This isn’t the first time low-cost carrier SpiceJet Ltd has performed better than its larger competitor IndiGo (InterGlobe Aviation Ltd) on passenger yields. But the March quarter was quite different. While IndiGo’s passenger yields declined 5.6% year-on-year, SpiceJet’s reported a 5% rise.

What gives?

There seems to be a confluence of factors that may have caused this, although it must be said that it adds to the mystery behind Indigo’s shock announcement that sent its stock tumbling.

“The divergence in yield can be attributed to IndiGo’s endeavour to maintain high load factors in a backdrop of significant capacity addition," point out analysts from JM Financial Institutional Securities Ltd in a report on 11 May. SpiceJet’s strong regional presence and variety of aircraft that help align capacity better with demand worked in its favour, they added.

Further, in its post-results call, IndiGo had said that its fares in the 0-15 day booking window were materially lower compared to a year ago.

According to Praveen Sahay, assistant vice president (equity research) at Edelweiss Broking Ltd, “It is quite possible that IndiGo had to accommodate passengers at a much lower fare considering some of its flights were cancelled during the quarter, thus adversely affecting its yields."

To elaborate, these seats could otherwise have been sold at higher rates if not for the need to accommodate customers whose flights were cancelled. SpiceJet, of course, didn’t face the cancellation issues which Indigo did last quarter. Additionally, IndiGo has a bigger presence in tier I routes where competition is more intense, added Sahay.

Sure, SpiceJet’s March quarter yield performance stands out, coming at a time when load factors increased to 94%. Unfortunately, the airline’s better yields did not mean a dramatic improvement in profits. Blame rising costs, especially fuel costs, which have increased 31% year-on-year. Fuel CASK (cost per available seat kilometre, the unit measurement of cost for airlines) increased as much as 13%. Non-fuel CASK rose 5% as well.

In fact, just like with IndiGo’s financials, “other income" saved the day for SpiceJet as well. The airline’s other income for the March quarter stood at Rs61 crore, whereas net profit was Rs46 crore. Simply put, SpiceJet’s Ebitda of Rs70 crore wasn’t enough to cover its interest and depreciation costs. IndiGo’s Ebitda too was lower than its cumulative interest and depreciation expenses. Ebitda, a measure of profitability, is short for earnings before interest, tax, depreciation and amortization.

It’s important to note that the current yields are unsustainable if airlines have to make healthy profits given that crude oil prices are rather firm at the moment and are expected to stay strong in the near term.

Currently, SpiceJet shares trade at an inexpensive nine-times estimated earnings for fiscal year 2019, based on Bloomberg data. IndiGo, of course, trades higher at 17 times.

Improving yields is what SpiceJet investors will watch for, if its valuations have to narrow the gap with IndiGo’s. In any case, higher crude oil prices will mean sentiments for aviation stocks will generally remain subdued in the interim.

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