Frantic fare wars among airlines

Desperate times call for desperate measures. Why else would an airline announce a super summer sale—the third sale in about a month—that offers up to 75% off on fares, when it posted a net loss of ₹ 173 crore in the December quarter? And this loss for SpiceJet Ltd came about on a revenue increase of 14% year-on-year (y-o-y) to ₹ 1,807.73 crore.

Rival Jet Airways (India) Ltd, too, posted a net loss last quarter when its revenue had increased. But when airlines fare badly in the December quarter, which is the strongest season in the year for the sector, it’s an ugly situation to be in.

SpiceJet has understood this well. It isn’t earning enough revenue to cover costs. Consider this: in the last quarter, the airline’s overall revenue per available seat kilometre declined by 6% y-o-y to ₹ 3.6. One reason for that is the decline in SpiceJet’s December quarter load factor. On the other hand, cost per available seat kilometre increased by 10% to ₹ 3.9.

Given these circumstances, SpiceJet is doing whatever it can to fill seats. SpiceJet maintains that limited seats are available for this offer and that depends on specific dates and flights. The offer is valid for travelling in the June quarter and for bookings made during 24-26 February. The exact benefits of these discounts offered though cannot be gauged right now. “It will improve load factors to that extent but yields could also get affected,” said an analyst.

While those factors largely influence revenue, there seems to be little respite on the costs front. Fuel costs remain firm and a weak rupee does not augur well for SpiceJet’s dollar-denominated costs. In the December quarter, SpiceJet’s fuel costs accounted for 52% of the revenue compared with 45% in the same period last year.

Economic signals are far from inspiring. Balance sheet position is shaky. On 30 September, the company’s net worth was negative at ₹ 603 crore and its debt was ₹ 1,645 crore. Market capitalization stands at ₹ 733 crore.

Amid all this, one thing is clear. Airlines seem to be losing their pricing power. IndiGo has matched or reduced fares for the same period. Other may follow suit too. What’s more discouraging is that, with rising competition, the scenario on pricing can only get worse.

In reaction to the discount, SpiceJet’s stock rose by just 0.74% to ₹ 13.70 on Monday. On the same day, the benchmark Sensex gained 0.53%. Shareholders know the hard truth.