Jet Airways grounds three planes to curtail cash burn

Crunched for cash, Jet Airways has begun belt-tightening exercise with sources claiming that the full service carrier (FSC) has been cutting capacity and flights to curtail cash burn to keep afloat.

An industry source, who spoke to DNA Money on condition of anonymity, said, "Three A330s have been grounded: one in Chennai, one in Abu Dhabi and one in an undisclosed location in Europe. Hence six routes have been reduced. The aircraft could have been grounded for reducing capacity, and not routes".

The source told DNA Money the grounding of the aircraft could have been done to prune capacity by merging flights with negative operating margin on a route to cut costs, and thereby reduce losses.

Another source also claimed that Jet's aircraft have been grounded but could not confirm the aircraft type or the reasons for it.

In a written response to DNA Money's queries, the Naresh Goyal-promoted airline refuted this and said "occasional aircraft changes were a result" of its network optimisation efforts.

"Jet Airways would like to state that your information is false and incorrect. The airline is always working to optimise its network and occasional aircraft changes are a result of such efforts as well as scheduled maintenance from time-to-time," replied the beleaguered airline, which has been defaulting on or delaying payments of senior employees' salaries over the last few months.

Till June, out of Jet's total fleet of 120 aircraft, 119 were operational. As per information available on its website, the airline currently has a fleet of 124 aircraft, including those on dry leased to other air carriers.

Pankaj Pandit, Bangalore-based aviation expert, said grounding of aircraft was normal during the financial crisis. According to him, long-haul aircraft consume more fuel and so are, generally, among the first to get hit when an airline starts cutting operations. He said this helps airlines to trim variable costs such as fuel, landing, navigation, handling, crew allowances, distribution and marketing and others.

"Airlines meet a large part of their working capital requirement from operating flights, but if a flight turns cash negative (having negative operating margin) then it's better to ground them and stop the cash burn. It is the easiest thing to do rather than wait for the times to improve. Just like companies cut down production by shutting factories, airlines stop operating certain flights or aircraft, which are cash negative," he said.

The average operating margin of domestic airlines have been declining in recent times with crude prices soaring and Indian rupee sliding. As per data available from Directorate General of Civil Aviation (DGCA), it fell to 3% in fiscal 2017 from 6% in 2015-16. It was in the negative at -5% in FY15, -11% in FY14 and -6% in FY13. The latest official data is not available.

Pandit believes operating margin may have moved in the negative territory in FY18 due to rising operational cost, primarily because of higher aviation turbine fuel (ATF) jet fuel prices.

According to numbers put out by Jet Airways for the first or the June quarter of the current fiscal, Jet's actual plane load factor (PLF) at 80% was below its breakeven PLF of around 94%. And since June the crude prices have climbed quite a bit, the gap between the breakeven PLF and the actual PLF may have widened further, unless the yield were also proportionately up.

As per Jet's April-June quarter figure, the airline's aircraft fuel expenses shot up 53% to Rs 2,332 crore from Rs 1,524 crore a year ago. Jet fuel spends are a major cost of scheduled air operators, constituting around 50% of their total cost. The full service airline's expenses on employees were up 12.6% to Rs816 crore from Rs 725 crore and lease rental rose 11% to Rs 637 crore from Rs 511 crore during the same period. As of March this year, Jet's total debt stood at Rs 8,424 crore.

Its earnings before interest, depreciation, tax and amortisation (Ebidta) slipped to -15% in the first quarter from 6% a year ago. The airline's Ebidta for the three months ending June 2018 was negative at Rs 962 crore compared with Rs 399 crore in the same period in the previous fiscal.

Its revenue per available seat kilometre (RASK), measured by dividing operating income by available seat kilometre, has also dropped 3.9% to Rs 4.10 on a year-on-year basis. What has made matters worse for the airlines, especially Jet, is that despite a fall in RASK they have not been able to raise fares as they do not possess much pricing power due to the competitive intensity in the market.

The airline recently raised Rs 258 crore through advance sale of tickets from Jet Privilege, a customer loyalty programme. This will meet its immediate working capital requirement even as it struggles to pay employee salaries.

To DNA Money's query on delayed salary payment, the stock exchange listed airline firm said, "While the company has been diligent in running its payroll as per schedule for all employees, it is only in the last couple of months that the schedule has been impacted due to unavoidable reasons. Despite these challenges, the company has ensured that 85% of its employees are paid salaries on time while those of the leadership, pilots and engineers have been delayed. However, the airline remains committed to honour its obligations".

An email to pilots, aircraft maintenance engineers (AMEs) and senior management last week, said, "We have remitted the balance of the August 2018 payroll today. However, I sincerely regret that owing to unprecedented circumstances, including the continuing rise in the price of Brent fuel and the appreciation of the US dollar, there will be a delay in the payment of the September 2018 payroll."

The airline said it was "actively exploring all possible opportunities to turn around the business".