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Cost-cutting strategy pays off, Jet Airways on path to revival

By P.R. Sanjai, Mint, New Delhi on

Published in Senior Living Features

MUMBAI -- A close eye on costs, better capacity utilization and gains from a partnership with Etihad Airways PJSC have helped Jet Airways (India) Ltd report its first-ever annual profit for the year ended 31 March 2016, said a top executive at the airline.

Last week, India's second largest airline by passengers flown reported a consolidated annual profit of Rs.1,211.65 crore, as against a net loss of Rs.2,097.41 crore a year ago. Jet and other Indian airlines have benefited from a slump in crude oil prices that has lowered fuel expenses, which make up around 40% of their total costs.

In an interview, Amit Agarwal, acting chief executive officer and chief financial officer at Jet Airways, acknowledged that a drop in costs aided profitability, but added that higher capacity utilization and the partnership with Etihad have also helped the airline. Etihad holds a 24% stake in Jet Airways.

"Our focus is on delivering a turnaround which is sustainable in nature. We have added capacity which is equivalent to nine Boeing 737 planes in the network without adding actual planes," said Agarwal.

Cost reduction has also been a major part of the airline's strategy.

"We have focused on the smallest items for cost reduction, for instance, cutting the wastage of engine oil. On the larger items, we have renegotiated engineering and credit card contracts in favour of Jet Airways," Agarwal added.

The strong financial performance and improved cash flows enabled the airline to reduce its debt by Rs.1,680 crore in the year ended 31 March. Debt on the company's books has now come down to below Rs.10,000 crore, according to Agarwal.

He declined to share targets for further reduction in debt during the current financial year, but added that the airline would primarily use its cash flows to retire high cost debts.

A senior analyst with a domestic brokerage, who spoke on condition of anonymity, said that Jet Airways has managed to reduce its cost per available seat kilometre, or CASK, excluding fuel. At the same time, it has increased revenue per available seat kilometer or RASK.

For Jet Airways, CASK dropped by 3.2% from Rs.3.37 in 2014-15 to Rs.3.26 in 2015-16.

Despite these measures, the airline's CASK could inch up in coming days, especially if the rupee depreciates, as costs include several dollar-denominated expenses including airport and catering charges.

Agarwal agrees that there is a possibility of an increase in CASK if the rupee depreciates, but argues that the airline has a natural hedge since it earns more than half its revenue in dollars. The rupee has depreciated 1.55% against the dollar so far in 2016.

 

Agarwal admits that there are other causes for concern too, but spells out how the airline proposes to deal with them.

"There is constant pressure on yields that can impact profitability in future in the context of competition and discounted fares. However, Jet Airways will place itself midway--neither offering heavy discounts, nor over-pricing (its tickets)," said Agarwal, while cautioning that excess capacity in the airline industry could be disruptive.

The benefits of the partnership with Etihad Airways are also starting to play out. Passengers and revenue delivered by Etihad Airways and Etihad Airways partners rose by 86% and 72%, respectively, in 2015-16.

"The association with Etihad Airways is beginning to help. We have consolidated services at several international airports. In those select airports, either we are servicing or Etihad Airways. For example, the consolidation of services at two airports are helping us save $1.6 million a year," Agarwal said. Etihad Airways picked up a stake in Jet Airways in November 2013.

Kapil Kaul, chief executive officer at aviation consultancy firm Capa India, agrees that Jet's international operations have helped drive growth and profitability.

"The impact of the new global network of Jet-Eithad has driven India's international growth in FY15 and FY16. The back-end integration which includes joint procurements, etc., to bring cost efficiency and developing integrated corporate contracts, for both passengers and cargo, will further ensure cost and revenue upside. Some impact in these areas is already visible," Kaul said.

However, there's more work to be done, he said. According to Kaul, the Jet-Etihad partnership has not been fully leveraged so far and the promoters of the two airlines are still not entirely on the same page.

(c)2016 the Mint (New Delhi)

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(c) Mint, New Delhi

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