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SpiceJet Q3 Fiscal 2012 financial analysis: Q400 operations cushion the loss

The second financial analysis for the third quarter in India is of low fare carrier SpiceJet, who mirrored the performance of the industry by losing Rs. 39.26 crore in Q3 of Fiscal Year 2011~2012 (FY2012).

  • Revenue growth for SpiceJet was strong, rising 41% to Rs. 1,175.8 Crore from Rs. 759 Crore
  • Passengers carried were up 29.2% to 3.08 million; beating demand growth for the overall industry by about 17%
  • Passenger yield grew 9.7% to Rs. 3,816; despite a large increase in capacity
  • Absolute non-fuel costs were up 49.7% driven jointly by large increases in employee remuneration, aircraft lease rentals, and maintenance costs, while absolute fuel costs jumped a staggering 90%; on a capacity increase of 32%, a 52.8% growth in number of flight hours flown, and a 60.1% increase in number of departures.
  • Seat-kilometer revenues were up 7.2%, while seat-kilometer costs were up 26.8%; seat-kilometer costs excluding fuel were up 14%.
  • Load factor slipped 8.8% to 80.1%
  • EBTIDAR Profit (which measures operating results before taxes, interest, depreciation , loan amortization, and rents) of Rs. 14.7 Crore (Rs. 22.7 Crore in Q3 10-11), resulting In fall of EBITDAR margin from 27.3% to 12.5%
  • Net margin of -3.3% vs. 11.3% in same period last year, but up from -32% in Q2 of this fiscal year

Analysis

Considering that Q3 is typically the best quarter for India’s airlines, this performance from SpiceJet is somewhat disappointing. However, SpiceJet has managed to reverse some of the negative trends from the previous quarter, while displaying some positive trends as well.

Particularly important was that they managed to increase passenger yields despite a huge rise in capacity, both from SpiceJet and the market as a whole. SpiceJet has also managed to outstrip demand growth for the market as a whole. The combination of these two effects really reflects in our opinion, the stunning success of SpiceJet’s Q400 operations, which have achieved better unit revenues and superb loads, and served to prop up SpiceJet’s overall revenue figures.

On the expenditures side, two particularly troubling figures were aircraft maintenance and employee remuneration both of which saw increases that far outstripped the increase in capacity (implying an unnatural rise in costs). The former is probably a direct response to the ever increasing utilization and flying from SpiceJet as well as the additional costs of starting up a Q400 operation and adding a second fleet type, which will be mostly accounted for during Q3.

Meanwhile, the employee remuneration increase is something that India’s airlines apparently just do not understand the necessity of controlling. SpiceJet’s employee costs rose a mind-blowing 82.2% in Q3, and this sort of situation simply is not sustainable moving forward. Employee costs are the single biggest portion of an airline’s expenditures that it can control, and the real story here is that if SpiceJet had limited the increase in employee remuneration to 32%, it would have made a net profit this quarter.

So given this mixed bag of performance in Q3, the main question that remains is should these accumulated losses erode SpiceJet’s net worth as a recent article in the Business Standard newspaper claims they have?

At the moment, I will say no, simply because they have done a good job of minimizing their losses after a disastrous Q2. Moreover, the Q400 has been a fantastic success, and with more of these aircraft on the way in 2012 (plus 15 options), its not hard to see a scenario under which SpiceJet’s losses narrow this calendar year.

India’s legacy carriers still charge an arm and a leg for some short turboprop flights, and SpiceJet’s ability to enter these markets and stimulate them with low fares, especially in light of Kingfisher’s continual draw down in regional capacity, should boost profitability moving forward.

That being said, the fact that SpiceJet has failed to make a profit despite insanely strong (given current market dynamics) revenue performance is another black mark against the poor environment for airlines in India, which continues to strangle this vital sector.

About Vinay Bhaskara

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