Post Jet Airways’ July-September Q2 earnings, the airline saw its first quarterly profit since 2012. Boosted by sale of its frequent flyer business, the aviation company posted profit in the quarter gone by.
The airline, which has struggled to make money amid fierce competition for fares and high operating costs, said net profit totalled Rs 69.8 crore in the three months to September 30 after it banked a Rs 305 crore gain from the sale of its Jet Privilege frequent flyer programme.
Furthermore, recent plunge in Aviation Turbine Fuel (ATF) prices that accounted for around 50 percent of operational expenses also helped the airline. Market experts Anand Tandon and Mayuresh Joshi analyse if the airline industry is set for a rebound with low ATF prices.
However, with robust competition in the market, Tandon is confident of the aviation industry moving up. Although it may take time for yields to translate but he expects airliners to make money at least at the EBITDA levels.
In an interview to CNBC-TV18, Mayuresh Joshi, VP- Institution, Angel Broking Limited says that the load factors need to improve drastically from the 70 percent that they are currently operating at.
Joshi feels the two key variables why the EPS and the return ratios are down and why airliners don't make money is the interest cost and the depreciation cost.
Below is the verbatim transcript of Anand Tandon and Mayuresh Joshi's interview:
Q: Is the worst over for airline companies especially for Jet Airways?
Tandon: The industry so thoroughly cyclical that it is difficult for only one thing to make a difference. The fact that ATF prices are down will mean that they will make money but then you have to also understand that there is new competition on the horizon and with AirAsia coming in and after that the Tata Singapore Airlines joint venture (JV) becoming operational as well the capacity in the industry is also likely to move up. So, we will have to see how the yields translate but for now as you mentioned it will make money at least at the EBITDA level.
Q: Will this be a trading call for you or will it be an investment call?
Tandon: So far the airline industry both here as well as in the US are opposed to deregulation and never made money over a long period of time and there has been variety of reasons for it, capacity being one, cost being other and cyclicality in terms of new people coming in and out being the third. So, in all of this, longer term I don’t think that we have yet seen the industry make consistent returns.
Will it be different this time, I would have my doubts because all said and done as I mentioned every time the entry barriers are not that high especially in terms of adding capacity because all you need to do is lease up an airline and your airplane and you are ready to go. So, I don’t think on a sustained basis one could argue even today that you will make money but therefore the only thing you are left with is on the trading basis.
Also, the valuations are not cheap for neither Spice nor Jet. We are looking at valuations that are very low. They are being priced at market cap to sales kind of ratios rather than bottomline because there is no bottomline or hasn’t been for so far. Those numbers don’t look very attractive in environment where others are likely to give you more sustained or more predictable earnings at least.
Q: If you strip off the exceptional gain then it doesn’t look like such a great quarter for Jet. So from a fundamental point of view is this a good time to buy or would you still stay away?
Joshi: I think if you look at all the parameters that Jet had posted in the quarter gone by I would completely agree and second Anand’s point that at the EBITDA level probably you might see some improvement in the quarters gone by or in the coming quarters with ATF prices coming down. However, if you look at the two key variables why the EPS and the return ratios are basically down and why they don’t make money is the interest cost and the depreciation cost.
Even for Jet in the quarter gone by, the interest cost was close to Rs 212 crore, the depreciation was close to Rs 193 crore. If you add off or you take off the exceptional items and you keep these items into place it would have actually posted a loss. At the kind of debt levels that Jet is sitting, ATF is not the only variable. As you rightly pointing out the load factors need to improve drastically from the current levels. So, the domestic load factors need to improve from the 70 percent that they are currently operating at.
The international load factors need to pick up as well and for that the entire banking of the industry is based on the economic turn that will probably happen and more disposable income boost in terms of consumers and industrial demand coming back leading to a lot of commercial travel probably happening. However, the cash flows are in negative territory, the EPS will remain in negative territory because of the interest and depreciation cost and the company is reporting a negative net worth.
So, all that plus valuations around 0.6 times EV/sales I think it is fair at the current levels. Sentimentally the stock probably might move higher say around Rs 290-300. However, my belief is that the cash flows to get reflected on the financial statements will take some amount of time to come and probably long-term investors have got much better plays than looking at Jet at this current point of time.
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