There is no industry in the world that has not seen bankruptcies, mergers, and churns to the extent that the aviation industry has. One-time airline giants like TWA, United Airlines, and Pan American don’t exist any longer. Two of the largest aviation names today -- American Airlines and Delta -- had also filed for Chapter 11 in the past but managed to come out of it.
In India, we have seen East West, Damania, Kingfisher, and Paramount vanish in the last 20 years, while other like Air Deccan, Sahara, and Indian Airlines merged along the way.
If you were to add up the profits of all the airline companies put together from the beginning, the result would still be a net loss. This entire history of the aviation industry has become very relevant in light of the problems mounting for Jet Airways. It is said that if you want to look at the emerging challenges for a company, then you just need to look at its historical stock performance. Check the chart for Jet Airways below:
The above chart captures the performance of the Jet Airways stock since the beginning of the year. In this period, the stock has lost over 60% in valuation and continues to show signs of weakness. One can argue that the challenge is a macro issue due to the sharply higher prices of Brent Crude. After all, the price of Brent Crude has gone up from around $45/bbl at the beginning of the year to $75/bbl. But has the impact been uniform across all the airline companies?
The chart below captures the price comparison of Jet Airways with that of InterGlobe Aviation (owner of Indigo Airlines) and the Nifty index overall. While the Nifty has given 8% positive returns in the period, Indigo’s stock is down 20% year-to-date, while the share price of Jet Airways is down ~63%. This cannot be attributed to the price of oil alone, obviously!
Airlines companies and the Catch-22 situation
Airlines in India are finding themselves in a bind for three key reasons:
The price of ATF (Aviation Turbine Fuel) has been on an upswing in tandem with the price of Brent Crude. Since ATF prices account for more than 60% of the cost structure of an airline, this has put significant pressure on the carriers.
The aviation market in India is growing at an 18-20% annualized rate and so aviation companies have to run really fast to keep pace. This means higher operating metrics, expanding the network of airline routes, and also purchasing and leasing new aircrafts to rapidly expand the fleet.
The combination of tough competition among existing players and the entry of new players like Vistaara and Air Asia implies that airline companies do not have leeway to increase their fares in tandem with rising costs. That puts further pressure on their operating and profitability margins.
Coming back to Jet Airways, what has gone wrong?
The case of Jet Airways is not due to oil prices and competition alone. These are systemic factors that impact all aviation companies. In fact, the warning is almost as dire as Jet Airways’ mass termination of its employees in 2008, which had to be subsequently retracted. This time around, there are rumors that Jet could run out of cash in the next two months. Although the company has refuted these claims, what could be the trigger?
Revenue growth is struggling; both at the volume level and in terms of pricing power. Consider this quick comparison of revenue growth. In the last four quarters, Jet Airways has displayed flat to negative revenue growth on a year-on-year (yoy) basis. On the other hand, Indigo and SpiceJet have managed to improve their revenue growth closer to 10%. Even if you look at average ticket rates, Jet’s ticket rate growth has been flat since the last four quarters, but SpiceJet and Indigo have sealed yoy ticket price growth of 7-10% on an average. This is partly due to Jet Airways having a predominant share in the overseas market. As a result, the likes of SpiceJet, Indigo, and GoAir have benefited in a big way from the 19% growth in the domestic aviation sector.
Jet is really taking a hit is on the cost front and the reasons are not hard to seek. Jet is a full-service airline, while Indigo and Spice are low-cost carriers. This means that they accommodate 15% more people per flight compared to Jet Airways, thus reducing overall costs. The cost of an airline is normally measured by the cost per average seat kilometer (CASK). In the case of Jet Airways, this CASK stands at Rs4.80 compared to Rs4 for Spice Jet and just Rs3.5 in the case of Indigo.
The predominant focus of Jet Airways on the Middle East market has meant that the company is missing out on the India growth story. The Middle East is seeing a slow demand and that means Jet’s market share in the international market will remain stagnant at 14%. But even this overseas stagnation has come at a cost because, in the last one year, Jet’s domestic market share has come down sharply from 18.5% to around 14.5%.
But the biggest problem for Jet Airways is the unsustainable debt that it is running on its books, leaving little room for any evasive maneuvers. Jet already has a negative net worth to the extent of (-$1.1bn) while its outstanding debt (even after the partial payoff) stands at $1.25bn.
So, what is the way out?
The model of the aviation industry is that your fares have to constantly come down to expand markets. This leaves the airline with the only option of managing its operating costs. From oil hedging to forex risk management to operational cost reduction, Jet needs to try everything. Above all, it needs to focus less on the frills and more on utility. That is what the market wants!
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