial performance has been disappointing quarter after quarter. From the looks of it, investors have put the cart before the horse.