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Financial Analysis of SpiceJet’s Q1 Financial Results

Earlier this month, all 3 of India’s publicly traded carriers announced their results for the first quarter of Fiscal Year 2012. Devesh has already taken a look at the operating parameters for the quarter, so I’ll be digging into the raw data itself.

The three carriers to be studied are; Jet Airways Group; composed of full service carrier Jet Airways and its low cost subsidiary JetLite, (their second low fare service Jet Airways Konnect’s numbers are rolled in to those of Jet Airways), fellow full service carrier Kingfisher which includes its low fare Kingfisher Red service in the mainline numbers, and low cost carrier (LCC) SpiceJet.

First up is SpiceJet.

The Gurugaon based carrier swung sharply to a net loss of 719.6 million rupees in the first quarter of FY2012 (ended 30th, June 2011), versus a net profit of 552.2 million rupees in the comparable quarter of FY2011.

The airline did, however, indicate that some of its performance metrics improved year over year.

  • Revenue was up sharply to Rs. 9456.4 Crore, up 31.9% from Rs. 7168.6 Crore in Q1 2011
  • SpiceJet carried 2.58 million passengers, with its growth rate of 25% outpacing the overall industry growth of ~15%
  • Passenger yield was up 5.5% to Rs. 3,663
  • Absolute non-fuel costs grew 29.8%, while absolute fuel costs grew 94.9%; all on capacity growth of 36.7%, an increase of 40% in the number of departure, and 28.0% increase in block hours
  • Seat-kilometer revenues declined 3.5%, while seat-kilometer costs rose almost 14%; seat-kilometer costs excluding fuel decreased 5%.
  • Interest payments increased 352.8% to Rs. 59.9 million, greater than the entire interest payments of FY11; Rs. 48.3 million; however this total is miniscule in comparison to other Indian carriers
  • Total maintenance cost was up 33.6% on fleet growth of around 39.1%

Observations:



Fuel cost was obviously the biggest driver of SpiceJet’s performance this quarter. With fuel prices paid by SpiceJet up more than 42.5% YOY; it would have been hard for SpiceJet to make a profit in the best of revenue environments.

Despite Q1 traditionally being a period of peak demand (April and May are peak summer travel months), the lack of capacity discipline hurt SpiceJet’s ability to improve yields. As SpiceJet CEO Neil Mills put it:

“However, yields remained under severe pressure due to an irrational pricing environment that prevailed in the market, thereby undermining the airline’s ability to pass on the impact of the higher fuel price to the passenger in a growing market.”



Passenger yield did grow 5.5%, but this lags far behind the regular 15%+ growth figures displayed by SpiceJet; this in spite of 15% growth in demand.

Part of SpiceJet’s problem stems from the fact that its network is metro-heavy; the majority of its flights are in large cities; especially in the North. While Delhi is certainly a strong base for the carrier, having your largest bases in Mumbai and Delhi leaves a carrier vulnerable to fare wars. With margins on metro routes razor-thin due to competition amongst carriers, any increase in fuel prices is going to have a disproportionate effect on SpiceJet.

Thus, the new Q400 operation should help SpiceJet by balancing its route network with more smaller cities in the South (and later the North as well). Both Jet Airways and Kingfisher already have decent sized turboprop networks; these have higher passenger yield, less competition, and lower fuel costs. Look for SpiceJet’s results to reflect these benefits starting in Q3 and Q4 (as the operation really kicks into gear).

In spite of these issues, SpiceJet did manage to grow at a significant clip; with market-share up from 13% to 14%. As the carrier continues to grow its fleet and increase its flight offerings, it should be able to capture an ever-increasing share.

International growth looks to be more stagnant. SpiceJet has not yet expanded beyond its initial two destinations of Colombo and Kathmandu, even though it has rights to operate to Dhaka and Male. This blog speculated in 2010 that the Maran take-over would drive an increase in international presence; especially to ASEAN nations. As of today, no such expansion has occurred, and with the focus shifting to the Q400 operation, serious international growth may be pushed deeper into the future.

Cost performance excluding fuel was positive, despite a drop in aircraft utilization from 12.45 hours per day to 11.43 hours per day. However, utilization may have dropped due to an increase in the number of bases from which flights are operated. Utilization figure analysis must always be tempered with a consideration of revenues; if such an approach yields revenue growth; then SpiceJet can get away with flying their aircraft for less time each day.

Longer term, the only major concern I see for SpiceJet that is independent of the broader market, is aircraft related costs. Assuming that lease rates for the 737NG remain roughly stable over time (a valid assumption given that the A320neo and possibly 737-7/8/9 are on the horizon to drive down lease rates on current generation aircraft), SpiceJet will have to deal with increasing depreciation and maintenance costs. With an average fleet age of just 4.4 years in May of 2011, SpiceJet has thus far escaped the worst of these fleet related costs. Depreciation and maintenance costs increase exponentially as aircraft age, so longer term cost performance will be trending upwards.

Vinay Bhaskara

Twitter: @TheABVinay

Contact me at vinay@bangaloreaviation.com

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About Vinay Bhaskara

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