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Spicejet Boeing 737-800WL VT-SGK at New Delhi airport.
Spicejet Boeing 737-800WL VT-SGK at New Delhi airport.
Photo copyright Vedant Agarwal.

SpiceJet Q1FY17 results analysis

SpiceJetJet reported numbers for the first quarter and the earnings did not disappoint. For the quarter ending 30 June 2016, the airline reported a net profit of INR 149 crores with the same fleet as the previous quarter. The impact on the share prices was almost immediate with almost a 20% rise to INR 67.7 per share. An analysis of the financial and operational performance is presented below:

Financial performance

Revenues from operations came in at 1522 crores a 37% increase over the same quarter last year. The revenue strategy of focusing on passenger volumes continues to show results. Volumes are achieved by consistently having lowest fares and indeed this was what SpiceJet followed. Also reflected in the average yield for SpiceJet which was in the range of INR 3,500 – 3,700 – the lowest among competitors. The lower yield was compensated for by higher load factors and stronger ancillary revenues. SpiceJett’s Q1 load factor came in at 92.5% which is remarkable by any standards. In fact, for the quarter SpiceJet had a load factor ahead of 90% for each month.

On the cost front, total costs came in at 1374 crores a 33% increase over the previous year. SpiceJet had a higher CASK (Cost per Available Seat Kilometer) than its LCC competitors (Indigo, Go and Air Asia India). The CASK is estimated to be IN 3.6. While the revenues covered costs (and hence the strong profit), the CASK position is an item SpiceJet may have to address. Comparing expenses to the previous quarter, one sees a drastic reduction maintenance costs. This occurred due to maintenance planning where more checks are planned during weaker quarters as compared to stronger quarters.

The EBITDAR (earnings excluding lease rentals) came in at 474 crores with a margin of 31% (Indigo in comparison was 34%, GoAir likely in the 30% range and JetAirways was 19%). The EBITDAR is used to compare operational efficiency and SpiceJet led the charge. However, this number should not be extrapolated towards profitability parameters given the higher costs of the wet leases that SpiceJet incurs. EBITDA was a respectable 215 crores with a 14% margin and the net profit was 149 crores. Finance costs of only 20 crores were remarkable.

Two points on the costs that require deeper analysis (which will only be possible once additional information is put out in the annual report) are the finance costs and also the provisions. SpiceJet is enjoying low finance costs however, the earnings release did not have enough details to delve further. Additionally, SpiceJet is also engaged in a legal proceeding which would require penalty payments of 579 crores. However, SpiceJet believes that this will not be the case and thus has not provisioned for this.

Looking at the balance sheet the company’s total liabilities exceed its total assets by INR889 crores which is a point that was highlighted by auditors.

Operational performance

Operational performance was strong and highlighted by a network on-time-performance (OTP) of 80.2%, dispatch reliability of 99% and high block hours of 38,769. However, on customer complaints there seems to be margin for improvement as the number came in at 1.1. The complaints in part are driven by asset utilization and GoAir saw the same number.
With regards to the network, for the quarter, SpiceJet had 41 destinations (including 6 international). The number of destinations compared to the fleet makes for a network that’s focused on connectivity as opposed to capacity and it a very different strategy than its peers — targeting flyers who care about price and not as much about schedules. The lower price points coupled with marketing are helping position it as the low fare airline.

The fleet stayed steady at 37 aircraft (independent estimate) and both the 737 and the Q400 fleet utilization was in the range of 12 hours. Operationally, the Q400 fleet also helped open routes to SpiceJet and also build monopoly positions in sectors that cannot be serviced with a larger aircraft (thereby limiting competition from other LCCs). Pilot staffing for the fleet may be a challenge in later quarters as the hours being flown are high and unless a strong pipeline of pilots is built up as the year progresses SpiceJet will have several pilots that are close to the maximum flying hours by the 4th quarter.

Outlook

SpiceJet seems to be continuing its upwards trend and proving naysayers wrong. However, the pending aircraft order is a matter of concern as the market will see almost all airlines expanding their fleet and SpiceJet will stand to lose marketshare.

An aircraft order would also have impacts to the balance sheet with the cash requirements including those for commitments and PDP financing which no doubt is being considered. Currently the leasing market is also quite liquid so taking aircraft from lessors may also be an option – however, sources indicate that the airline is inclined towards an order as opposed to leasing.

The health of the airline will be fully assessed with the soon to be published annual report. Specifically, this will throw more light on the strength of the balance sheet and the airlines cash position. With regarding to funding for expansion and strategy going forward, a transaction or equity stake by a foreign partner is still a possibility. For the network expansion, it is also likely that SpiceJet will take advantage of the governments recently announced regional connectivity scheme.

Overall, with low fuel prices forecast to continue and domestic demand growing at 20%, SpiceJet seems to be well positioned for now. But in an industry as dynamic and competitive as airlines, it will not be able to rest on its laurels for long and must constantly evaluate ways to compete.

About External Analyst

The writer(s) are external experts. Bangalore Aviation may not agree with the views expressed by the author. Authors prefer to remain anonymous for a variety of reasons but mostly since they are not authorised by their employers to express their views publicly on the record.

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