Why 11 November could be a terrible day for Jet Airways

Jet Airways losses are expected to peak in the September quarter, according to HSBC Securities, and 11 November is the day the airline announces its results.

Jet Airways, India’s largest airline, is expected to report a loss of Rs3.5 billion, or Rs 350 crore, on a consolidated basis, according to the brokerage’s estimates.

[caption id=“attachment_122146” align=“alignleft” width=“380” caption=“Jetlite, its low-cost carrier, continues to be a burden on the company’s overall profitability. Reuters”] [/caption]

The brokerage highlighted three reasons for the airline’s poor performance.

One, it expects unit costs to rise by 16 percent year on year (yoy) mainly due to a 45 percent annual rise in fuel costs.

Two, the rupee’s sharp depreciation will take a toll as almost 80 percent of Jet’s debt is foreign-currency denominated: its interest costs will increase.

Three, Jetlite, its low-cost carrier, continues to be a burden on the company’s overall profitability. While Jetlite’s contribution to the group’s revenues is around 12-13 percent, it accounted for almost 40 percent of the group’s recurring losses over the past four years (barring fiscal 2010).

[caption id=“attachment_121842” align=“alignleft” width=“300” caption=“Jet Airways losses to peak in the September quarter”] [/caption]

HSBC expects Jet to post a loss in financial 2012 (April-March) as well as in 2013.The brokerage also reduced the target price for the airline to Rs 275 per share from Rs 500 earlier, reflecting a drop of almost 45 percent. The stock was trading at Rs 259 on Thursday.

In addition, the report noted a key risk for the airline industry as a whole: the expansion in aircraft capacity.

In order to capitalise on demand, many carriers had placed orders for newaircraft in the past two years, which has led to declining load factors. HSBC expects a 12-15 percent capacity addition in seat capacity over the next two years based on the fleet addition plans announced by Indian carriers.

While Jet’s plans are not worrying (because the expansion is relatively moderate), the expansion plans of other carriers, namely Indigo, Spicejet and Kingfisher Airlines, are likely to impact the overall performance of the industry, it added.