http://www.dnaindia.com/report.asp?NewsID=1067092
Jet Airways ‘flying into cost turbulence’

Praveena Sharma
Thursday, November 30, 2006  22:42 IST

To thrive, it should benchmark costs with no-frills rivals, say analysts

BANGALORE: Two years back, investment banking and advisory services firm Seabury Group, which boasts of a client list that includes leading airlines like Lufthansa, Ryanair, Air Canada and others, had prescribed a survival pill to the full service carriers (FSCs) grappling with competition from low cost carriers (LCCs) in the US and European markets.

There were a few strict no-nos on the list — protecting market share by selling tickets below cost was not a viable survival strategy; benchmarking costs against competing full service carriers was insufficient; and those who believed the current market conditions were transient would face a very difficult future.

Reeling under the impact of LCC invasion in the market, home-grown legacy carrier Jet Airways has tuned itself to the first suggestion but digressed from the prescription on the other two counts.

In fact, Jet’s chief commercial officer, Garry Kingshott, is emphatic the current market “is a moment in time.”

Why does Kingshott differ from Seabury? The answer, he says, lies in the current Indian situation, which is very different from other markets.

“(Today), the market is out of balance. Capacity exceeds demand, causing average fares to fall while aircraft numbers exceed infrastructure, causing additional costs to the sector. All this will balance out in time,” explains Kingshott.

But, what after things even out? The lean and mean LCCs would still be around.

What is Jet doing ward off competition from them? Seabury’s market study warns that unless full service carriers smarten up on cost management, their flight to profit would not be smooth.

“A (beleaguered) FSC should benchmark its cost against low cost carriers, not other full service carriers, and try to understand why the gap exists and understand the costs associated with providing incremental services,” says a presentation of the investment banker.

If you go by Jet’s numbers, that’s not happening. Over the last few quarters, its unit cost (cost per available seat kilometre or CASKM) has only been spiralling. It jumped 23.82% from Rs 3.40 in the first quarter of 2005-06 to Rs 4.21 in the quarter ended September in the current fiscal. On the other hand, its revenue per passenger kilometre is up by just 7.61% from Rs 5.25 to Rs 5.65 during the same period.

This has only widened the cost gap between itself and one of its biggest rivals in the LCC space, Air Deccan, which has pruned its unit cost by around 10% over the last eight months to bring it down to Rs 3.

“Even today, Jet’s cost (on CASKM basis) is over 60% higher than ours. Our composite (Airbus and ATR) unit cost is Rs 3 in comparison to Jet’s Rs 4.80,” boasts Air Deccan COO Warwick Brady.

This, analysts say, has brought down Jet’s seat load factor below the breakeven load factor. Just over a year back, its seat load factor was much above the breakeven load factor. In Q1 of 2005-06, it had a seat load of 75.2% against a breakeven seat factor of 64.8%. This has reversed in the Q2 of 2006-07 with passenger load down to 65.6% against a breakeven load of 72.8%.

On a positive note, fuel surcharge hike has helped Jet improve gross yield, which climbed 8% in Q2 this fiscal after a dip of 6% in Q1.

Without the levy, gross yield would have dropped by 5% and 9% in Q2 and Q1, respectively.

Analysts said Jet and other FSCs, like Indian Airlines and Air Sahara, cannot afford to ignore the challenge from LCCs. “If they don’t get their act on cost transformation process right, it wouldn’t long before they go bankrupt,” says an international broking firm analyst.