Jet Airways (JAL) continued to disappoint in Q1FY19 with EBITDAR plummeting to a loss of Rs 35 bn (including `36bn forex loss) and net loss widening to Rs 13.6 bn. Earnings took a hit due to:
(i) higher fuel CASK (up 37% y-o-y); and (ii) yield compression (down 2.5% y-o-y). Though non-fuel CASK continued to improve (-2.2% y-o-y), it still lagged management guidance of ~5%.
We expect dual pressure on earnings as: (i) oil price has jumped further by 5.3% QTD and 42% y-o-y. According to Dr Fesharakhi (renowned oil expert), oil could touch $100/bbl, which we believe would take further toll on profitability; and (ii) the exchange rate (Rupee/Dollar) continues to depreciate (down 4.0% q-o-q), which again impacts earnings—a 10% rise in ATF price or Rupee depreciation will impact FY20e EBITDAR 23% each. In light of the adverse competitive scenario and tightening macros, we downgrade to Hold.
Liquidity crunch averted
A key positive during Q1FY19 was the repayment of Rs 1.1 bn debt due this year. With over Rs 1 bn of additional cash from lease incentive/borrowings (net of repayment) and Rs 3.5 bn in equity from owned planes (net of aircraft debt), JAL has adequate runway for operations this year. Although Jet Privilege Programme’s monetisation continues to be a priority, it is not an urgent necessity.
RASK declines with PLF/yields under pressure
Consolidated passenger growth came in at 3.9% y-o-y (domestic up 5.8% y-o-y, international down 1.0%). Hits: CASK (ex-fuel) at `3.2/km fell 2.2% y-o-y. Misses: RASK declined 3.9% y-o-y (SpiceJet’s up 4.9%, IndiGo’s down 4.1%), with yield dipping 2.5% and PLF slipping by 130bps.
Outlook and valuations: Deteriorating macros; downgrade to Hold
Sharp rise in oil price coupled with a depreciating INR are key concerns. JAL’s non-fuel cost cutting targets appear increasingly ambitious in light of recent results. In our view, any recovery from the prevalent pricing war remains elusive. We conservatively estimate CASK (ex-fuel) to fall 10% to Rs 2.9/km by FY20. In light of the adverse competitive scenario and tightening macros we downgrade to Hold from ‘BUY’ with revised target price of Rs 331 (7x FY20e EV/EBITDAR versus 8x/9x for SpiceJet/IndiGo).