Jet Airways valuation
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This document discusses the financial difficulties faced by Jet Airways, one of the major airlines in India. It provides an overview of the industry trends, Jet Airways' financial performance over the years, and the key factors that affected the company like high fuel costs, increased competition from Indigo, and Etihad's withdrawal of financial support. It also summarizes the proposed restructuring plan where SBI and other PSU banks will acquire a majority stake in Jet Airways along with investment from NIIF to rescue the company from bankruptcy.
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Jet Airways valuation
- 1. PRESENTED BY – AMIT AGARWAL (06) HARSHIT GOYAL (20) NIYATI NIGAM (37) SUBHRAT BARAL (48) VISHWA RANJAN (58) “Creating value through restructuring of Businesses under stress”
- 2. Major Airline Market Share(%) Jan’19 Public / Private Indigo 42.5 Private Spice Jet 13.3 Private Air India 12.2 Public Jet Airways 11.9 Private Go Air 8.7 Private Air Asia 5.3 Private Vistara 3.8 Private Major Airline Net Income (INR Cr) Indigo 2243 (FY18) Spice Jet 566 (FY18) Air India -5765 (FY17) Jet Airways -630 (FY18) Go Air 205 (FY17) • Almost all airlines are Low Cost Carriers. Industry Trend
- 3. INDUSTRY TREND • INDIA’S PASSENGER TRAFFIC (DOMESTIC + INTERNATIONAL) GREW AT 16.52% Y-O-Y TO REACH 308.75 MILLION IN FY18. IT GREW AT A CAGR OF 12.72% DURING FY06-FY18 WITH DOMESTIC GREW AT A CAGR OF 13.91% • INDIA’S DOMESTIC AVIATION MARKET HAS RECORDED 52 CONSECUTIVE MONTHS OF DOUBLE DIGIT GROWTH BY DECEMBER 2018. • GROWTH IN DEMAND HAS CONSISTENTLY OUTPACED THE GROWTH IN SUPPLY RESULTING IN HIGH UTILIZATION (PASSENGER LOAD FACTOR). AS OF MARCH 2018, INDIA HAD THE HIGHEST UTILIZATION (PASSENGER LOAD FACTOR) AMONG THE TOP SEVEN AVIATION MARKETS IN THE WORLD. • DURING APR-NOV 2018, DOMESTIC PASSENGER TRAFFIC STOOD AT 181.72 MILLION WHILE INTERNATIONAL TRAFFIC STOOD AT 45.08 MILLION. • DOMESTIC PASSENGER TRAFFIC GREW YOY BY 18.28% TO REACH 243.28 MILLION IN FY18 AND IS EXPECTED TO BECOME 293 MILLION IN FY20E. • INTERNATIONAL PASSENGER GREW YOY BY 10.43% TO REACH 65.48 MILLION IN FY18 AND IS EXPECTED TO BECOME 76 MILLION IN FY20E. CONCLUSION: INDIAN AND INTERNATIONAL MARKET FOR AVIATION INDUSTRY IN GROWING AT ROBUST RATE.
- 4. JET AIRWAYS • Airline company providing air passenger transportation, cargo, and other related services. Transported 29.9 million passengers in FY18. • Two reportable business segments, domestic (inr116 billion) and international (inr129.1 billion). • Fleet of 112 aircraft. Avg. Fleet age 8.4 years Strength Weakness Code sharing and Interline Partnerships Growth in Traffic Volume (83.6%) Robust Fleet Base and Network Working Capital Deficit Operational Performance Opportunity Threat Growth Initiatives Growth Prospects: Aviation Industry Growing Global Travel and Tourism (T&T) Industry Network Expansion Intense Competition Volatile Fuel Charges Regulations in the Airline Industry
- 6. ETIHAD AVIATION GROUP (EAG) • Diversified global aviation and travel company offering air-transportation and cargo services • Eithad owns stock in Air Seychelles, Virgin Australia and Aer Lingus, apart from Air Berlin to counter competitor Emirates • In 2013, acquired A 24% equity stake in Jet airways Etihad gains Jet gains Mutual gains Jet airways shift one-third of its international operations to Abu Dhabi airport Access to US pre-clearance facility at the abu dhabi airport Maintains interline relationships and codeshare agreements with Jet airways Etihad purchased the Heathrow airport slots of Jet airways for $70 million. Lease its Airbus 330 plane to Etihad, raising more funds to repay high-cost debt. Hala group, an Etihad BU, manages both Etihad guest & Jet privilege loyalty programmes Resource-constrained Jet’s equity alliance gives it financial strength in a world large global players
- 8. INDIGO EFFECT 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 2012 2013 2014 2015 2016 2017 2018 2019 Market Share Jet Airways Indigo Indian Airlines LAST FEW YEARS DEVELOPMENT LEADING TO DISTRESS Year Jet Airways Indigo 2012 26.5% 20.0% 2019 14.3% 43.0%
- 9. LAST FEW YEARS DEVELOPMENT LEADING TO DISTRESS • JET LITE FAILURE: JET LITE REBRANDED UNDER JETKONNECT IN 2012 AND FINALLY MERGED UNDER JET AIRWAYS BRAND IN 2015 AFTER CONTINUOUS LOSSES. • JET FUEL AFFECT: • INDIAN CRUDE OIL BASKET REMAINED EXPENSIVE IN LAST 2YRS. FIRST DUE TO HIGH PRICES DUE TO DEMAND SUPPLY GAP FOLLOWED BY RS. DEPRECIATION AGAINST USD. • ATF PRICES INCREASED 26% SINCE JAN’18. SOARING ATF PRICE HURTS JET AIRWAYS PROFITS BADLY.
- 10. Etihad Affect • Jet was Equity was valued by Etihad as Rs.8541Cr. in Nov’13. • In 2015, Etihad had written off its investment in Italian carrier Alitalia, which filed for bankruptcy after posting a loss of more than $117 million. • 2017, Germany’s Air Berlin filed for insolvency. • After it, Etihad said that it was no longer in a position to provide financial support to the airline which had run into losses of close to $1 billion over six years.
- 11. Key Points for affecting future • Foreign carriers are allowed to own up to 49% in an Indian airline. • Etihad wants a Goyal-less Jet, going by its communications to Jet’s lenders. • Naresh Goyal committed to invest Rs. 700 crore in the airline, but his stake shouldn’t fall below 25% from the current levels of 51%. • Under the SEBI’s takeover code, any company acquiring control in a listed company, or when its stake crosses 25%, must make an open offer to its minority investors. Therefore, any additional equity infusion by Etihad, which owns 24% in Jet Airways, could go past the open offer threshold. Etihad wants relaxation on this norms which is not acceptable to Indian Govt.
- 12. Latest news : (Proposal in EGM 21.02.19) • Naresh Goyal agreed to give away managerial control. • NIIF and lenders banks offered Bank-Led Provisional Resolution Plan (BLPRP) which has been approved by Jet Board on 14.02.2019. EGM was called on 21.02.19 for approval by stake holders. • Restructured Jet Airways will effectively be 51% government fund and PSU banks-owned. • SBI-led lenders will convert Rs 600 crore loan into equity at Re.1, which will take their stake to 32%. • National Investment and Infrastructure Fund (NIIF), an investor-owned fund manager anchored by the government of India, will pick up 19.5% and invest Rs 1,400 cr. • Jet's remaining debt of Rs 6,000 crore will be restructured and converted into long term 10-year debt. • It is learnt Abu Dhabi-based Etihad, which currently has 24% stake in Jet, will invest another Rs 1400 crore, limiting its stake at 24.9% and avoiding an open offer. Etihad is expected to pick up the additional equity at Rs 150 per share. After this restructuring, Naresh Goyal's stake will fall from 51% to 20%. While he will remain promoter, Goyal will lose board seat and managerial control.
- 13. Valuation – DCF Assumptions FCFF calculation • Revenue grows at 10% (around 8.5% Jet Average) per year from 2018-2019 till 2022-23, thereafter at 8% till 2028 • EBIT margin increases from 13.5% ( Jet’s EBIT margin in Q3 2018 ) to 15.4% ( Indigo’s EBIT margin in 2018) • The NWC varies from -31% ( Jet B/S, 2018) to -2.56% (Indigo’s Financials, 2018) in equal steps • Tax rate of 30% used for FCFF calculation, a year after EBIT becomes positive (2023) • Growth rate of 5% for terminal value calculation Cost of Asset calculation • As Jet is distressed firm, Asset beta of Indigo used instead of Jet as it’s closer to industry • Risk Free Rate (Rf) 7.52% taken from 10 yr govt bond Interest Tax Shield calculation • Interest paid at 9% of debt (cost of debt from Jet bond rating assumed to be improved after restructuring.
- 14. BEAUTY LIES IN EYES OF BEHOLDER : DIFF. PERSPECTIVES -- DIFF. VALUATIONS Method Value of Equity Market is fairly pricing Jet (share is actively traded at NSE) 2,658.75 Cr. Distressed Adjusted Value of Equity: = Going Concern*(1-P)+ Distress Value* P •Going Concern by DCF •Probability of Distress (P) : Bond Rating & Damodaran’s sheet 2,010.09 Cr. Etihad is fairly pricing considering distress possibility •Jet share price per Etihad, from news reports = Rs 150 •No. of Jet shares, from Balance Sheet = 113597383 1,703.96 Cr. Revenue Multiple Approach = Going Concern*(1-P)+ Distress Value* P •Going Concern by Revenue Multiple •Probability of Distress (P) : Bond Rating & Damodaran’s sheet 6,379.03 Cr. NIIF is valuing it fairly NIIF (National Investment and Infrastructure Fund) proposed to invest 1400Cr. For 24% Equity stake 4,433.33 Cr. Real Options Approach NA. Majority holder will be banks and no major investments projected for Jet Airways hence real options are not logical to value.
- 15. THANK YOU
- 16. SOURCES • BALANCE SHEET AND INVESTOR’S REPORT OF JET IN PAST 5 YRS. • HTTPS://EN.WIKIPEDIA.ORG/WIKI/JETLITE • HTTP://TIMESOFINDIA.INDIATIMES.COM/ARTICLESHOW/68039871.CMS?UTM_SOURCE=CONTENTOFINTEREST&UTM_MEDIUM=TEXT&UTM_CAMPAIGN=CPPST • HTTPS://WWW.MONEYCONTROL.COM/FINANCIALS/JETAIRWAYS/ • HTTP://WWW.ACEANALYSER.COM/ANALYSER.ASPX?MENUTAB=C • HTTPS://WWW.LIVEMINT.COM/COMPANIES/SUUVA3QOSCP7EK4YTHBNCI/ETIHAD-SBI-DISCUSS-JET-AIRWAYS-RESCUE-DEAL.HTML • HTTPS://TAXGURU.IN/INCOME-TAX/CARRY-SET-LOSSES-TABULAR-FORM-FAQS.HTML • HTTPS://ECONOMICTIMES.INDIATIMES.COM/INDUSTRY/TRANSPORTATION/AIRLINES-/-AVIATION/A-JET-ETIHAD-DEAL-WONT-COMFORT-MANY- INVESTORS/ARTICLESHOW/67615614.CMS • HTTPS://WWW.BUSINESS-STANDARD.COM/ARTICLE/COMPANIES/SBI-PNB-MAY-BUY-OTHER-BANKS-EXPOSURE-TO-DEBT-LADEN-JET-AIRWAYS-119030400873_1.HTML • HTTPS://WWW.BUSINESSTODAY.IN/SECTORS/AVIATION/JET-AIRWAYS-EXPECTS-FUNDS-OVER-RS-3000-CRORE-POST-DEBT-REJIG-ETIHAD- INVESTMENT/STORY/319630.HTML • HTTPS://WWW.LIVEMINT.COM/MONEY/HROII2KLXMB72PAL0RTZUN/JET-AIRWAYS-NEEDS-AN-OVERHAUL-NOT-JUST-DEBT-RESTRUCTURING.HTML • HTTPS://ECONOMICTIMES.INDIATIMES.COM/INDUSTRY/TRANSPORTATION/AIRLINES-/-AVIATION/JET-LOAN-RESTRUCTURING-TO-BE-UNDER-SASHAKT-SCHEME-SBI- CHIEF/ARTICLESHOW/67803047.CMS • HTTPS://ECONOMICTIMES.INDIATIMES.COM/INDUSTRY/TRANSPORTATION/AIRLINES-/-AVIATION/JET-LOAN-RESTRUCTURING-TO-BE-UNDER-SASHAKT-SCHEME-SBI- CHIEF/ARTICLESH • HTTPS://WWW.FINANCIALEXPRESS.COM/INDUSTRY/ETIHAD-AIRWAYS-ABSTAINS-FROM-VOTING-AT-JET-AIRWAYSS-EGM-ON-FEB-21/1498528/ • HTTPS://MUMBAIMIRROR.INDIATIMES.COM/MUMBAI/OTHER/RESOLUTION-PLAN-WILL-HELP-JET-RECLAIM-ITS-VIABILITY-GOYAL/ARTICLESHOW/68158618.CMS • HTTPS://WWW.MONEYLIFE.IN/ARTICLE/JETS-BOARD-APPROVES-BANK-LED-PROVISIONAL-RESOLUTION-PLAN/56352.HTML • HTTPS://WWW.LIVEMINT.COM/COMPANIES/PEOPLE/NIVAAN-GOYAL-ON-BOARD-SEEN-AS-PROXY-FOR-NARESH-GOYAL-AT-JET-AIRWAYS-1551827019749.HTML • HTTPS://WWW.THEHINDUBUSINESSLINE.COM/SPECIALS/FLIGHT-PLAN/JET-AIRWAYS-ON-RAPID-DESCENT/ARTICLE26440193.ECE • HTTPS://WWW.LIVEMINT.COM/
Editor's Notes
- Strength Codesharing and Interline Partnerships The company operates a wider network of destinations at greater convenience through its codesharing and interline partners. Jet Airways has codeshare agreements with other airlines such as Air Canada, Etihad Airways, Kenya Airways, Malaysia Airlines, Qantas, Thalys, KLM, Garuda Indonesia, Virgin Atlantic, and Air France. The company also has 102 interline eTicketing partners. Apart from its codesharing partners, the company’s interline partners include AccesRail, Adria Airways, Aeroflot, Bangkok Airways, Biman Bangladesh Airlines, Cathay Pacific Airways, EgyptAir, Kenya Airways, Oman Air, and Vistara. Growth in Traffic Volume Jet Airways reported growth in its traffic volume during FY2018. The company carried 29.9 million passengers through 234,069 departures with an average passenger load factor of 83.6% in FY2018, as compared to 27.1 million passengers through 225,938 departures with an average passenger load factor of 81.3% in FY2017. Robust Fleet Base and Network The company’s strong fleet base connects a large network of destinations. As of March 2018, the company had a fleet of 120 aircraft. The average fleet age of the company's aircraft was 8.4 years as of March 2018. Through this fleet base, as of March 2018, the company operated daily flights to 45 domestic destinations and 20 international destinations. Its airline operations cover international destinations such as Abu Dhabi, Amsterdam, Bahrain, Bangkok, Colombo, Dammam, Dhaka, Doha, Dubai, Hong Kong, Jeddah, Kathmandu, Kuwait, London Heathrow, Muscat, Paris Charles de Gaulle, Riyadh, Sharjah, Singapore, and Toronto. Weakness Working Capital Deficit Jet Airways reported deficit in its working capital in FY2018, which could cause financial instability and make it difficult for the company to meet its short-term obligations. Working capital deficit renders the company to borrow additional funds in case there are any unforeseen indirect expenses, in turn increasing its interest liabilities. In FY2018, the company reported working capital deficit of INR72 billion compared to working capital deficit of INR64.7 billion in FY2017. Decline in working capital was due to the increase in current liabilities. Its total current liability was decreased to INR145 billion for FY2018, compared to INR119.3 billion in FY2017. This led to a marginal deficit in its working capital. Operational Performance Poor operational performance may reduce investor confidence and have a negative impact on its growth prospects. Jet Airways displayed poor financial growth in FY2018 during which the company recorded a significant decline in income levels, although the revenues increased by 8% on an annual basis. In FY2018, the company reported an operating loss of INR5.4 billion, compared to operating income of INR8.2 billion in FY2017. This was caused by higher maintenance, landing and navigation costs. It was also affected by increase in overall brent crude price by 16% during FY2018. The company’s operating margin was -2.2% in FY2018 which was lower than its close competitors, Interglobe Aviation Ltd and SpiceJet Limited, which reported respective operating margins of 10.9% and 6.6%. Opportunity Growth Initiatives Jet Airways takes various strategic initiatives to drive growth. The initiatives are expected to strengthen the company’s operations and increase its returns. In July 2018, the company placed an order of worth US$8.8 billion to Boeing for an additional 75 737 MAX 8 airplanes. In the same month, Jet Airways signed an agreement with GE Capital Aviation Services to lease 12 Boeing 737 MAX8s during June 2018 till 2020. Growth Prospects: Aviation Industry The company could benefit from the long-term positive outlook for the global air passenger industry, which can drive the demand for its services in the aviation market space. According to the Airports Council International (ACI), the global passenger volume is projected to reach 15.4 billion by 2031. The period is projected to witness an annual passenger volume growth of 4.9%. The domestic passenger volume in Asia Pacific is expected to account for 38.8% in 2040, followed by Europe (26%), Middle East (17.9%), North America (8.4%), Latin America and Caribbean (6.9%) and Africa 2%. Growth in air passenger traffic in emerging countries is expected to record 50.1% in 2022 and 49.9% in 2040; and in advanced countries, it is expected to reach 49.9% in 2022 and 38.4% in 2040. Growing Global Travel and Tourism (T&T) Industry The company is likely to benefit from the positive outlook for global T&T industry. According to the World Travel & Tourism Council (WT&TC), the direct contribution of T&T industry to the world’s GDP, is expected to increase by 3.8% per year during the forecast period (2018-2028), to reach US$3,890 billion in 2028, in comparison with US$2,570 billion in 2017. The industry's total contribution to GDP may increase to US$12,450.1 billion in 2028. Rise in investments in T&T industry to US$1,408.3 billion in 2028, is likely to boost activities within the T&T industry. Network Expansion The company’s network expansion strategy could increase its traffic volume. In June 2018, the company started second flight service between New Delhi and Dhaka. In the same month, the company started a direct service linking New Delhi with Nashik under the Government's Regional Connectivity Scheme (RCS) – UDAN. Under the same scheme, Jet Airways also started airline services linking Allahabad with Lucknow and Patna. In May 2018, the company planned to launch direct flights from Mumbai to Manchester. In April 2018, the company expanded codeshare partnership with ANA, covering service to and from Tokyo Haneda. In March 2018, the company expanded its presence in the North East by making Guwahati as its regional gateway and introduced several direct and nonstop flights connecting Jorhat Guwahati, Aizwal, Silchar, Imphal with New Delhi, Mumbai, Pune, Patna, Raipur, Chandigarh, Amritsar, and Bengaluru. In the same month, Jet Airways started a second daily frequency flight from Bengaluru to Singapore. In FY2018, as part of its network expansion plan, the company also increased its capacity between Indian metros and emerging cities such as Indore, Jaipur, Dehradun, Silchar, Bagdogra, Madurai, Mangaluru, by adding 30 new flights a week. Threat Intense Competition The competition in the airline industry has been intensified with the emergence of low cost carriers (LCCs) in the East Asian region. The low fare charged by these budget airlines makes Jet Airways' airline operation less competitive. In the long-haul market, the company faces competition from local operators in most geographical areas, including Middle East and Asia. In the medium-haul market, low-cost carriers have established strong market positions and continue to grow. Jet Airways faces stiff competition from Air India, IndiGo, Air Asia, Vistara, Go Air, Joon and SpiceJet. The recent policy reversal by the Indian Government allowing foreign stakes in airline companies in India may result in the launch of new airlines in the industry, further increasing the competition. Volatile Fuel Charges The company’s business is highly dependent on the price and availability of aircraft fuel, and its performance could be adversely affected by high volatility in fuel costs, increased fuel prices and disruptions in the supply of aircraft fuel. The fuel market is volatile and changes according to market, political and economic movements. Therefore, a modest decline or increase in prices could have a significant impact on the company's business operations. Several factors are responsible for such changes including domestic and foreign supply of oil, global economic conditions, price and availability of alternative fuels, governmental regulations, weather conditions and technological advances, among others. The global benchmark, Brent crude oil was traded more than US$75 per barrel on June 6, 2018, which was up US$20 over the previous year. Increasing prices could affect the company’s overall profitability. Regulations in the Airline Industry Jet Airways should comply with the standards and regulations enforced by MOCA (Ministry of Civil Aviation), DGCA (Directorate General of Civil Aviation) and AAI (Airports Authority of India). The MOCA is responsible for the formulation of national policies and programs for the development of the civil aviation sector in India. It is responsible for the administration of the Aircraft Act, 1934, and Aircraft Rules, 1937. The company could be affect due to any changes in the national policies for the civil aviation development. DGCA regulate the safety aspects of civil aviation in India. The changes in the safety policies could affect the company's operations. AAI is responsible for creating, upgrading, maintaining and managing civil aviation infrastructure in India. These regulations could impact the company's business operations, profitability and revenue. Airline company providing air passenger transportation, cargo, and other related services. Two reportable business segments, Domestic and International, which generated revenue of INR116 billion and INR129.1 billion respectively, in FY2018. As of March 2018, the company had a fleet of 112 aircraft. The average fleet age of the company's aircraft was 8.4 years as of March 2018. In FY2018, the company transported 29.9 million passengers through 234,069 departures with an average passenger load factor of 83.6%.
- Etihad Aviation Group PJSC (EAG) is a diversified global aviation and travel company. It offers air transportation and cargo services across the world. The company provides Maintenance, Repair and Overhaul (MRO) services for aircraft. It invests in global loyalty and travel distribution program. The company classifies its operations into five business units: Etihad Airways, Etihad Airways Engineering, Etihad Airport Services, Hala Group and Airline Equity Partners. EAG operates its airline business through its principal subsidiary Etihad Airways PJSC. Diversified Global Aviation And Travel Company Offering Air-transportation And Cargo Services In 2013, Acquired A 24% Equity Stake In Jet Airways Eithad Owns Stock In Air Seychelles, Virgin Australia And Aer Lingus, Apart From Air Berlin. Maintains Interline Relationships And Codeshare Agreements With Jet Airways Hala Group, An Etihad BU, Manages Both Etihad Guest & Jet Privilege Loyalty Programmes A Few Viable Options For Small, Resource-constrained Airlines Such As Jet In A World That Is Likely To Be Occupied By Large Global Players In Traditional Alliances (Oneworld, Skyteam And Star Alliance) Or Equity-based Alliances Such As Those Being Developed By Etihad. Jet Can Use This Arrangement To Finally Develop A Viable Strategic Brand And Offer An Attractive Value Proposition, Etihad US Pre-clearance Facility At The Abu Dhabi Airport. Etihad Itself Would Be The Main Beneficiary, But So Would Jet. Passengers Would Take Its Flights From Indian Regional Airports To Abu Dhabi, So As To Enter The US At That Airport, To Avoid The Long Lines At JFK And Other US Airports," Jenks Said. Jet Airways Is Also Set To Shift One-third Of Its International Operations To Abu Dhabi. Jet Airways Is Also Expected To Sign An Agreement To Lease Its Airbus 330 Plane To Etihad, Raising More Funds That It Can Use To Repay High-cost Debt. Earlier This Year, The UAE Airline Purchased The Heathrow Airport Slots Of Jet Airways For $70 Million.