February 14th saw SpiceJet report its third-quarter results. The airline reported a profit of INR 78.2 crores but we believe the results warrant closer examination. This because of the Boeing 737MAX grounding and the fact that compensation that has been recorded but not yet received by SpiceJet significantly contributed to this result. Additionally, in looking at the operational numbers, it seems that SpiceJet has not really benefitted from the exit of Jet Airways and the capacity induction. Rather the expansion has come at a huge cost to the airline.
SpiceJet Q3FY20 results snapshot (in INR) comparisons to Q3FY19
- Revenues ₹3,656 crores (up 47%)
- Costs ₹3,8443 crores (up by 55%)
- EBITDAR ₹761 crores (up 59%)
- Profit after tax (PBT) ₹73.2 crores (up 33%)
- Revenue per available seat kilometre (RASK) ₹3.99
- Cost per available seat kilometre (CASK) ₹4.21
- Capacity (measured in available seat kilometres) 9.1 billion (up 59%)
- Passenger load factor 90%
- Yield (fares realised) ₹4462 per (average of domestic and international
Aggressive capacity induction but at what cost
SpiceJet had a revenue increase of 47% against a capacity increase of 59%. Indeed compared to last year, SpiceJet expanded its fleet from 77 aircraft to 119 aircraft. But the telling figure is the cost per available seat kilometre excluding fuel. This showed a 5% increase. If calculated as a profit per aircraft, SpiceJet in Q3FY19 made 62 lakhs per aircraft compared to 71 lakhs per aircraft during the same period last year. Effectively the additional capacity has come with declining profitability.
This is particularly interesting as industry sources indicate that SpiceJet was a key beneficiary of the ministry decision to link slot allocation with new capacity induction post the failure of Jet Airways. Further during this time, fuel costs fell from approximately 14% – 17% during this period. Put simply, SpiceJet flew more with a cheaper input cost (fuel) but made less money. The cost of capacity weighed heavily on the airline.
Currently, the airline continues to look for capacity. The airline has stated that it will wet-lease two Airbus A320 aircraft. The wet-leases are slowly becoming more accepted in operations and this is SpiceJet’s second-time wet-leasing aircraft. However, on a per-seat wet-leases basis are more expensive.
Finally, while there is much speculation about the 737MAX return to skies the truth is that a definitive date simply does not exist. Regulatory scrutiny continues and it is expected that for the first batch of aircraft, each aircraft will undergo a certification check by the regulator. For SpiceJet, this uncertainty does not bode well.
The Boeing compensation helped push the airline to profit but has to be examined
SpiceJet has recognized INR 270 crores as compensation for the grounding of the MAX. This is particularly significant because without this amount the airline is effectively registering a loss. Further, the amount is contingent upon negotiation with Boeing which will apply not only to this quarter to but to the previous one as well.
As of now, SpiceJet has thirteen 737 MAX aircraft with another 192 on order. Across 13 aircraft this amount equates to 6.7 crores per aircraft per month. The challenge here is that the compensation involves both revenue and cost items. That is, SpiceJet will claim both lost revenue and mounting costs and these will have to be negotiated towards a settlement. Items will include aircraft on ground compensation, lack of sale and leaseback profits, expenses related to the MAX grounding, cost of inducting other aircraft (which are not as efficient as the 737MAX) and perhaps even reputational damage.
If this wasn’t challenging enough, the settlement is not a straight cash payment. Indeed, settlements take various forms including discounts on future aircraft, credits, training and simulator setup (already announced), lease rent waivers and cash compensation. To recognize all of this upfront means it is being recognized as cash. And this will have to be sorted before the close of the year which ends in March. As such it is extremely optimistic treatment.
Competitors and cash-flow are not letting up
All this while, the competition has not eased up. If anything it has become even more aggressive. Indigo, the 800-pound gorilla, continues to aggressively induct capacity. Vistara which has the corporate backing of the Tata’s and the Singapore Airlines group has demonstrated via equity infusions into the airline that they are here for the long-haul. GoAir has lucked out with a sale-and-leaseback income stream that continues. Even Air India continues with the backing of sovereign guarantees for the time being. In this situation, cash is very critical to the airlines need and that is what SpiceJet needs the most.
While SpiceJet does not share the cash-flow statements as a part of the reported earnings, the balance sheet indicates that the cash-position is fairly tight with some estimates of only 63 crores of liquid cash. Lessors continuously assess the liquidity and a fragile balance sheet coupled with declining EBITDAs will likely make for very nervous lessors. Thus, this is an item that will require immediate attention.
Other items that are also impacting SpiceJet disproportionately include the structure of its network where it focuses on a purely leisure base. The mixed fleet is also now posing challenges though views on the profitability of the regional operations remain mixed.
SpiceJet has made some network adjustments and most notably had entered into a code-share agreement with Emirates that is to start early this year. But the fact that this was not disclosed as a separate line item or alluded to leads us to believe that the code-share pact will not start delivering revenue immediately. That said, the partnership may be key to the success of the airline going forward.
Aggressive discounting has led to declining yields. The coronavirus impacts demand to the South East and this is a blow for SpiceJet as their Hong Kong flight was doing fairly well. Other destinations such as the ones in the Middle East, Colombo and Dhaka have seen increased competition and thus very aggressive pricing.
As the airline heads into quarter four – one of the weakest quarters the situation will get worse before it becomes better.
We wish SpiceJet all the best.