IIMB

NOW YOU SEE IT, NOW YOU DO NOT: THE CASE OF JET AIRWAYS AND ITS ACCOUNTING POLICIES.*
If you want to become a millionaire, start with a billion and buy an airline. It's sad but true. Richard Branson
The year 20082009 had been very difficult for the airline industry. Losses of the airline companies globally accounted for nearly US $10 billion. Increase in crude oil prices to US $140 per barrel, fueled by global economic recession led to turbulent times for the airline companies. From the demand perspective, recession also hit travel plans of both business as well as leisure travelers. Earnings fell drastically for most companies, however Jet Airways first quarter net earnings soared by 364%, as compared to the previous years first quarter.

Overall revenues were up 46% as compared to the same period a year ago, and up 6% versus the immediately preceding quarter. Our operations as a whole showed a pre-tax profit of Rs. 2191 million or US $50.9 million versus a profit of Rs. 495 million or US $12.21 million during the same period last year. The breakdown of this number shows a profit of Rs. 5022 million on the domestic operations, and a loss of 2831 million on the international operations. These numbers will also be need to be read along with the changes in the accounting policy. Vishwanath, General Manager, MIS, Jet Airways 1 The last line of the conference call gives us an indication of the issues in the accounting followed by Jet Airways.

BACKGROUND OF JET AIRWAYS (INDIA) LTD.

Jet Airways India Ltd. (Jet Airways) has been Indias largest private domestic airline and one of Indias largest international airlines with a turnover of Rs. 114,769 million2 for the year ended March 31, 2009. Jet Airways, an Indian company was promoted by Naresh Goyal, its founder and chairman of the company. Naresh Goyal a graduate in commerce, started his career in the tour and travel industry as a sales agent for the Lebanese International Airlines and later on started his own travel agency, Jetair in 19743. He promoted Jet Airways in 1992 with the opening up of the Indian economy. Naresh Goyal has been the recipient of several national and international awards as an entrepreneur in the travel industry.4 Jet Airways commenced its operations in 1993 with a fleet of four Boeing 737 aircraft. By 2008, the company operated around 380 flights daily to 64 destinations within India and overseas, including destinations such as New
At the analyst meet while announcing the third quarter numbers. http://www.jetairways.com/EN/IN/Uploads/InvestorRelations/TranscriptofAnalystcallforresultsJuly.pdf 2 Conversion rate of $0.023 to Re. 1. 3 http://www.jetairways.com/EN/IN/AboutUs/ChairmanProfile.aspx accessed on 2/7/10. Excerpts of the conference call to analysts are given in Exhibit 6. 4 Some of the awards include: Business Person of the Year award by UK Trade & Investment in 2008, Man of the Year Award by the Aviation Press Club (APC) at its 30th Anniversary in Belgium (2008), Travel Entrepreneur of the Year award at the 19th Annual Travel Trade Gazette, Travel Awards in 2007 in Bangkok, etc. http://www.jetairways.com/EN/CH/AboutUs/ChairmanProfile.aspx
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Prof Padmini Srinivasan assisted by R. Subash and M. Satish prepared this case for class discussion. This case is not intended to serve as an endorsement, source of primary data, or to show effective or inefficient handling of decision or business processes. 2010 by Indian Institute of Management Bangalore. No part of the publication may be reproduced or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise (including internet) - without the permission of Indian Institute of Management Bangalore. Ref. #

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York, Toronto, Brussels, London, Hong Kong, and others. Its fleet of aircraft included Boeing 777-300, Airbus A330-200 aircraft, next generation Boeing 737-400/700/800/900 aircraft, and ATR 72-500. The company offered both passenger and cargo transportation services. Jet Airways had won several recognitions for its excellence in 5 operations. It also set a record by flying 36,406 passengers with a seat factor of 86% in 2006 . In April 2007, Jet Airways acquired Sahara Airlines (which was later renamed as JetLite), a low-cost carrier to gain synergy with the 6 existing operations. Jet Airways has been the largest private sector airline in India with a market share of 29.2% in the domestic market as on March 2008. The company went public in 2005, through a public issue of 172, 66,801 shares at an issue price of Rs. 1,100. The shares were listed at the National Stock Exchange and the Bombay Stock Exchange on March 14, 2005. On listing, the shares were quoted at Rs. 1,155 which further rose to Rs. 1,428 on that 7 day . The equity held by the promoters and its affiliates was 80% in 2009. The Jet Airways board of directors was composed of 10 directors, constituting individuals who were eminent globally both from the private and public sectors. The financials of the company from 2006 to 2009 are given in Exhibits 1 and 2.

TURBULENCE IN THE AIRLINE INDUSTRY

After the year 2000, India saw the emergence of many low-cost airlines such as Air Deccan, Spice Jet, Indigo, GoAir, etc. As air travel became affordable, several people started using air travel especially with the advent of lowcost airlines, intensifying the competition for full fare airlines like Jet Airways. To counter the competition, many airlines resorted to discounted airfares. The airline industry went through a turbulent period shortly after 2006. Rising oil prices increased the cost of operations for the airlines. The price of aviation turbine fuel was hiked by nearly 20% in May 2008. Added to this was the onset of slowing down of the economy and recession in several countries. Business growth was hindered and consumers become conservative in their traveling. The average passenger load factor had been 67.7% and the revenue passenger was 21,444 million kilometers. Rising oil prices in 2007 and 2008 forced companies to increase the airfares. The domestic traveler hit by inflation and high airfares resorted to other modes of transport, especially for short duration flights. The shifting of airports in key cities, the charges of user development fee, and austerity measures forced by companies as well as by leisure travelers saw a reduction in air travel, leading to poor performance of the airline industry as a whole. The Indian aviation industry continued to grow, though at a slower rate, during the year under review. Economic growth, the emergence of India as a global economic power and other factors, that have had a positive impact on air travel into and from India, were sustained all through the year under review. However, the aviation industry worldwide was adversely affected by the spiraling cost of aviation turbine fuel, caused by the continuing increase in crude oil prices. The resultant increases in fares and fuel surcharges that the airlines had to implement, resulted in a slowdown in air travel, both in India and worldwide. Directors Report, Annual Report of Jet Airways, 2008 8. The performance of the Companys domestic operations was also adversely affected by lower domestic passenger traffic in the country, primarily due to the economic slowdown and unrealistic pricing adopted by carriers, caused by the overcapacity that resulted, in order to attract passenger traffic. The performance of the Companys international operations, particularly its long-haul sectors, was adversely affected by weak demand and yields, primarily caused by the slowdown and recessionary conditions in most global economies. Directors Report, Annual Report of Jet Airways, 2009 9. Most airline companies were looking at innovative ways to increase their revenues and to combat the crisis. Jet Airways entered into mutually beneficial agreements with its alliance partners as well as other airlines. Routes were restructured and some of the companys aircraft were leased out to other airlines.
5 6

DatamonitorAirlines in IndiaNovember 2008 Ref Code 01020756 Jet Airways (India) Ltd. 16th Annual Report, 20072008 7 http://www.thehindubusinessline.com/2005/02/28/stories/2005022802090100.htm 8 Annual Report for the year ended March 31, 2008 9 Annual Report for the year ended March 31, 2009

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First Quarter (2008-2009) Results of Jet Airways

Several airlines posted losses in the first quarter of the year 20082009; rise in the crude oil prices and slowing down of demand being the chief factors affecting the performance. New entrants in the airline industry had added capacity which led to surplus supply. Airline companies were trying to restructure and revaluate various routes to increase the load factor. Airfares were also increased by most airlines. Although many other airlines posted losses during the first quarter of the financial year 20082009, Jet Airways posted a rise in net profit (rose by 364% as compared to the first quarter of the previous year). Sales recorded in the quarter were Rs. 28,671.6 million as compared to the first quarter of 2007 at Rs. 18,066.7 million, an increase of 58%. The net profit after tax for the quarter ended June 30, 2008 was Rs. 1,433.8 million as compared to the quarter ended June 30, 2007 of Rs. 308.8 million. Refer Exhibit 3 for results of the first quarter 20082009 announced on July 30, 2008. What was the reason for such growth in the bottom line contrary to what one would have expected? The conference call transcript from Jet has the answers. During this quarter, we have changed our accounting policy for charging depreciation on our narrow-body aircraft through a straight-line method from a written-down method to be in line with our policies of the wide-body aircraft as well as to be in line with international practices. On account of this change, there was a one-time impact of Rs. 9,159 million or US $2,12.8 million, which has been considered in the current quarter. The other change in accounting policy that we will be able to operate is to the extent of foreign currency translation loss or gain. We have now adopted a policy by which the same will be adjusted in the carrying cost of asset, rather than accounting for the same in the profit and loss. Thus, the rise in earnings would not have been possible without the change in the depreciation method for its narrow-body aircraft and the accounting treatment for the foreign currency translation losses.

Accounting Policy of Jet Airways

1. Depreciation (20082009) The airline industry has been a capital intensive industry and the fixed assets formed a major component of the assets of an airline company. Jet Airways reported a net block of fixed assets (property plant and equipment including intangible assets) of Rs. 162,619 million. Out of these, the aircraft accounted for Rs. 139,043 million, nearly 85% of the total assets. Although other expenses such as fuel cost or administrative expenses are accounted using the accrual method of accounting, requiring very less or no estimation, depreciation is an area requiring considerable judgment and estimation. Depreciation accounting can sometimes result in distortion of the companys bottom lines and hamper the comparison of companies. The depreciation policy of Jet Airways is reproduced below after the change: Depreciation on tangible fixed assets has been provided at the rates and in the manner prescribed under the schedule XIV to the Companies Act, 1956 on Written Down Value method, other than Narrow and Wide Body aircraft which are depreciated on straight line method and expenditure incurred on improvements of assets acquired on operating lease are written off evenly over the balance period of the lease. Premium on leasehold land is amortised over the period of lease.10 Depreciation rates are given in Schedule XIV of the Companies Act, 1956, in India, which represent a minimum threshold rate. However, companies can choose a higher rate of depreciation if justified. The Indian accounting standard does not mention any rates for depreciation. Jet Airways fixed assets schedule for the year ended March 31, 2009 is given in Exhibit 4.

10

Annual Report for the year ended March 31, 2009.

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The airline industry has been using different types of aircraft for passenger transportation, the popular classification being the wide-body aircraft (WBA) and the narrow-body aircraft (NBA). These aircraft differ in terms of the technology, performance, and efficiency in operations. Jet Airways normally used WBA for international operations and NBA for domestic purposes. During the first quarter ending June 2008, Jet Airways decided to change its accounting policy by adopting the straight-line method (SLM) instead of the written down value (WDV, also termed as reducing balance) method for its NBA. The effective rate of depreciation under SLM was 5.6% per year, down from 16.2% under WDV. The residual value would be however 5% irrespective of the method used. The company justified the change stating: Depreciation on narrow-body aircraft was hitherto provided on written down value method. Based on the usage of such aircraft, the industry practice followed in domestic and international markets, the Company, in order to reflect a more appropriate preparation/presentation of financial statements, has changed the method of depreciation on such aircraft to straight-line method. The accounting impact for the quarter on account of the one-time depreciation write-back was Rs. 9,150 million which was added to the profit and loss account before tax. 2. Accounting for Foreign Currency Exchange Difference Jet Airways also made a change in its accounting policy related to accounting for foreign exchange difference arising out of liability designated in foreign currency. The accounting changes involved adjusting the difference through the asset account instead of the income statement. The impact on account of the foreign currency loss being directly taken into the fixed assets was Rs. 624 crores11 for the quarter. Explaining the accounting policy change to a caller during the conference call: Obviously, you have not seen all the balance sheets because we have read many more. We think quite a lot of companies taking a stand that it is a company law which is a primary thing that companies need to follow, and the accounting standards get overridden by the company law requirement. Company law very clearly states that any foreign currency loss or gains needs to be taken to the carrying cost of the asset, and we also have taken a legal opinion in this regard to support this case. Going forward, even to the extent, there is going to be a gain, the same will be taken to the carrying cost of assets and not adjusted in the profit and loss statement. There seems to be a conflict between the Indian accounting standards and the Companies Act, 1956 with respect to the treatment of the foreign currency translation difference.12 3. Revaluation of Fixed Assets A quick look at the note in the balance sheet schedule of fixed assets of 2009 (see Exhibit 4) reveals the following additional information: (a) Leasehold land was revalued on March 31, 2008 with reference to the existing market prices; amount added on revaluation was Rs. 14,811.9 million; the revalued amount substituted for the historical cost on March 31, 2008 was Rs. 1,845.00 million.

The annual report of 2008, carried the following explanation provided on revaluation:

1 crore = 100 million and 10 lacs = 1 million The notification dated 31.03.2009 issued by the Ministry of Corporate Affairs seeks to insert paragraph 46 after paragraph 45 in the Accounting Standard (AS) 11 relating to the The Effects of Changes in Foreign Exchange Rates. It requires that exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period (in respect of accounting periods commencing on or after December 7, 2006) or reported in previous financial statements, in so far as it relates to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset.
12

11

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During the year, in order to reflect the current reinstatement cost/market value, the Company revalued the Leasehold Land and Narrow Body aircraft (including aircraft revalued in the year ended 31st March, 2002) owned by the Company as at 31st March, 2008. Such revaluation for aircraft has been carried out by International Aircraft valuers and for Leasehold Land by a registered valuer considering the present market/reinstatement value and considering the book value of such assets as at 31st March, 2008. Accordingly, the resultant appreciation in respect of land of Rs. 148,119 lac and in respect of aircraft of Rs. 118,133 lac has been added to respective assets and the aggregating amount of Rs. 266,252 lac has been credited to Revaluation Reserves. Since the valuation of the aforesaid assets has been carried out as on 31st March, 2008, there is no additional charge on account of depreciation on the assets so revalued. Depreciation includes Rs. 1,563 lac (Previous Year Rs. 2,958 lac) on the aircraft revalued in the earlier year, which has been withdrawn from the revaluation reserve as per the accounting policy followed. The depreciation expenses had been reduced by an amount of Rs. 473.3 million as depreciation on amount added as revaluation, charged to revaluation reserve (see Exhibit 2 for the income statement). The preparation of financial statements is not an exact science. It requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, incomes and expenses on the date of the financial statements and the results of operations during the reporting periods, respectively. Although these estimates are based on the management's best knowledge of the existing events and actions, sometimes one would wonder about the purpose behind the changes.

Questions for Analysis

1. How does a company decide on the method of depreciation and why? How would the method of depreciation affect the net income of the company? Evaluate the alternative depreciation policy (straight line vs. written down value (reducing balance method) adopted by a company, say for Rs. 35,000 invested in an equipment which has an economic life of 3 years with a residual value of Rs. 5,000 at the end of 3 years. The rates of depreciation are given in the Companies Act, 1956, which is the minimum that needs to be charged. Discuss the suitability of rule based regulation (rates given) against the principle based application of depreciation. In Question 2, what would be the impact on the income statement had the company changed the method from reducing balance to SLM in year 2? What is the impact of the change in the accounting policy of Jet Airways on its net earnings? Why is the policy not followed from beginning? What has changed in the year 2009 to warrant such a policy change? What would be the impact for the increase in profits on the tax payment by the company? What is the impact of revaluation on the companys assets? Did revaluation affect the profit and loss account of 2008/2009?

2.

3.

4.

5.

6. 7.

8. What is the accounting treatment followed by Jet Airways for exchange difference arising from foreign currency loans that were used to purchase the depreciable assets ? How did it impact the income statement?

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APPENDIX
Exhibit 1 Jet Airways Balance Sheet

Year as on March 31 SOURCE OF FUNDS Share Capital Reserves and Surplus Profit and Loss Account (Loss) Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Total Liabilities APPLICATION OF FUNDS: Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans, and Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less: Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Total Assets

2009 863 33321 (2614)* 31570 45009 118226 163235 194805 187637 25018 162619 5832 17450

2008 863 44653 45516 12003 108148 120151 165667 165911 25069 140842 12233 14754

2007 863 21509 22372 7425 53138 60563 82935 57138 24163 32975 39945 689

2006 863 22196 23059 2060 46896 48956 72015 43721 22496 21225 26657 1872

5957 7323 13945 16283 43507 32815 1788 34603 8904

5450 13137 8551 12085 39224 37891 1892 3978 (56) 2232 3835 (1602)

4390 6039 10966 12249 33645 18526 2482 2101 1264 379 3689 (3311) 82935

4053 4332 21043 9327 38754 10656 2630 1329 2547 138 3344 (3207) 72015

194805

165667

*Note: The carried forward loss is being shown as a reduction in the shareholders funds instead of showing it in the asset side as required by the
Schedule VI of the Companies Act.

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Exhibit 2 Jet Airways Income Statement (Profit and Loss account)

For the year ended March 31 INCOME : Revenue Non-operating Revenue Total Income EXPENDITURE : Employees Remuneration Aircraft Fuel Expenses Selling and Distribution Expenses Other Operating Expenses Aircraft Lease Rentals Depreciation Less: Depreciation on Amount Added on Revaluation Charged to Revaluation Reserve Net Depreciation Interest and Finance Charges Total Expenditure Profit Before Tax and Exceptional Items

2009

2008

2007

2006

114770 3099 117869

88111 6704 94815

70578 3435 74013

56458 4417 60876

14105 49150 10982 36472 7128 9471 473 8998 7380 134216 (16347)

12052 32930 9829 25792 5633 7934 156 7778 4928 98941 (4126)

9381 24276 8009 18833 6458 4437 296 4141 2402 73500 514

5672 16789 7261 13111 4340 4748 684 4064 2416 53653 7223

Exceptional Items Excess Depreciation Reversal Cenvat Credit Marked to Market Derivatives Sub-total (Exceptional Items) Profit (Loss) before Tax Less: Tax and Deferred Tax Net Profit (Loss) after Tax 9159 3499 (1007) 11651 (4696) 673 (4023) (4126) 1595 (2531) 51 234 (182) 722 2702 (1979)

Source: Jet Airways Annual Reports 2009 and 2008. Figures in million rupees. Notes to Profit and Loss Statement: Depreciation on narrow body aircraft was hitherto provided by the written down value method. Based on the usage of such aircraft, the industry practice followed in domestic and international markets, the Company, in order to reflect a more appropriate preparation/presentation of financial statements, has changed the method of depreciation on such aircraft to SLM and the surplus arising from retrospective computation aggregating Rs. 92,377 lacs (excluding adjustment to revaluation reserve) has been accounted and disclosed under exceptional items. Consequently, charge on account of depreciation for the current quarter was lower by Rs. 3,472 lacs.

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Exhibit 3 Quarterly Results Jet Airways (Amount in Rupees Million) Year Ended 31 Mar -08 (Audited) 88111.0 6704.1 94815.1

For the Quarter Ended Particulars 1. Net Income from Operations 2. Other Income 3. Total Income (1+2) 4. Expenditure: a. Employees Remuneration b. Aircraft Fuel Expenses c. Aircraft Lease Rentals d. Selling & Distribution Exp e. Depreciation f. Other Operating Expenses Total Expenditure 5. Interest & Finance charges 6. Exceptional items Excess depreciation reversal due to change in method 7. Profit/(Loss) Before Tax (34 5+6) 8. Provision for Taxation Current Tax (including wealth tax) Deferred Tax Fringe benefit tax Provision for tax no longer required 9. Net Profit/Loss after Tax (7-8) Paid-up equity share capital (Face Value Rs. 10.) Reserves excluding revaluation Earnings per share (Face Value Rs.10) Basic and diluted EPS (in Rupees)
*Note: Figures in million rupees except EPS and number of shares

30 Jun-08 (Un-audited) 28671.6 319.9 28991.5

30 Jun-07 (Un-audited) 18066.7 1765.3 19832.0

3552.2 15392.3 1505.7 3173.9 1989.9 8998.9 34612.9 1346.2

2634.4 5995.6 1532.2 2140.4 1327.8 5062.5 18692.9 644.3

12051.8 32930.3 5632.8 9828.6 7778.0 25792.0 94013.5 4927.5

9158.7

2191.1

494.8

(4125.9)

0.2 744.8 12.3 1433.8

58.0 104.9 23.1 308.8

.08 1708.3 100.2 12.0 (2530.6)

863.3

863.3

863.3 17654.2

16.61

3.58

29.31

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Exhibit 4 Fixed Assets Schedule for the Year ended March 31, 2009

Balance on 31 Mar-08 Items Leasehold Land Freehold Land Buildings and Improvements Plant and Machinery Electrical Instalations/Fittings Furniture and Fixtures Office Equipments Computers Vehicles Aircraft and Spare Engine (narrowbodied) Aircraft and Spare Engine (widebodied) Other Fixed Assets Total Figures in Million Rupees
Note:

Net Additions 588.20 0.00 0.00 0.00 (6.10) 44.10 23.40 89.60 46.30 (3720.90) 24815.60 (154.80) 21,725.40

Balance on 31 Mar-09 19113.50 1.10 446.80 76.50 261.60 365.90 494.10 852.00 834.50 49649.50 109235.20 6306.70 187,637.40

For the Year Depreciation 232.00 0.00 70.30 8.30 22.50 35.60 40.70 89.70 114.20 2542.70 5456.30 859.10 9,471.40

Accumulated Depreciation 307.30 0.00 275.10 51.40 123.50 213.70 243.00 665.80 544.70 11965.40 7875.40 2752.70 25,018.00

Balance on 31 Mar-09 18806.20 1.10 171.70 25.10 138.10 152.20 251.10 186.20 289.80 37684.10 101359.80 3554.00 162,619.40

18525.30 1.10 446.80 76.50 267.70 321.80 470.70 762.40 788.20 53370.40 84419.60 6461.50 165,912.00

1) All the aircraft are acquired on hire-purchase/finance lease basis. Such aircraft are charged by the hirers/lessors against the financing arrangements obtained by them. 2) Additions to leasehold land/aircraft/simulators/CWIP during the year include Rs. 215,55.6 million [net] (previous year net of Rs. 1.5 million) on account of exchange loss/(-)gain during the year and opening exchange difference (refer Note 6 of Schedule S). 3) (a) Leasehold land was revalued on March 31, 2008 with reference to current market prices; amount added on revaluation is Rs. 14,811.9 million; the revalued amount substituted for historical cost on March 31, 2008 was Rs. 18450 million. (b) Narrow body aircraft were revalued on March 31, 2008 with reference to current market prices; amount added on revaluation was Rs. 118, 13.3 million; the revalued amount substituted for book value on 31March, 2008 was Rs.346, 396 lacs. Adjustment to gross block of narrow body aircraft during the year included reversal of Rs. 7902.7 million from revaluation reserve on account of change in method of depreciation for narrow body aircraft from written down value to straight-line method. (c) Deduction from accumulated depreciation of narrow body aircraft during the year includes Rs. 9158.7 million on account of change in method of depreciation for narrow body aircraft from written down value WDV to straight-line method SLM.

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Exhibit 5 Treatment of Losses/gains Arising Out of Exchange Rate Differences The Ministry of Corporate Affairs have notified an alternate treatment for losses arising on exchange rate difference as compared to the Accounting Standards AS 11. The notification, allows companies to capitalize losses and gains arising from the restatement of financial items (assets and liabilities) owing to mark-to-market accounting. Exchange difference arising from the change in the exchange rates on long-term foreign currency loans for acquisition of depreciable fixed assets can be capitalized to the cost of that capital asset. The exchange difference can be depreciated over the life of the asset. Other exchange losses and gains can be accumulated under a separate account, "Foreign Currency Monetary Item Translation Difference Account" and amortized by March 2011. A company can follow the revised accounting norms relating to foreign exchange losses and gains for accounting periods commencing December 2006 up to March 2011. For example, if there is a exchange loss during the accounting year 2008, the same can be amortized over 3 years.

Exhibit 6 Excerpts from the Conference Call13 Manjula (Moderator): Welcome everyone on this conference call for the first quarter numbers of Jet Airways. We have Mr. Saroj K. Datta, Executive Director; Mr. Wolfgang Prock-Schauer, CEO; Mr. Vishwanath, Senior GM MIS, representing Jet Airways management on the call. Over to you Vishy for the opening remarks, and then we can throw the floor open for Q&A. GM, MIS: Let me take you through the key highlights and the industry scenario for the quarter, after which Wolfgang will take you through the detailed performance. As all of you are aware, the aviation industry over the last two years has been impacted by very high levels of crude oil prices, and the slowdown in demand in India has also been affected to some extent. The situation in India has been that of an imbalance in demand and supply due to the entry of new carriers and a very high degree of capacity additions, which has led to a scenario of losses, and this is in addition to the impact of record high fuel prices. Over the last few months, major airlines have reduced capacity to bring about some balance in this demand and supply and the capacity overgrowth, and we believe that over the next few quarters the growth in capacity is expected to be flat or even negative in some instances. On the yields front in addition to the increases in the fuel surcharges to combat fuel price increases, most of the domestic carriers have also increased fare over the last few months. Though this will result in a reduction in the growth rate in the short term, the overall revenues of the airlines will go up as we continue to right size capacity in the industry. On the international side of the business, the slowdown in USA and Europe has had impact on airlines reducing capacity, but almost all airlines including Jet Airways are very bullish on India as the region for growth for the coming few years, and this is largely on account of the underpenetrated nature of the Indian market. This also leads us to further belief that the growth rates in India will be significantly higher than in other parts of the world, and being the predominant carrier in this part of the world, Jet Airways is best suited to take advantage of this. We have consolidated our position in the domestic market, and along with JetLite have the maximum market share both in terms of passenger numbers and revenues. Our seat factors at least have been much higher than the industry average, and this is a testimony of our strong product and service delivery in addition to a very strong loyalty program and network capabilities that we possess. In the domestic market, our market share was 21% for the quarter ended June in the case of Jet Airways, and 8.2% in the
13 http://www.jetairways.com/NR/rdonlyres/25D8C882-2699-4A81-BABF 2CDA96F01080/0/TranscriptofAnalystcallforresultsJuly.pdf accessed on 3/4/2010 or http://www.jetairways.com/EN/IN/Uploads/InvestorRelations/TranscriptofAnalystcallforresultsJuly.pdf accessed on 10/11/2010

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case of JetLite. Also in the major international market and to out of India, we have been able to expand our products and service excellence and currently enjoy a market share of close to 31% on the BombayLondon route, 23% on the DelhiLondon route, 21% on the MumbaiSingapore route, and over 40% in almost all the routes to the Gulf. Moving to the operational highlights for the Jet Airways for the quarter just ended, we achieved a system-wide seat factor of 67% versus 69% in the same period a year ago. Our domestic seat factor was 72.3% versus 71.2% for the same period a year ago, while our international seat factor was 64.7% versus 65.6% in the same period a year ago. Domestic and international yields as measured by revenue per revenue passenger kilometre were Rs. 6.07 and Rs. 3.28, respectively as compared to Rs. 5.61 and Rs. 3.05 in the same period a year ago. Our system-wide breakeven seat factor was 86.1% versus 66.9% in the same period a year ago, largely reflecting the high cost of fuel. During this quarter, our capacity on the international routes went up by close to 200% as compared to quarter 1 last year, and by 11% as compared to the quarter ended March 2008. Overall revenues were up 46% versus the same period a year ago, and up 6% versus the immediately preceding quarter. Our operations as a whole showed a pre-tax profit of Rs. 2,191 million or US $50.9 million versus a profit of Rs. 495 million or US $12.21 million during the same period last year. The breakdown of this number shows a profit of Rs. 5,022 million on the domestic operations, and a loss of 2,831 million on the international operations. These numbers will also be need to be read along with the changes in the accounting policy, which we will come to later in this call. The key operating highlights for the quarter in the case of JetLite were as under. Revenues for the period were Rs. 4,260 million or US $98.9 million. EBITDAR was in negative Rs. 1,140 million or 26.5 million dollars, while the loss after tax was Rs. 1,348 million or US $31.3 million. We have been consistently achieving high levels of seat factor in the JetLite operations, and we achieved seat factor for the quarter just ended was 72.4%. Coming to the two issues, which I would like to bring about in terms of these results. During this quarter, we have changed our accounting policy for charging depreciation on our narrow-body aircraft through a straight-line method from a written-down method to be in line with our policies of the wide-body aircraft as well as to be in line with international practices. On account of this change, there was a one-time impact of Rs. 9,159 million or US $212.8 million, which has been considered in the current quarter. The other change in accounting policy that we will be able to operate is to the extent of foreign currency translation loss or gain. We have now adopted a policy by which the same will be adjusted in the carrying cost of asset, rather than accounting for the same in the profit and loss. In closing, I would like to reiterate that despite of very challenging situation that we are being faced with, Jet Airways has been able to maintain a very high degree of customer confidence, and we are confident of coming through this phase successfully. Moderator: Thank you very much. We will now begin the Q&A interactive session for Indian participants. First in line, we have Mr. Prakhar Sharma from CLSA India. Please go ahead with your questions. Prakhar Sharma: On the depreciation, on the single aisle aircraft, effectively your depreciation rate will now be about 5 to 7%, is that what it is? GM, MIS: The effective rate is 5.6%. The effect will be down to a 5% residual at the end of 17 years, and under the WDV, the effective rate was 16.2% on reducing balance, which would have again given a 5% residual at the end of 17 years. Prakhar Sharma: 5.6 is after considering 5% residual value? GM, MIS: 5.6, yes, correct. Moderator: Next in line, we have Malik from HSBC. Please go ahead with your questions. Malik: Yeah, good afternoon everyone. Congrats for good set of numbers. I was just looking at your operating numbers, so I mean, after the new depreciation policy and as you have changed from WDV to straight line method, I just wanted to understand that what will be your depreciation cost in first quarter 2008, that means at last year if I will take it as a straight-line method instead of WDV that you have considered, because I want to do apple to apple comparison, so on that part I just wanted to understand that what will be your total depreciation cost in first quarter of 2008? GM, MIS: The first quarter 2008, the numbers will be lower by close to 30 crores or $7 million.

Now you see it, now you do not: the case of Jet Airways and its accounting policies.*

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