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Jet Airways (India) Limited

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Jet Airways (India) Limited September 21, 2017 Jet Airways (India) Limited Summary of rated instruments Instrument* Rated Amount Rating Action (in Rs. crore) Long-term loans 3,574.7 [ICRA]BBB- re-affirmed; outlook revised to ‘negative’ from ‘stable’ Long-term, fund-based 645.0 [ICRA]BBB- re-affirmed; facilities outlook revised to ‘negative’ from ‘stable’ Long-term, non-fund based 600.0 [ICRA]BBB- re-affirmed; facilities outlook revised to ‘negative’ from ‘stable’ Short-term, non-fund based 3,950.0 [ICRA]A3 re-affirmed facilities Non-convertible debenture 698.9 [ICRA]BBB- re-affirmed; programme outlook revised to ‘negative’ from ‘stable’ *Instrument details are provided in Annexure-1 Rating action ICRA has re-affirmed the long-term rating of [ICRA]BBB- (pronounced ICRA triple B minus) 1 assigned to the Rs. 3,574.7 crore2 long-term loans; the Rs. 645.0 crore long-term, fund-based facilities; the Rs. 600.0 crore long-term, non-fund based facilities; and the Rs. 698.9 crore non-convertible debenture programme of Jet Airways (India) Limited (Jet Airways). The outlook on the long-term rating has been revised to ‘negative’ from ‘stable’. ICRA has also re-affirmed the short-term rating of [ICRA]A3 (pronounced ICRA A three) assigned to the Rs. 3,950.0 crore short-term, non-fund based facilities of Jet Airways. Rationale The revision in the rating outlook takes into account the weakened operating and financial performance of the company on account of its inability to adequately pass on the increased operating costs, primarily jet fuel, to the customers. While yields in the domestic aviation industry have moderated on account of increased competition due to the addition of new players as well as capacity enhancements by the existing players, Jet Airways witnessed a YoY decline of 7.7% in international revenue per available seat kilometer (RASK) during Q1 FY2018 on account of subdued demand conditions and reduction in yields in the Gulf market. Jet Airways had witnessed significant improvement in operating performance in FY2016 on account of reduced jet fuel prices as well as the support from its strategic partner–Etihad Airways PJSC. However, it has been unable to sustain this improvement, as evidenced by 7.1% and 4.1% YoY reduction in RASK during Q3 FY2017 and Q4 FY2017, respectively, and a muted 0.4% YoY growth in Q1 FY2018. Furthermore, its cost per available seat kilometer (CASK) has witnessed a YoY increase of 0.5%, 5.6% and 2.3% during Q3 FY2017, Q4 FY2017 and Q1 FY2018, respectively. This has resulted in a decline in its operating profit margin to 4.0% during Q1 FY2018, as against 6.3% during Q1 FY2017 and 6.6% during FY2017. ICRA notes that Jet Airways has reported a profit after tax (PAT) of Rs. 58.0 crore during Q1 FY2018, supported by the share of profit of Rs. 114.0 crore on the completion of the development of its plot of land situated at Bandra-Kurla complex (BKC), Mumbai upon final settlement with Godrej Buildcon Private Limited (GBPL), and ~Rs. 46 crore profit booked towards the sale of Jet Privilege Frequent Flyer Programme (JPFFP) to Jet Privilege Private Limited (JPPL) entered into in FY2015. The ratings also factor in the large debt repayments due over FY2017 (Rs. 1,930.5 crore), 1 For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications 2 100 lakh = 1 crore = 10 million FY2018 (Rs. 2,803.6 crore) and FY2019 (Rs. 2,188.3 crore). ICRA notes the various liquidity initiatives being undertaken by the company, and the timely implementation of these initiatives is a key rating sensitivity. The ratings reaffirmation continues to take into account the improvement in Jet Airways’ CASK excluding fuel on the back of the strategic initiatives being undertaken together with its strategic partner in reshaping its business so as to enable it to return to sustainable profitability and improve cash flows. This strategic alliance between the two airlines has benefitted Jet Airways across all areas, including network growth, code sharing, operational synergies and cost improvement through maintenance contract renegotiations, co-ordination of flights, leasing of spare aircraft, procurement of fuel and other services, resulting in cost savings. However, the overall credit profile of the company continues to remain stretched, characterised by negative networth and high leverage, partly mitigated by the several liquidity initiatives undertaken by the company, and other ongoing initiatives with banks to raise funds. ICRA notes the various cost reduction activities being undertaken by the company, which would show results over the next three-five years. ICRA also notes that the upturn in the jet fuel prices has eradicated the pricing cushion available with the airlines and therefore sustainable improvement in the company’s performance hinges on recovery in the underlying demand. Furthermore, with a considerable portion of the company’s expenses, including financial / operating lease payments, fuel expenses and a significant portion of aircraft and engine maintenance expenses, being denominated in US$, the company is exposed to foreign exchange risk. Debt funded office space purchase (net outflow of ~Rs. 400 crore) at BKC under its project with GBPL is also expected to result in an increase in borrowings. The company is actively evaluating options to lease out the office space. Continued support from Etihad Airways is fundamental towards turning Jet Airways around and improving its liquidity profile. Key rating drivers Credit strengths Strategic initiatives planned by Jet Airways together with Etihad Airways in reshaping its business has helped contain costs - With the strategic investment by Etihad Airways, there is an improvement in operating cash inflows through network synergy, cost synergies, revenue management and leasing out aircraft. However, the cash flows would largely depend on the jet fuel prices and the ability of the company and the industry to pass on the increase in jet fuel prices through increase in fares. Gains from the sale of JPFFP to JPPL have supported cash flows and liquidity - In April 2014, Jet Airways transferred its JPFFP undertaking to JPPL, a 49.9% subsidiary, as a going concern on a slump sale basis, resulting in a total profit of Rs. 1,530.4 crore. Based on the commercial agreement with JPPL, Rs. 305.0 crore was recognised during FY2015, and the profit of Rs. 1,225.4 crore is being recognised based on the miles accrued during the period. Accordingly, the company recognised surplus of Rs. 262.5 crore during FY2015, Rs. 346.9 crore during FY2016, Rs. 311.6 crore during FY2017 and Rs. 46 crore during Q1 FY2018. The balance amount of Rs. 258.4 crore will be credited to income in subsequent periods proportionately based on the fulfillment of commitment. These have supported Jet Airways’ profitability. Of the 112 aircraft operated by Jet Airways (consolidated) as on March 31, 2017, 15 are owned, providing opportunities for monetisation and thus debt reduction - The company has 15 owned aircraft as on date. A sale and lease back transaction for the same would help reduce the debt burden. Credit weaknesses Credit profile of the company continues to remain stretched, characterised by negative networth and high leverage - Despite equity infusion (~Rs. 2,058 crore) by Etihad Airways in FY2014, Jet Airways continues to have negative networth (-Rs. 4,899.9 crore as on March 31, 2017), on account of the accumulated losses and diminution in the value of investments in Jet Lite. As on March 31, 2017, the company had total debt of Rs. 9,097.5 crore, lower than the Rs. 10,877.6 crore as on March 31, 2016. However, overall, till the company starts reporting profits on a sustained basis, the debt levels are expected to continue to remain high. Large repayments due over FY2018 to FY2020 – The company has repayments of Rs. 1,930.5 crore due in FY2018, Rs. 2,803.6 crore in FY2019 and Rs. 2,188.3 crore in FY2020. In the absence of adequate cash accruals, the company will require to refinance its repayments falling due. While the company has been undertaking several liquidity initiatives, timely funds tie-up is a key rating sensitivity. Weak market conditions in the Middle East, resulting in pressure on yields and thus profitability - The weakness in the international markets is primarily attributed to the Gulf as the economic slowdown has resulted in significant weakening of demand and thus excess capacity, both in passenger and cargo. This has resulted in a decline in fares. With ~55% of Jet Airways’ revenues being derived from international markets, the depressed demand and lower passenger load factors (PLFs) has impacted its profitability. The Indian airline industry continues to be faced with competitive pressures on industry-wide pricing power despite increasing jet fuel prices - Post entry of seven new airlines–Air Asia India, Air Carnival, Air Costa, Air Pegasus, TruJet, Vistara and Zoom Air–in the recent past, there are 12 scheduled domestic airlines currently operating in India, of which two have suspended operations. Addition of industry capacity by the new airlines and rapid expansion of capacity by the existing ones have resulted in intensely competitive market and the same prompted all the airlines to resort to variety of fare promotions in order to improve their PLFs. Debt-funded space purchase at BKC under its project with GBPL to result in an increase in borrowings - In 2011, Jet Airways entered into an agreement with GBPL for the development of a plot of land at BKC, Mumbai, taken on long-term lease from Mumbai Metropolitan Region Development Authority (MMRDA). The project entailed development of a total area of 1.25 million square feet (sft), of which ~0.25 million sft has been purchased by Jet Airways.
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