Jet Airways' record profit on prudent cost cutting measures, not just benign oil

Benign jet fuel prices have helped Indian airlines, and how. Jet Airways, which added no new capacity in FY16, managed to post its first ever annual profit thanks to easy oil prices. But what has been remarkable in the Jet turnaround story is the fantastic cost initiatives and enhanced synergies it managed with partner Etihad Airways.

Reuters

Reuters

The airline saved close to Rs 5 crore a day in fuel costs in FY16 compared to an year ago period, reaping an overall benefit from about 25% year-on-year reduction in total outgo on purchasing jet fuel. But it also did many other things simultaneously: aircraft utilization was enhanced significantly which meant more capacity was available without actually adding new aircraft, costs outside fuel were also reined in and there was much better synergy with Etihad for global operations. Competitors need to take a leaf out of Jet’s turnaround story to script their own fairy tales.

Softer fuel prices have helped every airline, not just Jet. Market leader IndiGo reaped the benefits by reporting record profit of Rs 1,989 crore, an increase of 52.6 percent year-on-year for FY16. SpiceJet was also able to script a rather remarkable turnaround on the back of historically low fuel prices and industry-leading aircraft load factors throughout the year. Wonder of wonders, even state-owned Air India has brandished its first ever operational profit of Rs 8 crore in a decade, after the merger of the two erstwhile airlines into the present entity. It managed to save a whopping Rs 2500 crore or close to Rs 7 crore a day due to lower oil prices alone during FY16!

But this fairy tale script may not continue much longer as oil prices are beginning to harden even as competition ratchets up in India’s notoriously fragmented domestic aviation market and airlines rush in with more seats. It would be foolish for the otherwise loss laden Indian airlines to lay all their eggs in one basket by depending on benign fuel prices alone. Driving up efficiencies remains the key to long term profitability.

Aviation turbine fuel is very expensive in India compared to other countries due to local taxation and since fuel accounts for over 40% of an airline’s operating costs, any increase in global crude prices will bring woes to India’s airlines. Ruthless cost cutting and sweating out assets seems to have guided Jet Airways to record profit last fiscal.

On a consolidated basis, it announced its first ever annual profit of Rs.1,211.65 crore in FY16 against a net loss of Rs 2,097.41 crore an year ago. Fuel costs were lower in the fourth quarter by about 20% compared to the December quarter. No wonder then that net profit for Q4 of FY16 was Rs 397.16 crore against a net loss of Rs 1,728.99 crore in the same quarter of the previous fiscal.

Net sales in Q4 rose 3.57% to Rs 5,245.28 crore from Rs.5,064.52 crore in the same quarter of the previous fiscal. In a smart move, Jet managed to enhance capacity not by deploying more aircraft but by using the same fleet for longer periods during FY16. It said the Boeing 737 fleet was utilized for 13.01 hours per day in FY16, making this one of the highest aircraft utilisations in the industry.

Then, cost per available seat kilometer (CASK) excluding fuel dropped by 3.2% from Rs 3.37 in FY15 to Rs 3.26 in FY16.This indicates that though fuel price easing helped, Jet was not sitting on its haunches but as simultaneously also improving other cost metrics. Improved aircraft use enhanced available seat kilomteres by almost 12%. Then, codeshare traffic – which comes due to the alliance between Jet and Etihad – also surged by 31%, from 1.6 million passengers carried in FY15 to 2.1 million passengers in FY16. All these initiatives helped Jet’s bottomline outside of fuel costs.

But the road ahead may be bumpy despite oil price largesse and cost control. Chairman Naresh Goyal said yesterday after announcing the results, “The competitive and structural challenges in the Indian aviation market continue to exist. In addition, the induction of capacity and the enhanced competitive scenario is creating a constant pressure on yields. We will continue to focus on strengthening our balance sheet to ensure sustainable growth and value addition for our stakeholders.”

This is specially true for Jet’s domestic operations. Air India, which is operating on government dole, has been speaking of a massive capacity enhancement and is already readying to make inroads into India’s hinterland by signing pacts with state governments for increased regional connectivity. This means increased competition for Jet Airways, which is also eyeing the same customer pie since both these airlines are FSCs. Then, newbie Vistara is expanding its wings steadily, adding to competition.

Let us not forget that the LCCs, which control two-thirds of the Indian market, are anyway posing a tough challenge with their low cost models and rock bottom fares. In the end, even if oil prices were to stay benign for another year, the benefits would not appear to be as rich in FY17 as they do for the last fiscal. It is ruthless cost cutting and enhanced efficiencies which will make all the difference in India’s domestic aviation market which is growing in double digits.


Published Date: May 27, 2016 04:28 pm | Updated Date: May 27, 2016 04:28 pm


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