The challenges facing Jet Airways and its attempts to raise fresh capital continue to dominate the headlines, but all Indian carriers are having a tough time amid cost pressures and intense competition.
Attention has focused on Jet Airways in particular since a two-week delay over the summer in publishing its first quarter results. The struggling carrier subsequently embarked on efforts to secure a cash infusion and a major cost savings drive after eventually disclosing it had fallen to a loss in the first quarter of its financial year.
There was little respite in the second quarter. On 12 November it disclosed a further net loss of Rs12.9 billion ($179 million) for the three months ending 30 September 2018. It had posted modest profits in both comparable quarters the previous year.
The challenge facing Jet Airways is clear. It lifted revenues 8% in the second quarter, but this was far outpaced by its costs jumping almost a third to Rs75.3 billion. That includes a 58% rise in fuel costs.
"At the strategic level, the company remains committed and is on track to realise most of the outcomes that were outlined as part of its turnaround strategy last quarter," the carrier says. That includes costs savings in excess of Rs20 billion over the next two years, around a quarter of which it says have already been realised.
But despite this, and further revenue initiatives, it is undertaking more moves to “enhance economic viability, efficiencies and productivity” to ensure the long-term health of the business. That includes a review and consolidation of its network and service offering.
"With our clearly defined focus on profitability, we are in the midst of turning the ship around," says Jet Airways chief executive Vinay Dube. "We remain closely engaged with all our partners, who acknowledge the challenges faced by the Indian aviation industry and have been very supportive."
Jet, which is 24% owned by Etihad Airways, says it continues to "engage with financial stakeholders for supporting its funding requirements till it starts generating operational surplus and is actively working on the monetisation of its assets and capital infusion".
Indian conglomerate Tata Group, which is a co-owner of domestic carrier Vistara, subsequently confirmed preliminary talks have taken place regarding a potential investment in Jet Airways. But it stressed discussions have not reached the proposal stage.
Media reports had earlier suggested a potential merger between Jet Airways and Vistara. The latter, a joint venture with Singapore Airlines, began operations nearly three years ago in the Indian domestic market, and is eyeing the launch of international services.
The merger talk had lifted Jet Airways' share price, which has slumped this year. Those gains, though, were largely wiped out after Tata confirmed talks were only at a preliminary stage.
Jet cites the challenges in the Indian market, namely a sharp increase in fuel costs, the depreciating rupee and competition challenges given over-capacity in the domestic market.
Such concerns for Indian carriers were highlighted by credit agencies ICRA and Crisil, which have downgraded ratings on Jet Airways as well low-cost operators IndiGo and SpiceJet in recent weeks. They cite poor market conditions and the impact on airline balance sheets. Both are concerned that rising fuel prices are not being met with higher air fares, as competition forces airlines into a new round of discounting.
IndiGo and SpiceJet both flagged the challenging conditions themselves after falling into the red for the second quarter.
IndiGo's parent Interglobe Aviation posted a pre-tax loss of almost Rs10 billion ($136 million) for the three months ending 30 September 2018. That compares to a profit of Rs7.6 billion for the same period last year.
"The second quarter is seasonally the weakest quarter of the year. In addition there has been a surge in the fuel prices and a significant depreciation in the Indian rupee during the quarter," says IndiGo's interim chief executive Rahul Bhatia.
"Fuel constitutes over 40% of our total costs and about 50% of our costs excluding fuel are denominated in foreign currency. Typically in the airline industry, you would expect to see higher fares to cover the increased costs, however that has not happened here," he says. "This has significantly impacted our profitability.
IndiGo has been India’s most profitable airline, recording a profit every year at a net level for the past decade.
It was a similar story at SpiceJet, which reported a Rs3.89 billion ($53.8 million) operating loss for the second quarter of 2018. This compared to the Rs1 billion operating profit it logged in the same period last year, and marked its first quarterly loss since 2015.
Higher oil prices and the sharp fall in the Indian Rand against the US dollar this year have combined at a time of continued capacity expansion in the Indian aviation market.
FlightGlobal schedules data shows seat capacity this December among India’s biggest operators is running 14% higher than the same month a year ago. That includes a 28% increase at India’s biggest carrier by seat capacity, Indigo. Jet Airways is the only one of the seven carriers which will have lower capacity than a year ago.
While a recent sharp drop in the barrel price of Crude Oil - which is as of 19 November was back at early year levels in the mid-$60s range - there is little respite in additional capacity.
Indeed IndiGo will grow capacity even faster - by around 35%- in the quarter ending 31 December 2018. Speaking during an earnings call, the carrier's chief financial officer Rohit Philip explains that capacity increase is being driven by a ramp up in the number of A320neo it will receive in the coming quarter "to make up for the delays" in planned aircraft deliveries earlier in the year.
Philip acknolwedges the increase in capacity put pressure on unit revenues. "In this growth phase, when new capacity is being added, the RASK is generally lower as it takes time for new markets to mature," he says.
IndiGo senior advisor Gregory Taylor adds that it is taking a long-term view towards its planned network growth over the next two quarters. "Even though we have somewhat of a bubble in our capacity during these two quarters, we still are comfortable with our long-term capacity plans. We think we are on the right strategy to create value, not only for shareholders but for our customers," he says.
SpiceJet meanwhile will over the next quarter take delivery of 10 Boeing 737 Max aircraft and four Bombardier Q400 turboprops, with another eight 737 Max aircraft and four Q400s planned for the fourth quarter.
"With the crude prices taking a fall in this quarter, the profitable performance is expected to pick up during the next two to three quarters," it adds.
Jet Airways, which placed its own major follow-on order for Boeing 737 Max aircraft earlier this year, will itself take another six of the type of its second half. It though is using the aircraft to replace older 737s in the fleet, as part of its efficiencies measures.
Source: Cirium Dashboard