Thursday, October 24, 2013

Behind Jet Airways\' mounting losses

In a clear sign that aviation business in current operating environment is making airlines bleed and challenging their balance sheet viability, country\'s second largest carrier by way of market share Jet Airways posted it\'s worst ever quarter loss of Rs 891 crore.

High air turbine fuel taxation, increase in aircraft lease rentals, short term borrowings to keep the business afloat and an increase in trade payables has led to Jet\'s losses sky rocketing from Rs 100 crore in the corresponding quarter of the previous financial year to Rs 891 (standalone losses) crore this year. It has also widened its loss margins on a quarter on quarter basis by 51 per cent. Its first quarter loss for this financial year stood at Rs 355.4 crores.

Airline consultancy firm CAPA has projected heavy losses for all airlines for the second quarter. It estimates total losses in excess of $500 million (INR30 billion), with LCCs estimated to have lost $120-130 million and full service airlines over $400 million.

CAPA projected Jet losses at $150 million, highest among private carriers.

Reeling under huge debt burden of over Rs 12,000 crore, Jet increased its current liabilities further during the first two quarters of this financial year as its short term borrowings went up by Rs 528 crore from Rs 1952 crore in FY13 to Rs 2480 crore.

In a very worrying trend pointed out by finance experts Jet\'s trade payables have increased for the first two quarters of this financial year by Rs 680 crore from Rs 4752 crore in last financial year to Rs 5432 crore for the half year ended September 30. Also, its current liabilities have gone up by Rs 1471 crore during the same period.

\"These numbers suggest that Jet is financing its losses by increasing its liabilities. They are also squeezing the suppliers as there is an increase in trade payables. This raises serious doubts on the financial viability of the balance sheet of the company,\" said a finance expert not wanting to be identified.

Jet has shown minimal growth in its revenues from Rs 4051 in the corresponding quarter to Rs 4194 crore in Q2 of this quarter, an increase of just 1.7 per cent whereas its expenses on jet fuel and aircraft lease rentals have all gone up significantly.

Jet Airways paid to oil companies Rs 1810 crore for the second quarter up from Rs 1681 for the same quarter last year and it also paid more money to aircraft leasing companies increasing its expenses by Rs 792 core for the quarter when compared to the second quarter of FY12-13.

Experts point out that irrational pricing is the reason for the airline companies to post continuous looses as most of the carriers.

\"Indian airlines have unfortunately repeatedly demonstrated their ability to undo months of hard work with just a few weeks of irrational pricing as a result of which profitability remains elusive,\" observed a recent aviation sector monitor report on Indian carriers by CAPA.

Though Indian carriers, including Jet, hiked fares by 30 % over the last couple of months to cover up an increase in fuel costs (eight percent increase YoY) and also to recover some losses resulting from selling inventory cheap to stimulate slacking demand in a weakening economy and rupee, a Jet official said it was \"too little too late.\" As a result of this passenger yields for Jet declined by 11% to Rs 7376 from Rs 8335.

Jet\'s CFO, Ravishankar G could not be reached for a comment despite repeated attempts. But explaining these huge losses, Jet in a statement said, \"Lean season and economic slowdown resulted in drop in yields. Depreciating currency, high fuel prices and increases in airport charges in select Indian airports have driven cost pressures resulting into losses.\" Jet\'s passenger numbers grew by just 12% and its departures went by just 6% reinforcing what analysts have feared for some time now that Jet is losing its grip in the domestic market.

Jet said that it had to keep aircraft on ground which further resulted in a loss of Rs 123 crore for the quarter.

\"Indian aviation Industry witnessed increasing cost challenges, mainly due to rupee depreciation against US Dollar, high fuel prices and increase in airport charges in certain stations putting pressure on the bottom line,\" explained Jet\'s recently appointed, Chief Executive Officer, Mr. Gary Toomey.

In its outlook for the third quarter Jet said the quarter will reflect high seasonality, which will help to improve yields. Domestic fare revision which was made at the fag end of Q2 will start showing positive effect in the balance part of the year though rupee depreciation against the dollar and volatile crude prices will continue to be a cause of concern.

\"The forward booking trends for the quarter are quite encouraging. In this ensuing peak season more of business class seats will be on offer,\" the airline said.

Jet which is in the final stages of getting regulatory approvals for its over Rs 2000 crore equity deal with Abu Dhabi based Etihad Airlines, accordingot aviation analysts might not really have enough left to take off on ot a path of robust growth and expansion as a result of this money coming in.

\"With huge debt and interest burdens, capital remains scarce and investor in incumbent carriers is weak, especially as any funding would largely fund losses rather than growth. Expansion plans are increasingly reliant on raising debt,\" CAPA said.

According to aviation experts the operating environment is challenging for Indian airline companies and they will continue to face the dual challenge of a hostile cost environment and soft yields.
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