The trend of high growth in domestic passenger traffic continued in May. Total passenger traffic in May, at 4.7 million the highest ever, grew by 22% YoY (year-on-year) and 14% MoM (month-on-month). Also, this time, the growth was not induced by cheap fares, indicating a strong rebound in domestic travel and reinforces our bullish outlook on the sector.
For Jet Airways, the April domestic traffic of 0.8 million (41% YoY and 13% MoM growth) was in line with our expectations.
Passenger load factor in May reached the highest level in the last ten years for both the industry as well as Jet Airways. May?s load factor improved by 8% to 85% due to strong demand and low single-digit capacity addition by full service carriers. Budget carriers saw greater improvements in load factors. For Jet Airways, seat factors improved by 8% to 83%, and for Jet Lite, it improved by 7% to 85.3%. Jet Airways? international load factors improved by 3% to 80.3% over April. Improvements in load factors gel with our expectations and augur well for profitability.
Jet fuel prices have declined from $95 per barrel to $85 per barrel in the last couple of months against our assumption of $90 per barrel for FY11 and thus poses an upside risk to our earnings assumptions. Oil constitutes one-third of operating costs. Our sensitivity suggests a 10% drop in oil prices can increase FY11 earnings of Jet Airways by 50%.
Jet Airways is a key beneficiary of the revival in aviation traffic. Industry discipline should lead to improved yield and profitability. Strong Q1FY11 aviation traffic and earnings are likely positive triggers. We have an ?Overweight? rating on Jet Airways stock, with a 12-month target price of Rs 590. We value the company on EV (enterprise value)/Ebitdar (earnings before interest, taxes, depreciation. amortisation and rental) and benchmark it to regional Asian peers. Our target price implies 7.5x FY12e EV (enterprise value)/Ebitdar (the average of Chinese airline and regional international airline multiples).
Jet Airways, the largest airline company in India, is expected it to be a key beneficiary of the revival in passenger traffic. Industry discipline has lowered the risk of price wars, while cost-cutting measures are leading to margin improvement. Higher-than-expected passenger traffic growth and upside earnings surprise should act as positive triggers.
We value Jet Airways on EV/Ebitdar and benchmark it to regional peers, given the company?s limited trading history. We compare earnings growth prospects, profitability, and solvency risk of aviation companies across the region. Jet Airways has a strong domestic market, similar to Chinese companies, but we believe its growth potential is lower than these companies. When compared to international players such as Cathay Pacific or Singapore Airlines, Jet Airways has higher growth potential and larger domestic exposure. Hence, we believe Jet stock should trade at multiples higher than these international players, but lower than Chinese. A mid-range multiple of 7.5x FY12e generates our 12-month target price of Rs 590. Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points above and below our hurdle rate for Indian stocks of 10.5% or 0.5-20.5% above the share price. As the potential return was above the Neutral band at the time we set our target time, we rate the stock Overweight (V). Key downside risks, in our view, include a sharper-than-expected rise in the jet fuel price; a loss of price discipline, although slow capacity additions reduce the likelihood of such a possibility; and a scenario of a global double-dip recession.