Stock Review: Jet Airways

Jet Airways reported 20 per cent and 12 per cent growth in revenues (at 3,515 crore) and net profit (at `118 crore), respectively, in the December quarter. Earnings before interest, tax, depreciation and amortisation margins, ex of rental costs, fell 50 basis points year-on-year to 24.5 per cent due to higher fuel costs (up 12 per cent).

According to a company release, yields were up 16 per cent sequentially (11 per cent for Jetlite), while passenger load factor (PLF) improved 150 basis points year-on-year to 76.9 per cent for domestic operations, reflecting the buoyant demand. However, international PLF slipped 190 basis points to 80.6 per cent due to the launch of two long-haul routes, which pulled down consolidated PLF by 70 basis points to 79.3 per cent.

The management appears fairly sanguine about demand, adjusting for seasonality in the relatively weak fourth quarter. Lower demand is expected to pull down yields by 10 per cent, but the company hopes to counter it with higher aircraft conversion from low-cost to full-service.

The share of Jet Airways Konnect (low-cost carrier) was down from 65-67 per cent last year to about 54 per cent. Its net impact on yields is expected to be up to three per cent this quarter, given that the company raised fuel surcharge by `100-200 in December and hasn't seen demand being hit. Any further increase in jet fuel prices is likely to be passed through.

However, analysts believe Air India's lead in cutting fares will prevent full passthrough of additional fuel costs. Also, the ambitious capacity expansion plans of SpiceJet and other carriers may impact the demand-supply dynamics of the industry. Analysts expect staff shortage (experienced pilots) and funding constraints to check expansion and see demand outpacing supply for the next two years. The buoyant international operation outlook will be the icing on the cake.

The stock ended three per cent higher on Thursday at `518.35 and is priced at a P/E valuation of 5.6 times 2011-12 earnings per share estimates.

Domestic operations performed better than expectations, but fuel costs hurt the bottom line