State of Aviation Industry – Second Quarter Review

Second quarter financial results are available for Jet Airways, Spicejet and Deccan; Deccan has also declared its annual results for an extended period of fifteen months (April-June). The following table presents a summary of the performance

	Jet Airways		Spicejet		Deccan
Type	Un Audited		Un Audited		Un Audited
Date Begin	01 Jul 06	01 Apr 06	01 Jun 06	01 Mar 06	01 Jul 06	01 Apr 06
Date End	30 Sep 06	30 Jun 06	31 Aug 06	31 May 06	30 Sep 06	30 Jun 06
Description	Value (Rs. Million)
Net Sales	16150.4	16465.4	1594.69	1487.59	3587	3979.9
Other Income	2061.9	322.2	208.65	51.99	1773.8	321.6
Total Income	18212.3	16787.6	1803.35	1539.58	5360.8	4301.5
Expenditure	-17392.4	-15852.9	-1946.89	-1647.28	-5586.7	-5250.3
Operating Profit	819.9	934.7	-143.54	-107.7	-225.9	-948.8
Interest	-578.1	-642.4	-6.66	-10.27	-94.3	-86.8
Gross Profit	241.8	292.3	-150.2	-117.97	-320.2	-1035.6
Depreciation	-966.9	-887.4	-22.58	-7.35	-101.2	-67.4
Profit before Tax	-725.1	-595.1	-172.78	-125.32	-421.4	-1103.1
Tax	173.8	145.3	-5.41	-5.33	-8	0.5
Profit after Tax	-551.3	-449.8	-178.19	-130.65	-429.4	-1102.6
Net Profit	-551.3	-449.8	-178.19	-135.47	-429.4	-1102.6
Equity Capital	863.3	863.3	1843.39	1843.39	981.8	981.8
Reserves	-	-	994.19	1060.9	898.5	1259.5
EPS	-6.39	-5.21	-0.97	-0.73	-4.37	-13.58

Source: BSE website

Jet Airways: Rising cost and falling seat factors resulted in Jet Airways turning in a loss of Rs. 55 crore for the September quarter. Had it not been for the higher other income, of which around Rs. 160 crore was realised from sale and lease back of aircraft, the loss would have been higher. In fact, if we take out other income the airline posted a loss of Rs. 124 at the operating level and the EBITDA (earning before interest tax depreciation and amortisation) declined to 2.1% from 12.6% in the corresponding quarter of the previous year.

On year-on-year basis seat factor has come down to 63.5%, mainly due to competition. The airline has attempted to maintain yields at the cost of falling loads, resulting in revenue per km remaining flat at Rs. 4.82. However, due to higher expenditure on account of employees’ remuneration and benefits, fuel cost and distribution expenses; cost per available seat km has gone up to Rs. 3.6 from Rs. 3.08 during second quarter of last year. With discounted fares accounting for 65 per cent, the break-even level in Q2 FY07 moved up to 74.6 per cent from 63.9 per cent in Q2 FY06.

Jet’s market share is around 31 per cent, down 7 per cent y-o-y. The international operations will take time to stabilise with flights on new routes. The bulk of the losses came from international operations. These contributed to 17 per cent of Jet Airways’ revenue but it ran up a loss of Rs 111.4 crore during the reporting quarter. With fuel prices having eased and online bookings (10 per cent now) picking up, cost pressures will ease somewhat. Moreover, the management hopes to maintain yields and improve seat factors in the second half. However, unless capacity addition is delayed, both loads and yields are unlikely to improve significantly. The litigation over the Sahara deal is yet to be resolved, this may prove to be a drag on Jet’s performance for the remaining period of the year.

Spicejet: A write back of unclaimed payables of Rs 18.9 crore helped Spicejet keep down losses for the August quarter to Rs 17.8 crore, though this was still higher than the Rs 13.5 crore posted in Q4 FY06. With no aircraft added this quarter, which is the weakest for airlines, net sales grew 178 per cent y-o-y to Rs 159.5 crore, but just 7 per cent q-o-q. The loss at the EBITDA level was Rs 35.2 crore compared with a loss of Rs 16 crore in Q4 FY06. While high aviation fuel costs—prices were up 32 per cent y-o-y—were the main culprit, the load factor too was down at 82 per cent from 87.5 per cent in Q4 FY06. However, both loads and yields are likely to pick up in the November and February quarters given the holiday traffic. Besides, fuel costs should come off by about 10 per cent in the current quarter. Yields, according to the management are up 20 per cent in the current quarter, and two more aircraft will be added soon. Revenues from ancillary services currently at around 7 per cent of total revenues are likely to go up to 10 per cent by the end of FY07. The company has also started doing hotel bookings a few weeks back and is looking to start on-board advertising. Spicejet has tied up the funding for 22 aircraft—it will have 28 aircraft by end 2008. By remaining faithful to the LCC model the airline has managed to leverage the cost advantage rather well and been successful in keeping its loads at 80 per cent.

Deccan Airways: The market expectation was Deccan Aviation to turn in a loss of around Rs 150 crore for the 15 months ended June 2006. But the amount has been more than twice the estimate at Rs 340 crore. For the year ended March 2006 too, the loss at Rs 230.29 was way higher than anticipated. While higher aviation turbine fuel costs—which were up at 48 per cent of sales in FY06 compared with 30.3 per cent in FY05 and 56 per cent in the June 2006 quarter-were the biggest culprit, other costs too have gone up. For instance, employee remuneration is up around 400 basis points, while operating expenditure — including leases — have gone up by about 500 basis points. In all this, though the carrier has cornered a market share of around 19 per cent. Revenues are up 174 per cent y-o-y in FY06 at Rs 839 crore. However, the market share is obviously coming at a price because yields (revenue per passenger km) for the Airbus at less than Rs 3 are way below costs (cost per available seat km) of around Rs 3.60-Rs 3.70. The management has hinted that it would be no longer possible to pass on lower costs of oil given the competition. The Deccan stock was up around 4 per cent at around Rs 112 on 3-11-06 (Friday), possibly because the company has managed to find $100 million of funds, which would give it some breathing time. Meanwhile, if oil prices continue to fall, Deccan, as also other airlines, will continue to gain, as operating leverage is fairly high. In the June quarter, Deccan posted a Rs110 crore loss mainly owing to higher ATF costs. However, more than oil prices what is worrying is the capacity coming up in the industry. Unless demand grows at over 40 per cent, it will be difficult for the industry to maintain loads and yields.