SpiceJet Ltd succumbed miserably to the cost pressures facing the Indian aviation sector. While the rally in crude oil prices and a weak rupee were expected to hit all airlines, its performance for the quarter ended 30 September, or Q2, turned out to be worse than the already low expectations. Net loss of 389 crore was much more than consensus loss of 261 crore by analysts polled by Bloomberg.

The main disappointment for investors was the drop in yields, even though the airline fared better than its peers—Jet Airways (India) Ltd and InterGlobe Aviation Ltd (IndiGo). In previous quarters, SpiceJet had bucked the trend of falling yields in the sector, thanks to a higher share of revenues from regional routes.

But in Q2, SpiceJet reported a fall in yield by about 3%, while analysts at SBICAP Securities Ltd had estimated an increase by 3%. However, it still did better than IndiGo, which reported a decline in yield by 10%, and Jet Airways, which reported a 6% decrease.

For SpiceJet, “rising competition, especially in tier-2 markets, is mounting pressure on yields", pointed out SBICAP in a report.

With volumes rising, the airlines’s total operating revenue increased by about 4% year-on-year. Fuel costs increased sharply in line with the broad increase in crude oil prices.

Aircraft fuel expenses, expressed as a percentage of total revenues, increased to as much as 45%, compared to 36% in the June quarter, and 30% in the September 2017 quarter.

Other operating costs—other expenses, employee costs, aircraft maintenance costs—rose as well. Overall, there was a loss at the Ebitdar (earnings before interest, tax, depreciation, amortization and lease rentals) level of 43.8 crore, against a profit of 391 crore in the year-ago quarter. Ebitdar is a key measure of profitability for airlines.

SpiceJet’s capacity addition is expected to pick up in the second half of the fiscal year and that bodes well for volume and growth. It is expected to take delivery of 10 more Boeing 737 MAX aircraft in the current quarter and another 8 MAX aircraft in the March quarter.

Meanwhile, fragile industry dynamics on the costs and pricing fronts have meant that stocks of the three listed airline companies have languished so far in FY19. It helps that the current quarter is a seasonally strong one and pricing can be expected to show an improvement.

Besides, crude oil prices have softened comparatively, although that’s not enough to see a meaningful improvement in profits, given that the rupee continues to remain weak.

These factors will in general keep sentiments muted for aviation stocks and SpiceJet won’t be an exception.

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