We maintain ‘buy’ on Jet Airways, but reduce our target price to Rs 514 (from R612) to account for higher operating costs. Jet Airways’ Q2FY14 revenue of R4,200 crore was in line with our estimate.
However, non-fuel costs continue to rise sharply, leading to a loss of R890 crore, much higher than the anticipated loss of R520 crore. Jet has indicated one-off costs amounting to R620 crore — these include higher cost of maintenance, grounded aircraft, landing/navigation charges and rupee depreciation. We have been negatively surprised by the sustained high costs.
Fuel cost rose 17% q-o-q due to a 10% increase in ATF prices. Fuel cost now forms 43% of revenue. Lease rentals also rose 18% q-o-q, aided by an estimated 12% q-o-q increase in lease rentals in US dollar terms. However, the biggest negative surprise was in non-fuel costs to 37.6% of revenues, resulting in Ebitdar margin falling to (0.1) % versus 15.2% y-o-y. While Jet has referred to R620 crore of costs as one-offs, they have been on the increase over the last two quarters as well.
We expect H2FY14 to be better on the back of improvement in both traffic and yields led by an overall improvement in macro and seasonal uptick. In the long term, improved traffic and lower costs are expected synergies from the Etihad deal, which should boost profitability.