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Last Updated : Aug 10, 2018 06:46 PM IST | Source: Moneycontrol.com

Opinion | Jet has to make tough calls to ride out turbulence

The Jet management has to take tough calls, and soon, to restore credibility. Investors will respect that rather than the chairman’s feelings of guilt and embarrassment.

Ravi Krishnan @writesravi

Jet Airways seems to have hit an air pocket. On August 9, the Naresh Goyal-founded company informed stock exchanges that its audit committee had refused to sign off on the airline’s June quarter results. The decision to defer its earnings announcement added to speculation that all is not well with it financially.

What could help the airline is disclosures and tough calls by the management such as raising prices, and not the new public relations committee its chairman wants to put in place.

In the past week, the firm has been on the defensive, fending off news and rumours about its financial condition. There were reports that suggested the carrier had cash to operate for only 60 days and it had asked staff to take a 15 percent pay cuts. The airline denied these reports as "factually incorrect and misleading".

But postponing earnings, the audit committee's refusal to sign off on earnings and the resignation of the audit committee's chairman (his term ended, Jet clarified later) has sparked an investor rout. The stock of the airline tanked as much as 13.3 percent. High oil prices, a falling rupee, and inability to raise prices have led to a period of turbulence for the Indian aviation industry. For Jet Airways, the problem is worse, as its operating numbers reveal.

In the March quarter, when competitors such as SpiceJet and Indigo had posted post-tax profits, Jet reported a loss of Rs 1,036 crore. The earnings spread for Jet (revenue per available seat kilometre less costs per available seat kilometre) was negative. It lost 92 paise per available seat kilometre in the March quarter, much higher than losses of 3 paise for SpiceJet and 8 paise for Indigo, according to Kotak Institutional Equities calculations. Jet started making losses on its earnings spread much earlier than its competitors. It is unlikely that the June quarter earnings would be better, going by oil price and air ticket price trends.

The money Jet was able to charge a passenger for flying a kilometre has also decreased, showing lack of pricing power. Yields per revenue passenger kilometre fell to Rs 4.7 in the March 2018 quarter, a far cry from the high of Rs 6.7 in the September 2015 quarter. It had a debt of Rs 9,000 crore at the end of March, about 55 times its earnings before interest and tax for the fiscal 2017-18.

With aviation turbine fuel prices unlikely to come down, especially as the US presses hard for sanctions on Iran, a key crude supplier, things will only get tougher in future. The company then would be left with two options: One is to cut costs in other ways such as selling and leasing back some of its aircraft, while the other -- and tougher option -- is to raise prices even if it means that the domestic market share will reduce. In any case, not raising prices hasn’t helped market share which has declined to 13.7 percent in June 2018 from 19.6 percent in the September 2015 quarter.

The bottom line is that the Jet management has to take tough calls, and soon, to restore credibility. Investors will respect that rather than the chairman’s feelings of guilt and embarrassment at letting them down or setting up a committee to improve public perception.
First Published on Aug 10, 2018 06:46 pm
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