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SpiceJet Q1 FY 2013 financial and operations analysis – Bangalore Aviation

SpiceJet Q1 FY 2013 financial and operations analysis

When Gurgaon based low cost carrier (LCC) SpiceJet reported a net, pre-tax profit of more than Rs. 56 Crore in the first quarter of fiscal year 2012-2013, it represented a huge positive step for the Indian airline industry.

After SpiceJet had slipped to a large net loss for fiscal year 2011-2012, mirroring the performance of the industry as a whole thanks to sharply rising fuel costs, additional costs due to the integration of the Bombardier Q400 turboprop into the fleet, and depressed fare levels that arose because there was too much capacity in the Indian market. But with the effective demise of full service carrier Kingfisher and its low cost subsidiary Kingfisher Red and their subsequent capacity drawdown, much capacity has been pulled from the market, supporting fares and pushing not only SpiceJet but even full service rival Jet Airways and its low cost wing JetKonnect into profitability.

Looking specifically at some of the information from SpiceJet’s first quarter, once again their growth was quite impressive. They added seven new aircraft to the fleet, including five more Bombardier Q400 turboprops, and grew their market share in the Indian domestic market 18.6%. 26% passenger traffic growth for SpiceJet is pretty much the trendline over the past five to six quarters but importantly, traffic growth significantly outpaced capacity growth as SpiceJet’s seat load factor nudged above 80% for the first time in more than a year and a half. This paid dividends for SpiceJet, as the higher fares thus translated to larger revenues.

More specifically, unit revenue growth for the quarter was superb, RASK (Revenue per Available Seat Kilometre) growing an incredible 36.6% to Rs. 3.97. In fact, this 36.6% growth in RASK on a year over year basis was the highest I’ve ever seen recorded by a publicly traded Indian airline after reviewing more than four years worth of financial results. What created this excellent revenue performance was actually what one would call a “perfect storm,” of events during the first quarter.

On one side, you had LCC rivals IndiGo and GoAir not significantly expanding their domestic operations during the quarter (on an aggregate basis), as IndiGo set its sights on international growth and GoAir performed a pair of aircraft swaps and route swaps (bringing Chennai online into the network). Simultaneously, Kingfisher was entering into its “death by a thousand cuts routing,” chopping off most of its low cost Kingfisher Red network as well as its regional network of destinations with ATR 72 turboprops. Given that Jet Airways was happy to benefit from the higher fares as well, this created a situation for SpiceJet where its chief LCC competitors were showing unusual capacity restraint, and they were entering into monopolies or duopolies on a lot of their Q400 regional routes thanks to Kingfisher’s cuts. Add in the fact that the initial Q400 operations from Hyderabad, Chennai and the like have begun to mature (build up a customer base) and the recipe was set for unprecedented unit revenue growth at SpiceJet.

While the revenue gains were important to the result (it can never hurt to record 55.1% top-line revenue growth), SpiceJet’s results were unquestionably supported by the moderate decline in fuel prices over the quarter. In fact, their fuel costs on a per available seat kilometer (ASK) basis (given ASK growth of 16.7% in the quarter) increased just 13.4% YOY (the smallest increase of the last 5 quarters), which finally allowed SpiceJet’s revenue and traffic growth to “catch up” to previously runaway fuel price inflation. However, it was troubling to note that SpiceJet’s non-fuel cost per available seat kilometre (CASK) was up more than 30.7% YOY. While this can be partly attributed to the acquisition and leasing costs of 5 more Q400s, as well as to the large increase in fees at Delhi Airport by airport operator GMR since SpiceJet has more exposure (proportionally) to Delhi Airport than the rest of India’s airlines. But it is the more than 40% rise in the accounting category “other operating expenses” that is most troubling. Despite multiple efforts, SpiceJet did not provide any explanation of the costs in this category.

SpiceJet must keep its costs down, even in a favorable revenue environment like we have today. Revenue gains are typically temporary, and if any new entrant comes into the Indian market, then we are back to square one with capacity discipline (or in that case lack thereof). But low costs are low costs regardless of the competitive environment, and they are critical to SpiceJet’s continued financial success.

Looking forward for SpiceJet, it will be interesting to see if they can sustain this kind of revenue growth and profitability moving forward. But even this one profitable quarter has made SpiceJet a hot commodity for potential foreign direct investment (FDI) assuming government approval. With SpiceJet set to add service abroad over the next few quarters, perhaps they can improve these revenue and profit figures even further. SpiceJet, for the time being, is the best performing Indian airline (if only by default because IndiGo’s results are not clear. Congratulations are due to the fine team at SpiceJet who did not allow a temporary lapse into unprofitability in FY 2011-2012 taint the overall business, and who had the vision to take on India’s airline “giants” in the regional airline field.

About Vinay Bhaskara

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