Jet Airways (Jet) reported consolidated Q1FY18 EBITDAR of Rs 770 crore; lower than I-Sec estimates of Rs 930 crore. Consolidated PAT was Rs 58 crore compared to our estimates of Rs 67.3 crore. The miss was largely as a result of cost overrun which the company alluded to the cost incidence of incoming wide bodies into its fleet and inflationary hikes. The international segment performance remained weak as expected with total international revenue per passenger declining by 4% Y-Y in Q1.
The depressed demand scenario in Middle East (ME) continues along with weak PLFs. The domestic segment performed better with domestic revenue per passenger increasing by 10.2% in Q1.
Domestic Revenue per ASK (RASK) improved by 10.8% while international RASK dropped by 7.7% Y-Y. It is clear that the company has been increasing the domestic fares in order to minimise the negative effect of the international segment.
This has been further possible on account of a better pricing environment in domestic market, also confirmed by the management. The frontloading of income from the land development agreement with Godrej and full factoring of the proceeds of slump sale, Rs 300 crore pending as of FY17, by FY18 is boosting the FY18 PAT.
We factor 3.5%/4% fare growth with crude estimates of at $50/55 for FY18/19E respectively. Deleveraging remains a structural positive.
FY18 capacity growth in line with our estimates. In line with our expectations, Jet is inducting 8 B 737s into its fleet in FY18, while the B737Max will start coming from June 2018.
ME slowdown beyond locus of control. While domestic profitability of Indian airlines has been largely under pressure from overcapacity, the demand slowdown in ME is a structural overhang on Jet’s earnings. While the former essentially can be controlled by the airlines, the latter is a macro overhang. The problem is further exacerbated for Jet considering its overt dependence on B737s which have a limited flying range.
The total international revenue per pax has declined for five quarters in a row, while the same has improved for domestic segment for four successive.
Maintain ‘hold’ on Jet Airways with revised TP of Rs 554.