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Fresh Dawn

After four years in the red, Jet Airways finally turns around. But sustaining this performance will be a bigger challenge.
twitter-logo Manu Kaushik   Delhi     Print Edition: June 19, 2016
Photo: Shekhar Ghosh

Just five days before Jet Airways was to shift its European hub from Brussels to Amsterdam, terrorists carried out two bomb blasts at Brussels airport, leaving thousands of passengers stranded. Jet's four Airbus A330s and more than 600 passengers were also stuck. But as luck would have it, Jet was able to quickly move its passengers and aircraft to Amsterdam due to the recent arrangement with the Dutch government. The shifting of the European hub from Brussels to Amsterdam was aimed at covering more cities in Europe and North America with the help of codeshare agreements with KLM Royal Dutch Airlines and Delta Air Lines, the partners of Etihad Airlines, which owns a 24 per cent stake in Jet. Codeshare is an arrangement under which two or more airlines share a flight.

That fortune favours the brave is as true in life as it is in business. And Jet has had its fair share of both over the past few years. As a result, for the first time since 2010/11, it has returned to full-year profitability - it reported a standalone net profit of Rs 1,173.56 crore in 2015/16. While luck has played a part - in the form of lower fuel prices and improvement in market conditions - credit also goes to the tens of operational improvements, both big and small, that it has been carrying out in all aspects of the business. The partnership with big brother Etihad has helped too. The last time it had reported a standalone net profit (a mere Rs 9.69 crore) was in 2010/11.

Naresh Goyal, Chairman, Jet Airways
The reasons behind the turnaround include more sweating of aircraft, cost control, better network planning, renegotiation of contracts and, of course, the drastic fall in aviation turbine fuel, or ATF, prices.

Understandably, Jet Chairman Naresh Goyal is a happy man. "Jet Airways has been revitalised as a business in the last two years. Our focused efforts have resulted in significant improvement in operational performance. The record profit and overall strong financial performance is a result of several initiatives for improving productivity and efficiency," he told BT.

But the big question is, can it sustain the momentum, considering that the Indian market has historically been brutal to airlines, competition is intense, and there is a limit to operational improvements a company can carry out? The answers lie in the turnaround story so far.

More Sweat

Between 2011/12 and 2014/15, Jet struggled due to poor network planning, operational inefficiencies, directionless management and insufficient brand focus. Things started changing after the stake buy by the UAE's national carrier, Etihad Airways, in November 2013. The next year, Jet started implementing a three-year plan (2014 to 2017) to return to profitability.

To begin with, it started utilising each aircraft more. For instance, its aircraft (Boeing 737) utilisation rate, close to 11.2 hours per day for years, rose to 13.2 hours in 2015/16. This means Jet added capacity equal to nine Boeing 737 aircraft. This required detailed planning and took 15-16 months.

"It was a tedious task as we had to first define the network, which is an art," says Amit Agarwal, acting CEO and CFO, Jet Airways. "It's a highly complex structure. DGCA [Directorate General of Civil Aviation] guidelines say clearly that a captain, and captain crew, can fly only so many hours. We have to ensure the quality of pilots. A huge amount of preparation has gone into this," he says.

In Jet's case, this was even more difficult as it has significant domestic and international operations. Out of 555 flights per day in 2015/16, 133 were international.

Cost Control

Jet also set up 20 teams for cutting costs in different areas. For instance, its revenue management team has 10 people, called route controllers, who manage about 60 flights each. Their job is to monitor booking patterns and seat inventories for setting fares with help from a software called Pros. The difference in fares that two people sitting next to each other on a Jet flight have paid can be as high as five times. Globally, Pros is believed to have the capability of increasing revenues by 1-3 per cent.

Though fall in ATF prices has also helped lower costs, Jet says it has passed on most of the benefits of this to consumers. For Jet, ATF accounts for 30 per cent cost, compared to 40 per cent-plus for low-cost carriers, or LCCs, such as IndiGo and SpiceJet. "The fall in ATF prices has been about 38 per cent. If you do the math, you are talking about 11 per cent [drop in overall costs]. The dip in fares in the domestic market is about 9 per cent. So, over 80 per cent of the fall in fuel prices has been passed on to consumers," Agarwal had told Business Today in March. In the year ended March 2016, Jet's fuel expenses fell 25 per cent over the previous year, while its standalone income rose 8 per cent. ATF prices have risen 20 per cent since February, though.

Jet has also saved a lot of money by renegotiating maintenance, repair and overhaul, or MRO, contracts. The earlier contracts were on 'time and material' basis, which meant that when aircraft went for visits to MRO facilities, the full cost used to be accounted for in that quarter. It got these changed to power-by-the-hour basis. This means Jet now pays MRO companies on an hourly basis. The companies agreed as this gave them assured business. At present, Jet works with four MRO units.

These renegotiations would not have been possible if Jet was on its own. But the airline has 23 codeshare partners, most of them bigger than it, who brought heft to the negotiation table. Etihad alone has more than 650 aircraft.

"There are several areas where we are now working with partners, including catering, fuel and ground-handling contracts. Possibilities of sharing office spaces are also being explored," says Gaurang Shetty, Whole Time Director, Jet Airways. In Bangkok alone, Jet is saving more than $1 million a year by reworking ground-handling contracts.

Etihad's backing also ensures that it does not have to give bank guarantees for buying fuel. It can use this capital for other purposes.

"Our strategic collaboration with Etihad has enabled us to leverage cost advantages and economies of scale to the eventual benefit of our guests and employees," says Goyal.

"Jet is focusing on better network planning, turnaround time reduction, higher aircraft utilisation and renegotiation of vendor contracts. There's a deeper focus on bringing the cost per available seat kilometre (CASK) closer to that of LCCs. Benefits of synergy with Etihad are also coming in," says Amber Dubey, Partner and India head of aerospace and defence at global consultancy KPMG.

Jet, of course, is not alone. Domestic carriers, in general, have been performing well over the past 18 months or so. SpiceJet and GoAir have been making profits for several quarters while IndiGo, the largest Indian carrier by market share, has been profitable for eight years in a row now. IndiGo's net profit rose 52.6 per cent to Rs 1,989.7 crore in 2015/16.

"Jet's turnaround should be viewed in context of the operational environment. Just as the other airlines are doing well, so is Jet, as operational factors are favourable. These include fall in ATF prices, 20 per cent market growth, limited capacity augmentation and no fare war," says Jitender Bhargava, former Executive Director, Air India.

Little Big Things

Though Jet has gained enormously from the improvement in market conditions, the management, too, has been on its toes. It has gone into the minutest of details to make each operation, however tiny, more efficient. For instance, a separate team now negotiates fees with credit card companies. Plus, an engineering team meets every Saturday to discuss ways to plug leakages.

Other changes have also helped. For example, on landing, aircraft have the option of either using engine power or auxiliary power for air-conditioning. Auxiliary power is supplied by the airport and is cheaper than engine power. A team watches every aircraft and ensures that it connects to auxiliary power as quickly as possible.

Jet has also asked its e-commerce team to push ticket sales through its website and mobile app by adding wallet payments, cash-on-delivery and "farelock", a feature that gives people the flexibility to lock the fare and buy the ticket later. Increase in online sales has helped Jet save on payments to ticketing agents.

The results of these improvements are there for all to see. As per aviation consultancy CAPA, Jet's CASK fell in the first nine months of the year to Rs 1.28, which is 31.7 per cent lower than the Rs 1.87 in 2014/15. This is the second-lowest in the industry after IndiGo's Rs 1.24.

But are these improvements sustainable? "There's no guarantee in life. At least we are not disbanding these teams," says Agarwal.

Branding/Global Ambitions

Another decision the management took in 2014 was to exit the low-fare segment and phase out JetLite and JetKonnect brands. "I had JetLite, JetKonnect and Jet. Consumers were completely confused. We standardised the fleet. We decided to become a full-service carrier as the Indian market is growing at a phenomenal pace," says Shetty.

The decision to become a full-service carrier was also driven by a desire to cater to corporate/premium travellers, who are not as much concerned about fares as they are about connectivity and network. "As the Indian market matures further, there will be enough headroom to tap the increasing number of guests who are willing to pay a reasonable premium to experience superior personalised service," says Goyal.

The move will also help the airline expand international operations as full-service carriers do well on long-haul flights, that is, flights with duration of more than four hours. In 2012/13, Jet flew 37,058 international flights compared with 48,660 in 2015/16. Out of its 115 flights, around 50 fly on international routes. The focus on international routes is also behind its support for the 5/20 rule that makes it harder for new carriers (such as AirAsia India and Vistara) to fly outside India.

Amit Agarwal, Acting CEO and CFO, Jet Airways (Photo: Rachit Goswami)
Jet's global strategy involves signing more codeshare agreements rather than joining global alliances such as Star Alliance, Oneworld and SkyTeam. Though these alliances help airlines strike codeshare agreements, extend loyalty programmes and market themselves, each alliance is dominated by a few large players. For instance, Lufthansa is reported to have a substantial clout in Star Alliance. "I am giving the same benefits to Indian consumers without these alliances. We are in one of the best positions as we have partnerships with airlines that are part of the different alliances," says Agarwal.

Interestingly, Jet and Etihad are now the topmost international carriers in India, ahead of Air India and Emirates.

Though the partnership with Etihad has benefitted Jet in more ways than one, some allege that the airline has become just a feeder to the big brother. "With the entire 37,000 additional seats to both sides, provided by the 2013 bilateral agreement between India and Abu Dhabi, being used up fully till the winter schedule of 2015 and no other carrier, except Jet, having utilised the additional bilateral entitlement from India's side, the airline is gradually becoming a feeder airline to Etihad. This is a huge climbdown for an airline that used to be called 'gold standard' in India's airline market till a decade ago," says Bhargava.

Agarwal does not agree. "If Jet was a feeder airline to Etihad, all its 52 aircraft used for international operations should have stopped in Abu Dhabi. We fly to 27 cities overseas." There are reports that Etihad may increase its stake in Jet to 49 per cent.

Demystifying Debt

Analysts are concerned with Jet's debt, which stood at Rs 11,547 crore as on December 2015. The industry practice is 'sale and leaseback' aircraft rather than owning them, but Jet, says Agarwal, owns some 24 aircraft, bought with part equity and part debt. "I can knock off this debt immediately by doing 'sale and leaseback'. If we sell these aircraft, it will release some equity, which can go for repayment of debt," he says. That leaves Jet with a debt of Rs 4,000 crore. "In any business, you need to have some debt," says Agarwal.

So, while Jet may not agree that its turnaround is considerably aided by external factors, it has a long way to go before we can bet that the revival is for real this time.

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