SpiceJet loses its edge

As we enter a lean season after the strong festive quarter, it’s worth noting that SpiceJet’s load factors are already high and average fares aren’t improving


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

SpiceJet Ltd has lost its edge. In the September quarter, its average fare had increased 5% year-on-year, at a time when other airlines had faced comparatively more stress on this parameter. One quarter down the line, it succumbed to the tough pricing environment. The airline’s average fare declined 7% in the December quarter.

Of course, healthy load factors and higher capacity helped. The upshot: SpiceJet’s operating revenue increased 12.5% to Rs1,642 crore. But that didn’t translate to commensurate profit growth. In fact, the profitability picture is far from impressive what with fuel costs as a percentage of revenue rising. For perspective: Ebitdar declined by a fifth compared to last year to Rs418 crore, while earnings before tax and exceptional items fell 40% to Rs143 crore. Net profit decline was relatively slower, thanks to an exceptional item. Ebitdar is earnings before interest, tax, depreciation and amortization, and aircraft lease rentals, and is an important measure of profitability for airlines.

Two things need to be kept in mind while evaluating last quarter’s performance, says Kiran Koteshwar, chief financial officer at SpiceJet. First, the December 2015 quarter was a superlative one. Second, the December 2016 quarter had the adverse impact of demonetization with demand getting affected.

To be sure, it’s not as if peers have had a great run either. Bigger rival, InterGlobe Aviation Ltd’s (IndiGo) Ebitdar declined 13.7% during the December quarter. Both SpiceJet and IndiGo saw about 1,000 basis points decline in their respective Ebitdar margins on a year-on-year basis. SpiceJet’s December quarter Ebitdar margin came in at 25% while that of IndiGo’s stood at 29%. A basis point is 0.01%.

What next? The discouraging part is that Koteshwar expects the trends in fares to continue. Sure, domestic passenger traffic growth is robust. But increasingly, investors will have to watch the impact on profit margins.

Any increase in SpiceJet’s profitability looks challenging hereon, says Praveen Sahay, a research analyst at Edelweiss Financial Advisors Ltd. As we enter a lean season after the strong festive quarter, it’s worth noting that SpiceJet’s load factors are already high and average fares aren’t improving. Room to improve pricing reduces further, as the airline continues to add capacity, he adds. SpiceJet, according to Sahay, may continue to make profits but whether they will grow is the important question. Moreover, crude oil prices are expected to be relatively firmer, which is generally troublesome for the aviation sector.

Given those concerns, even as the stock has outperformed the S&P BSE 500 index so far this calendar year, sustaining that trend is likely to be tough.

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