ICICI Direct : Buy Jet Airways

(BSE: 532617 | NSE: JETAIRWAYS | ISIN: INE802G01018)

Company Background Jet Airways commenced its operations as an air taxi operator in 1993 with four aircraft and was granted the scheduled airline status in January 1995. Currently it serves both domestic as well as international routes. Jet Airways is controlled by Naresh Goyal through his wholly owned entity Tail Winds and became public in March 2005. Jet Airways currently operates a fleet of 66 aircraft with a mix of Boeing, Airbus and ATR turboprops. With an average fleet age of 4.92 years, the airline has one of the youngest aircraft fleet in the world. It operates over 340 flights daily to 53 destinations, which spans across the length and breadth of India and beyond.

Investment Rationale Domestic air travel set to grow at 20% over the next five years The liberalization of aviation industry in India has precipitated the boom for domestic and international passenger carriers. The domestic passenger and cargo traffic recorded a growth rate of 44.6% and 8.7%, and the international passenger and cargo traffic recorded growth rates of 15.8% and 13.8% respectively during 2006-07. Domestic air travel in India is predicted to grow at 20% over the next five years. Aircraft manufacturer, Boeing, has raised its 20-year market forecast for Indian aircraft purchases from $25 billion to $35 billion.

Jet to gain with leadership in domestic market Jet Airways with a fleet size of 80 aircrafts (including JetLite’s 14 aircrafts) is the second largest carrier in India behind the Air India & Indian combined fleet of 132 planes. However, it currently has the largest market share of 30% in the domestic passenger traffic. Air India & Indian together have a 24% share while Kingfisher & Deccan combine have 28%. With a leadership position, Jet Airways is in the best position to gain from the huge growth in the Indian aviation sector.

Consolidation in the industry will lead to an increase in fares/yields The competitive landscape of the industry changed with the recent consolidation witnessed in the industry. From a fragmented sector with 10 players competing with each other, today we have 3 large players competing with each other in their respective segments, with a couple of other smaller players in the LCC (low cost carrier) space. These three together have a combined market share of 80-85%.

Competitive scenario Jet + JetLite Market share 30 Percentage Fleet size 80 (66+14), Kingfisher + Deccan Market share 28 Percentage Fleet size 74 (31+43), Air India + Indian Market share 22 Percentage Fleet size 132 (55+77) and Others Market share 20 Percentage Fleet size 34

We believe that this consolidation will help the industry, which was mired by low yields and excess capacity. With the consolidation set in, these large groups have started on a route rationalisation exercise, which will help in pulling out excess capacity from sectors, which are susceptible to heavy discounting to over capacity and heavy competition. The consolidation has also triggered rationalisation of fleet expansion plans by players and will reduce the excess capacity in the industry. As a result, we expect that the average yields in the industry would go up by around 5-10% over the next few quarters.

Expansion in profitable international routes Jet Airways operates international flights to Nepal, Sri Lanka, Singapore, Malaysia, United Kingdom, Thailand, Belgium, Canada and USA. The airline plans to extend its international operations further in North America, Europe, Africa and Asia in the coming years with the induction of wide-body aircraft into its fleet. It has plans to invest $ 2.5 billion over the next three years for acquiring new aircraft and training. With this its fleet would increase from 59 in FY07 to 82 by FY09. Jet Airways has also placed an order for ten Boeing B787 Dreamliners, which will add to its wide-body fleet serving on the international routes. The company recently signed a purchase agreement with Boeing for 20 737-800s to be delivered between October 2012 and December 2014, plus options for an additional 10 aircrafts. The 10 other -800s will be delivered between August 2013 and February 2015 if the options are firmed.

Opening up of the Gulf routes to help break-even on international routes Private Indian carriers do not have permission to operate on the Gulf route, at present reserved for national carriers (Indian and Air India). The Ministry of Civil Aviation has proposed removal of these barriers beginning January ’08 provided they meet certain conditions. The ministry has given the first permission to Jet Airways to fly on the lucrative Gulf routes. While Jet has been allowed to commence operations to Kuwait, Qatar, Oman and Bahrain, its request to fly to Abu Dhabi and Dubai is under consideration. Jet has been allowed to operate up to 70 flights a week to these four destinations.

We expect this to be a positive for Jet, since more than 40% of international traffic to and from India is on the India-Gulf route. JetLite (Jet’s LCC arm) has also applied for permission to fly to Gulf and is awaiting a decision from the government. Majority of the traffic on this route being price sensitive, we believe JetLite will be an attractive offering.

Risk and concerns Crude prices continue to remain high and pose a key risk to the company’s profitability, Competition from LCCs can impact profitability in the Gulf and other short haul international routes if the Government relaxes norms that restrict airlines with less than five years of total experience, Expansion in international space will be subject to competition from globally experienced and large players and also execution risk.

Financials Jet Airways posted a net profit of Rs 30.9 crore in the quarter ended June 30, 2007 compared to Rs 45 crore loss in the corresponding period last year. This was attributed to the slower capacity addition and increasing international operations. It also benefited from the exchange difference on foreign currency loans, as a result of the appreciation of the rupee.

Total income grew 18% to Rs 1983 crore up from Rs 1678.8 crore in Q1Y07. Revenue from domestic operations accounted for 76% of total operating revenue, compared to 87% during the previous corresponding year. Revenue earned was boosted by fast rising international revenues, which increased by 104.5%.

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