28-Oct-2009 4:30 PM

EARNINGS WRAP: Jet Airways' losses widen; China's 'Big Three" return to the black

Analysis

Jet Airways, India’s largest carrier by market value, reported its largest quarterly loss in more than four years (the carrier’s net loss increased 6% to USD85 million) in the three months ended Sep-2009 (2QFY2010), attributed to the traditionally "lean" second quarter, low yields and the five-day pilot strike in Sep-2009. China’s ‘Big 3’ airlines, China Southern, Air China and China Eastern, meanwhile all rebounded to net profitability in same period, as economic growth (which expanded by 8.9% in the quarter) triggered a rebound in domestic air travel demand. The results also make it likely for the three carriers to report full-year profits.

Jet Airways' domestic traffic showing “some signs of recovery”

Jet Airways' five-day pilot strike in Sep-2009 led to ticket cancellations and a revenue loss of USD16 million and subsequent fare reductions to stimulate demand. This negated the benefits of lower fuel costs in the quarter. Revenues slumped 27% to USD495 million in the three month period.

The carrier added that domestic air traffic, which comprises 38% of total revenues, “has started to show some signs of recovery in the current quarter”, although a worsened pre-tax loss of USD76 million was experienced for domestic operations in the quarter.

International operations close to breakeven, following significantly improved results in 2Q2010

Jet noted that its international operations, which account for 62% of total revenues, are close to reaching breakeven, after a significantly improved pre-tax loss of USD8.4 million in the quarter and a “healthy” international EBITDAR margin of 28.5% (compared to a EBITDAR margin of -9.5% in 2Q2008). The carrier’s overall EBITDAR margin was 10.6% in the quarter.

Jet Airways total EBITAR margin: 1Q08 to 2Q10

“Intense competition” and over capacity leads to yield declines, but expected to improve over next few quarters

The Indian carrier, which reported a 4.6% yield decline in the quarter due to “intense competition” and overcapacity, “expects yield improvements with the peak season, as well as premium demand revival in the next few quarters.” Jet Airways and other airlines in the Indian market have started to raise fares over the last few weeks to improve the yield position, with Jet stating these increases “have not shown any negative impact on traffic”.

Jet Airways Executive Director, Saroj Datta, added, “the current capacity-demand situation is improving, capacity growth has been under check, while the demand continues to grow at a healthy pace. This coupled with a stable business scenario and steady GDP growth is an ideal environment for yields to go up from current levels. Further impact of our cost initiatives will start to show full blown results in the next few quarters”.

Load factors improve notably, but still way off break-even load factors

Jet transported 2.8 million revenue passenger in the quarter (-1.2% year-on-year), as the carrier reduced system-wide capacity by 18%, resulting in a load factor improvement of 10.7 ppts to 77.0%, although this was still significantly below the carrier’s breakeven load factor point of almost 95%.

Jet Airways passenger numbers and passenger number growth: 2Q08 to 2Q10

Jet Airways break even seat factor & Passenger load factor: 1Q08 to 2Q10

Big Three Chinese carriers swing to net profitability

By contrast, China’s ‘Big Three’ airlines, China Southern, Air China and China Eastern all rebounded to net profitability in 3Q2009.

Air China reported the largest net profit of USD130 million in the quarter, followed by China Southern with a USD42 million net profit and China Eastern with a net profit of USD8.4 million in the quarter.

Air China, China Eastern and China Southern financial highlights for three months ended 30-Sep-2009

	China Eastern	Y-o-Y change	Air China	Y-o-Y change	China Southern	Y-o-Y change
Revenue	1,669.4	+5.5%	2,058	+1.3%	2,335	+9.5%
Operating costs	1,463.9	-9.8%	1,975	-10.6%	1,958	-5.0%
Operating profit	-10.7	^	185.6	*	33.1	/
Net profit	8.4	~	129.6	#	41.6	<

Source: Centre for Asia Pacific Aviation & airline reports
^ Comapred to an operating loss of USD348.6 million in the previous corresponding period
~ Compared to a net loss of USD348.1 million in the previous corresponding period
*Compared to a loss of USD348.7 million in the previous corresponding period;
# Compared to a loss of USD288.7 million in the previous corresponding period. [more]
/ Compared to a loss of USD207.0 million in the previous corresponding period;
< Compared to a loss of USD121.5 million in the previous corresponding period.
Based on the conversion rate at USD1 = CNY6.83

China Southern has benefited the most from the improved demand for domestic travel, as domestic passengers account for 92% of its total of 49.0 million in the nine months to Sep-2009 (+13.6% year-on-year).

Also in the nine month period, Air China booked CNY2.02 billion (USD296 million) in gains from fuel-hedging contracts, while China Eastern booked CNY154 million (USD23 million) in such gains in the third quarter.