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Aarati Krishnan

Mr Wolfgang Prock-Schauer (right), Chief Executive Officer, and Mr Saroj K. Datta, Executive Director.... Flaps down on costs has helped the company manage a soft landing.

JET Airways' financials have truly taken flight in the company's maiden performance announcement since its IPO. The net profits for 2004-05 have expanded by a better-than-expected 140 per cent to Rs 392 crore, while revenues surged 24 per cent to Rs 4,420 crore. With its planes flying fuller and after a couple of fare increases through the year, the airline has managed to counteract the effects of a rising wage bill and surging fuel costs.

Earnings growth is likely to taper to more moderate levels this fiscal, as Jet Airways will have to deliver on a larger base and may also have to contend with rising fuel costs and escalating competition. But with domestic travel at takeoff stage, the company may be in a position to deliver earnings growth that justifies the stock's valuation. At the current market price of Rs 1,311, the stock trades at a price-earnings multiple of 25 times its trailing earnings; it has appreciated by 19 per cent from its IPO offer price.

Revenues: Buoyed by business travel

A whopping 7.4 percentage point rise in load factor and two fare increases amounting to 10 per cent each in April and October 2004, have been the key revenue drivers for Jet Airways in 2004-05.

The number of passengers boarding the company's planes rose 17.9 per cent during the year.

Jet registered a lower growth than the market, given that the overall domestic passenger traffic surged by about 25 per cent for the year.

However, this is only to be expected, as a significant portion of the market expansion has been driven by the low cost carrier — Air Deccan.

With at least three more low-cost carriers set to flag off operations this year, Jet could continue to register lower-than-market growth rates.

But this would not be a significant disadvantage, as long as Jet manages to garner a significant share of premium tourist and business travellers, also a growing market.

The buoyant trends in outbound tourism and booming industrial activity could ensure growing demand for Jet's services this year.

Tight rein on costs

Jet Airways has managed a challenging cost environment reasonably well in 2004-05.

Jet fuel prices, one of the largest items of cost, averaged 30 per cent higher during the year, expanding the company's fuel bill by 42 per cent. Staff costs also rose 33 per cent, as competition for trained personnel heated up. C

ompetition also had an inflationary impact on selling and distribution expenses. But the company appears to have managed the challenging environment reasonably well.

For one, Jet has been able to continuously offset rising costs with fare increases for domestic travellers. It raised passenger fares 10 per cent on two occasions and cargo fares by 10 per cent on one, in 2004-05.

Second, the company has also managed to lower its outgo on lease rentals despite operating a slightly expanded fleet in 2004-05. Third, savings in interest costs and depreciation charges have also helped expand operating margins. With the surge in load factor, all these have helped deliver a 140 per cent increase in net profit for the year.

Bright outlook

Three factors could help the company sustain strong revenue growth this fiscal. Recent numbers for industrial growth and outbound tourists suggest that Jet could continue to register an improvement in its load factor on its domestic operations, in the current fiscal.

The commencement of international operations (Jet recently flagged off flights to Kuala Lumpur and London) will also be a strong boost. Traffic growth in outbound travel has been far higher than that in the domestic market. Third, Jet recently raised fares 12 per cent to compensate for fuel price increases, the effect of which will kick in from the current fiscal. The increasing competition from low-fare and `value' carriers such as Kingfisher Air may make it more difficult for Jet to push through further fare increases during the year.

Mitigating factors

On the profit front, any further escalation in fuel costs can pose a major risk to earnings. So will any further escalation in staff costs, due to the growing shortage of skilled aviation personnel. Jet recently negotiated a three-year wage settlement with its staff. While this may help tackle attrition rates, it could bump up the wage bill from this fiscal on.

However, there are some mitigating factors that can help Jet deliver strong profit growth this year. The fare increase in April 2005 should help to partly offset the 18 per cent surge in fuel prices since March 2005. Trends in fuel prices are difficult to predict as forecasts for crude prices are still widely divided. However, an increase in fuel costs will be an industry-wide phenomenon with no special effect on Jet. Recent tax concessions on jet fuel may also help partly mitigate the impact of higher fuel prices on domestic carriers.

With a significant portion of the global aviation industry suffering from excess capacity, aircraft lease rates can also be expected to soften. This could help Jet as it prepares to deploy leased wide-bodied aircraft on its international operations. Savings in interest costs, as Jet fast tracks its debt reduction exercise from the IPO proceeds, will also buttress net profit margins.

Overall, Jet appears well poised to deliver a 20 per cent earnings growth this fiscal. The stock will also continue to command a scarcity premium, as Jet continues to be the only viable proxy for the domestic aviation industry, which is at the takeoff stage. Shareholders can, thus, hold the stock for a reasonable capital appreciation over the medium term.

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