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Crude Drop and ICRA Upgrades Takes Jet Airways Up 18.5%, Price War Looms Ahead

Jet Airways shares are up 18% at Rs. 315, after Crude prices fell hugely yesterday to less than $75 per barrel. In addition, the Investment Information & Credit Rating Agency Ltd. (ICRA) upgraded the long-term rating of Jet Airways bank facilitiets from ‘C’ to ‘BB’.

This is what their previous and current ratings mean, as per ICRA’s definitions:

  • C: Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.
  • BB: Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.

The total amount of the long-term loans is Rs. 3,120 cr. While ICRA has boosted the long-term ratings, the ratings for the short-term loans that Jet Airways has taken stays at A4. The value of these short-term facilities is Rs. 4,250 cr. What is A4 exactly?

  • A4: Instruments with this rating are considered to have minimal degree of safety regarding timely payment of financial obligations. Such instruments carry very high credit risk and are susceptible to default.

In short, ICRA has expressed a slightly more optimistic outlook regarding their long-term loans, but reaffirms their belief that the short-term loans are still under a very serious risk of default. This is as strange as strange gets – because if they’re going to default in a short term loan, they’re going to definitely default on their longer term borrowings.

In their report, ICRA talks about the various reasons that led to them upgrading their rating on Jet, as well as the risks that still persist with regards to Jet’s loans.

The share price was at a 52-week low of Rs. 203.5 on 26 September this year. In the 2 months since then, the shares have steadily climbed, receiving a further boost in early November when Aviation Turbine Fuel (ATF) prices fell by 7% to Rs. 67 a liter.

Jet Airways

Shares of Jet Airways are currently trading at Rs. 315, up 18% from yesterday’s close of Rs. 268.40.

For Q2 2015, Jet Airways showed a lot of improvement in their performance. This can be seen in their revenue growth (13.77%) and the fact that their Net Losses for the quarter, went down by 73.6% y-on-y to Rs. 235.2 cr. This is after discounting the exceptional gains that Jet Airways reported this quarter from the sale of the ‘Jet Privilege’ Frequent Flyer Programme for Rs. 305.01 cr. to Jet Privilege Pvt. Ltd.

Spicejet, another listed airline, is up 10%. Most other Airlines (Air India, Indigo, Go air) are not listed, and there are other new airlines:

  • Air Carnival (South India)
  • Zav Airways (North East)
  • AirOne (Ex Sahara Air CEO)
  • Tata SIA, which hasn’t yet turned operational
  • Air Asia (Operational, new)

The fall of crude prices could simply mean another price war, as new entrants take advantage of that, and of cheaper financial to provide another round of discounts to customers. While that is good news for consumers, it could mean another round of red for Airline balance sheets. Will Jet Airways make it through another price war?

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