SpiceJet: present perfect, future tense
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SpiceJet Ltd did well in the September quarter, with revenue up 35%. Net profit doubled as the budget airline benefited from new capacities and better utilization.
The company managed to extract better fares and average fare per passenger is up 5% from a year ago. In comparison, InterGlobe Aviation Ltd, which runs IndiGo airline, and Jet Airways (India) Ltd reported a drop in average fare per passenger.
Further, SpiceJet improved its market share in India to 13% in the past quarter. It held on to its position in October, or the first month of the current quarter, as well, data compiled by Motilal Oswal Securities Ltd show.
The performance validates investors’ bets on a turnaround at the airline. This is the seventh consecutive profitable quarter. According to the management, the airline has resolved legacy issues and plans to build cash reserves for long-term fleet expansion.
With crude oil prices relatively low and SpiceJet getting back into the groove in terms of profit and market share, the stock should ideally do well.
But that assumption has come under an unexpected test—demonetisation and the resultant liquidity crunch. According to IIFL Institutional Equities, the proportion of cash payments for airline tickets may be low. But travellers use cash for related activities such as hotel stay and food. Travel will also suffer from the overall decline in economic activity as a consequence of demonetisation. So, the cash crunch can impact domestic travel in the near term.
Kiran Koteshwar, chief financial officer at SpiceJet, agrees. Though it remains to be seen how it will pan out, Koteshwar says that if people are investing their energies in something else, their priorities will change.
Even if the cash constraints ease, the negative wealth effect (due to a potential correction in asset prices) and low consumer sentiment can weigh on air travel, IIFL says. Given the steady capacity additions, the demand slowdown can put pressure on utilization levels and the earnings of airlines. Citing these concerns, IIFL has cut its earnings estimates of IndiGo and Jet Airways.
The lean season for air travel and the concerns mentioned above are already driving airlines to offer discounts on air tickets. The revenue per available seat mile, which measures airlines’ efficiency taking the total passenger carrying capacity into consideration, is already down across the three airlines in the past quarter.
While it is not clear how long the current situation will last, if it continues for long, the airlines’ yields (pricing) will come under further pressure. That will weigh on earnings and impact the performance of the stocks.