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Can SpiceJet fly through the stormy weather?

Can SpiceJet fly through the stormy weather?

Can SpiceJet fly through the stormy weather?
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By Sonal Sachdev  Nov 28, 2018 7:04:08 AM IST (Updated)

SpiceJet has been on the recovery path but it needs free cash flows to keep coming to get healthier. If SpiceJet can maintain its high passenger load factor (PLF), at 90.8 in October, and well above its peers, the revenue addition could be significant. This might aid in a return to positive fund flows.

Almost 115 million people took to the skies for domestic travel in the first ten months of the current calendar, up from near 95 million in the year before period, but revenues of airlines aren’t reflecting this heady 20 percent growth.

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In fact, IndiGo Airlines has managed to grow revenues only by 16.9 percent in the second quarter. What’s more, in its presentation following its second quarter results, the market leader in domestic air travel revealed that revenue per average seat kilometer (RASK) declined 8 percent, even as costs per average seat kilometer (CASK) increased by over 13 percent.
One likely explanation for fares and revenues not rising in sync with volume growth is that IndiGo is playing for market share. With the state-run carrier, Air India, struggling to find a benefactor and private airline Jet Airways trying desperately to stay afloat, the industry leader is possibly playing to enhance its domination, and in the process driving others further to the fringes.
IndiGo has gained over 3 percent market share in domestic air travel between January and October this year, even as Air India (-1.1 percent), Jet Airways (-1.7 percent) and SpiceJet (-0,9 percent) have lost share.
An indication of IndiGo’s aggressive market positioning can be inferred from its fleet addition this fiscal. The airline has added 30 aircraft in the first six months of the year to up its fleet size by 19 percent to 189 aircraft. In contrast, SpiceJet has added only six aircraft, so far, to grow its fleet by 10 percent to 65. With Jet Airways looking to pare its fleet to raise resources, the equations could change further.
IndiGo clearly has the strongest balance sheet among all the domestic airlines with low debt and more than enough ready cash to meet its total current liabilities. Even SpiceJet, which has been on the recovery path, clearly needs those free cash flows to keep coming to get healthier. Unfortunately, fund flows for the airline turned a negative Rs 325 crore in the second quarter of the year, against a positive Rs 163 crore in the corresponding quarter of the previous year.
The one good news for all airlines, though, is the sharp reduction in crude oil prices in the recent past — with Brent sliding from about $84 per barrel to under $60 per barrel. While fuel costs accounted for about 49 percent of operating revenues for IndiGo in the second quarter, it took up 45 percent of SpiceJet’s income. So, lower fuel prices should benefit all.
But even so, worries for airlines like SpiceJet remain, as revenue growth has disappointed. The airline saw operating income grow only 3 percent (year-on-year) in the second quarter even as expenses other than fuel grew by between 15 to 22 percent. So, even after adjusting for the fuel hike differential and forex losses, the airline would have barely been able to post a 2.5 percent EBIDTA margin against almost 10 percent in the corresponding quarter of the previous year.
Some of the growth worries could be addressed by the induction of 26 cost-efficient aircraft to the fleet in the second half of the year — a 40 percent increase in its fleet size. Margins too will likely expand, with the new aircraft (inducted in the second quarter and to be brought in during the second half) expected to account for 35 percent of the expanded fleet of 91 aircraft. Given that these aircraft are supposed to be 8-9 percent more cost-efficient, a rough computation would indicate an over 300 basis point EBDITA margin expansion on this account.
One basis point is a hundredth of a percentage point.
If SpiceJet can maintain its high passenger load factor (PLF), at 90.8 in October, and well above its peers, the revenue addition could be significant. This might aid in a return to positive fund flows.
But don’t expect IndiGo to sit by and watch any such expansionary move without taking counter measures. IndiGo can well afford to bleed a little to ensure much more blood-letting happens by its financially weaker and struggling peers. Will this remain a game of the stronger airline wins? The trend in fares will tell.
Continued pressure on fares despite healthy volume growth will only mean that the competitive intensity isn’t ebbing anytime soon, making it resemble somewhat the telecom services sector, where Reliance Jio is clearly calling the shots.
Disclosure:
RIL, the promoter of Reliance Jio, also controls Network18, the parent company of CNBCTV18.com.
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