Jet Airways - double whammy: Lower yield, higher oil price headwinds; Buy :: Edelweiss

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Jet Airways (JETIN IN, INR 455, Buy)

n  Revising down earnings to reflect lower yields and higher oil prices

Based on our interaction with Jet Airways (JAL) management and industry sources, we understand that yields have come under severe pressure in February and March (seasonally weak months) despite high oil prices. We now estimate 8% Q-o-Q decline in domestic yield (earlier 5%) and 5% in international routes (earlier 1%) in Q4FY11. Due to Indigo’s aggressive stance (offering one ticket free for every two tickets in January followed by one for every ticket in February), most other airlines have been forced to toe the line. Oil prices, on the other hand, are up 16% Q-o-Q versus 13% assumed earlier. As a result, we expect JAL to report consol loss of INR 2.1 bn in Q4FY11 (versus INR 399 mn loss earlier). Ergo, we have revised down FY11-13E EBIDTAR ~5%.

n  Industry load factors at six-year high; could boost yield

In 9mFY11, 18% domestic pax growth outpaced the 9% supply (ASKM) growth, resulting in load factors of 77.9%, highest in the past six years. Demand has remained firm in February-March in higher double-digits despite the high base effect coming into play. In FY12E, we believe 15-16% demand growth will continue to outpace the 13-14% supply growth, resulting in industry load factors continuing to remain in the high 70s. We have estimated a 2.5% average improvement in domestic yield in FY12 (in line with the trend over FY07-11E; refer table 2). We have assumed average 6% rise in oil prices in FY12 over FY11.

n  Termination of lien on BKC land could be a trigger

JAL has applied to the High Court to remove the lien on BKC land. Currently, as all the company’s assets are on lien to the court due to the ongoing JAL-Sahara case, JAL is restrained from sale and leaseback (SLB) transactions on owned aircrafts and also the sale of BKC land. The company expects INR 5.5 bn upfront from the land sale. We have not factored any benefit flowing from either land sale or SLB (earlier assumed INR 1.5 bn profit flowing from SLB each in FY11 and FY12).

n  Outlook and valuations: Benefit from oil price fall; maintain ‘BUY’

We believe strong demand will continue to outpace supply in FY12, resulting in high industry load factors and improving yields. Further, any potential fall in oil prices will improve profitability significantly. At CMP of INR 455, the stock is trading at FY12E 7.0x EV/EBIDTAR. We continue to value the company at 7.25x EV/EBIDTAR and reduce our target price to INR 560 (earlier INR 783), reflecting our downward revision of EBIDTAR estimates. We maintain ‘BUY’.