Spicejet Q1 FY20 results – The 114.1 crore conundrum

SpiceJet reported their Q1FY20 earnings this Friday. A profit was expected but the quantum of the profit surprised several analysts. The airline reported a net profit of INR 261.7 crore and total income of INR 3,145.3 crore for the quarter ending June 2019 as against a loss of INR 38.1 crore and INR 2,253.3 crore for the corresponding quarter last year. Spicejet had reported a Net loss of INR 316.1 crore in FY19 due to a INR 427.5 crore loss in the first two quarters.

According to data provided by the Directorate General of Civil Aviation (DGCA), the LCC is now the second largest airline in India, by market share. Its market share grew from 13.6 per cent to 14.5 percent between quarter ending March, 2019 and quarter ending June, 2019. In the first six months of 2019, the airline has a market share of 14 per cent, coming second to IndiGo.

Key Numbers:

  • Revenues: INR 3,002.1 crores
  • Costs: INR 2883.6 crores
  • Capacity: up by 31% compared to the same period last year
  • EBITDAR: 812 crores
  • EBITDAR margin: 26%
  • RASK: 4.63
  • CASK: 4.24
  • Load factor: 93.8%

The numbers highlight strong performance – both financial and operational. Load factors in the high nineties continue and the RASK was especially strong. RASK was impacted by a strong pricing environment and also international segments that have much higher yields. That said, the costs grew by 29% compared to the same period last year compared to a capacity growth of 31%. The cost growth will have to be contained as a linear growth of capacity and costs is not sustainable. EBITDAR margins were healthy indicating strong operational performance.

The 737 MAX grounding impact mitigated by induction of ex-Jet Airways aircraft

As one of two 737Max operators in India, SpiceJet was impacted by the grounding of the aircraft. Yet in an irony of sorts, the collapse of Jet Airways and SpiceJet’s quick decision to induct aircraft that were previously with Jet Airways helped mitigate the capacity impact. Indeed, Spicejet is possibly the biggest beneficiary from the collapse of Jet Airways. As both airlines flew the Boeing 737 jet, it was incredibly easy for SpiceJet to add a record number of aircraft, 32 in total during the quarter. 27 of these were Ex-Jet Airways 737’s. Fleet commonality further helped SpiceJet recruit trained flight deck and cabin crew from Jet Airways and induct these jets at record pace.

However, the net capacity addition of narrow body jet aircraft was only 14 aircraft as Spicejet was forced to ground 13 Boeing 737 MAX aircraft.

The airline also added 4 Bombardier Q400 and one B737 freighter aircraft to its fleet.

With the current uncertainty around when the Boeing 737 MAX will return to service, the airline has plans to induct upto 10 Boeing 737 and 3 Q400 aircraft in October 2019 to cater to the peak winter holiday season in India.

Network expansion continues but market weakness may show an impact

SpiceJet continued with its aggressive and nimble network development. Gaining new slots was a key advantage and the airline has been allotted an additional 48 domestic and international departure slots in Mumbai; and 15 domestic and international departure slots in Delhi.

Starting April 1, 2019 the airline has announced 130 additional flights that include 78 flights connecting Mumbai, 20 flights connecting Delhi and 12 flights connecting Mumbai and Delhi.

There is however a catch to these slots. The Ministry of Civil Aviation has categorically stated these slots originally belonging to Jet Airways have been temporarily handed over to airlines for a period of three months at a time. Airlines cannot sell seats on flights operated using these slots till they are granted an extension by the authorities.

In July, Jet Airways’ bilateral rights were distributed, of which Air India received the largest share. Spicejet was allocated 77 flights a week. With the help of these rights, the airline launched a number of new flights and added frequencies on its international network from the key metros of Mumbai, Delhi and Hyderabad to Jeddah, Bangkok, Colombo, Hong Kong, Dubai and Dhaka. Besides, SpiceJet also announced the launch of flight services from Mumbai to the Saudi capital city of Riyadh which earmarks the airline’s 10th international destination.

The closing of Pakistani airspace forced SpiceJet to drop flights from New Delhi to the Afghan capital, Kabul – which has traditionally been a high yield market. With the airspace now open, this route should make a comeback sooner than later.

Strong Growth backed by demise of Jet Airways

All Indian airlines enjoyed record revenues in Q4FY19 and Q1FY20 due to the collapse of Jet Airways. SpiceJet was no different. Revenues from operation grew by 25% in a seasonally weak quarter with fares up 11%.

This trend continued for Q1FY20. This is possibly the strongest quarter of the year for Indian airlines. Additional slots at metro airport and the launch of record number of flights to international destinations saw capacity (in terms of available seat Kilometers) grow by 31%. Along with capacity, fares were up 11% when compared to the corresponding quarter last year.

The 114.1 crore conundrum

The total income though had an interesting treatment of other income. Specifically, as disclosed by Spicejet it

“has recognized INR 114.1 crore towards aircraft and supplemental lease rentals as other income. This is a part recognition of the total reimbursements, on which the Company is working with the aircraft manufacturer, towards various ascertained costs and losses incurred by the Company on this aircraft”

This treatment is unique due to two reasons. Firstly, the quantum of the payment is usually heavily negotiated between both sides and can include cash and non-cash components.

Second, unless Spicejet gets a commitment from Boeing about compensation numbers for the 13 grounded Boeing 737 MAX aircraft, recognizing such revenues may be legal but definitely premature. The profit declared for the quarter would look mightily different had it not been for this large chunk of money.

The profitability trend will continue but margins likely to contract

The current quarter Q2FY20 which is one of the two weakest quarters for Indian airlines will be a test for all airlines and more so for SpiceJet. Most if not all the capacity lost with the demise of Jet Airways is back in the skies resulting in deep last minute discounting on the same metro routes which the airlines fought so hard to get slots to operate.

Additionally, all competitors are now being very aggressive with pricing – which was a lead usually held by SpiceJet. The industry is also abuzz with rumors of the Chief Sales Officer for SpiceJet jumping ship to Indigo – which is perplexing to say the least.

On the revenue front, fares in the critical 0-15 day window are now starting to fall. Sales will be widely used by all airlines to fill up planes for the current quarter resulting in a significant drop in average fares.

The numbers for Q2FY20 will look very different from the last two quarters as the honeymoon courtesy the demise of Jet Airways is almost over. While demand is still strong, weakness in the economy is all but certain. SpiceJet due to its fleet and network mix will likely be able to register profits for the quarter but margins are already under pressure and leading indicators like auto sales, house inventory and banking credit are all trending downwards. Air travel demand is likely to slow-down leading to more discounting. And as the second largest airline in India, SpiceJet is all but certain to be impacted.

This article was jointly written with Satyendra Pandey.

About Vinamra Longani

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