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SpiceJet Fiscal Year 11-12 Financial Analysis – Too much growth and high fuel prices offset strong cost discipline

As with all of the Indian airlines, Delhi based low cost carrier SpiceJet faced disappointing financial results in the fourth quarter and full year of fiscal year 2012, posting a net loss of Rs. 605.8 Crore for FY 11-12 and Rs. 249.2 for Q4. After large net losses at India’s two other publicly traded carriers Kingfisher and Jet Airways, SpiceJet’s results only acted as a reaffirmation that the economics of the Indian airline industry are very much broken.

As for the specific issues that plagued SpiceJet in 2012, fuel prices once again were the main culprit behind the large rise in SpiceJet’s costs that pushed the airline into unprofitability. SpiceJet’s fuel costs rose a whopping 57.2% versus Q4 2011 on available seat kilometer (capacity) growth of 26.1% and a 48.8% rise in block hours flown, and that alone was the largest push into unprofitability. There is some relief on the horizon, as fuel prices do appear to be stabilizing at US $80-95/ barrel (West Texas Intermediate), but that still represents a “new normal” of fuel prices at a higher level than SpiceJet has ever made a profit with. A 13% decline in oil prices from Q3 to Q4 was not enough to put a serious dent in their overall fuel bill, and while importing aviation turbine fuel (ATF) might provide some relief, it should be noted that even if ATF purchases in India were not taxed at all, SpiceJet would have still lost more than Rs. 100 Crore.

What was surprising is that SpiceJet actually did a very good job of containing its costs in Q4. The general rule of thumb when judging airline cost containment is to look at the nominal percentage increase in each cost-line item relative to the capacity growth in ASKMs. Of the 8 different cost-line items in SpiceJet’s P&L sheet, only two, aircraft fuel and aircraft maintenance charges increased by more than the 26.1% growth in ASKMs, with the latter charges most certainly due to the residual effects of having 7 new Bombardier Dash 8 Q400s in the fleet which were a new type for SpiceJet. As a whole, most of SpiceJet’s cost increases were in factors beyond their direct immediate control (i.e fixed and/or inescapable costs such as fuel costs and maintenance costs).

The standard solution in such scenarios is to reduce the two cost line items which are directly controlled by SpiceJet itself, employee remuneration, training and benefits, as well as the “other costs” accounting line, which for SpiceJet includes things like distribution costs, the cost of ice on board, and the like. But SpiceJet actually has very sustainable labor and other cost levels; if you stripped both of these cost line items entirely, SpiceJet would still have not made a profit.

What the discussion above should have made clear is that SpiceJet has primarily a revenue problem; in that its revenue per ASKM (unit revenue) did not grow enough for the high cost, high tax environment currently plaguing India. To be sure, 16% unit revenue growth is a very strong figure in a market where capacity control is a taboo, and this was helped in large part by SpiceJet breaking into previous monopoly markets using the Q400. But in times of cost-side financial troubles, an airline should shrink its capacity and concentrate on the most profitable routes in its stable. This is a strategy used to great success in the United States, which is the second most profitable region for airlines in the world and actually contains four of the world’s ten most profitable airlines when just 5 years ago it had zero.

Yet SpiceJet, instead of taking this lesson to heart and contracting, instead highlighted its rapid growth in the fiscal year financial results press release.

 “SpiceJet has achieved many important milestones during FY 11-12. It has emerged as the fastest growing airline in India for the FY 2011-12 (Source: CAPA). SpiceJet have added more than 50% Fleet capacity in its Boeing from 21 airplanes last year to 33 airplanes as on March 2012 and has further added 7 Next Generation Bombardier Dash Q 400 aircraft during the FY 11-12. While it added 10 new airports to its network, the number of daily departures increased from 178 last March to 261 departures in March 2012. Spicejet now carry over 35,000 passengers per day as compared to 28,000 passengers a year ago. We now operate to 32 airports as compared to 22 airports a year ago.” 

 Unfortunately, SpiceJet has fallen into something known as the “growth trap” in which they’ve committed so many orders and long term leases for aircraft that will continue to come online at a rapid annual clip that they have no option but to utilize the aircraft. The combination of rapid aircraft intake and the inability to return such aircraft in effect locks SpiceJet into growing capacity, which is why you see SpiceJet adding more marginal routes like Delhi-Jaipur (which notwithstanding the Guar bean effect is still a route that SpiceJet has tried 10 different times). International growth like the recently announced Delhi-Kabul route is one way of offsetting the growth trap with its higher fares and lower fuel prices. But it will be interesting to see how SpiceJet approaches the next few quarters in its quest for profitability given the various constraints and challenges it faces

About Vinay Bhaskara

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