Jet Airways’s Q2 profit remains grounded, thanks to international operations

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Jet Airways (India) Ltd continues to underperform peers by a huge margin. It reported a 60% drop in Ebitda to Rs261 crore in the September quarter. Ebitda stands for earnings before interest, tax, depreciation and amortization.

In contrast, InterGlobe Aviation Ltd, which runs IndiGo, reported a 2.8 times jump in Ebitda to Rs378 crore, on the back of improved yields.

Jet Airways provides a break-up between its domestic and international operations, which suggests the culprit is the latter. While profit of the domestic operations grew around 12% year-on-year, profit from international operations fell 13%. A sharp rise in unallocable expenses resulted in the huge drop in reported profit.

Analysts point out that the company’s much larger exposure to international routes, especially connecting the Middle East, is the reason for the underperformance.

Competitors such as IndiGo get a majority of their revenues from domestic operations, which have done better on the back of both passenger growth as well as improved yields.

Jet Airways’ underperformance is all the more worrisome because its stock has been rallying for no apparent reason. As the chart alongside shows, the company’ shares have outperformed those of InterGlobe this year—particularly in the past two months.

Jet Airways’ performance in the September quarter, if anything, highlights the glaring gap between its fundamentals and its overvalued stock.

The management met analysts last month and said it plans to cut operational costs by a wide margin. Some analysts got excited about the prospects of the company’s margins rising to levels enjoyed by peers, but even in a best-case scenario, this is some time away. Meanwhile, margins of competitors are also expected to rise with the use of more efficient aircraft; as such, it may be foolhardy to expect Jet Airways’ margins to match that of its peers.

For now, the big worry remains its international operations, which is dragging the overall performance. To top all of this, the company’s huge debt remains an overhang. Given all these concerns, it’s rather strange that Jet Airways’ shares have taken off and outperformed peers in recent weeks.

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