After a turbulent Q2, IndiGo and SpiceJet are poised to take off in Q32 min read . Updated: 15 Jan 2020, 08:24 AM IST
- Both airlines are expected to report profits in Q3
- Both airlines are expected to see good revenue growth led by capacity expansion
InterGlobe Aviation Ltd and SpiceJet Ltd made a rough landing in the September quarter (Q2), reporting massive losses. InterGlobe runs IndiGo, India’s largest domestic airline by market share.
The big question now is whether the December quarter results will bring good news. The seasonally strong Q3 naturally means performance would be better compared to Q2.
Both airlines are expected to report profits in Q3. However, as one analyst points out on condition of anonymity, “Things would definitely have been better if yields were healthier."
For airlines, yields are a measure of pricing. Unfortunately, the pricing environment for the aviation sector hasn’t been upbeat even during the festive quarter.
“Weakness in the economy has negatively impacted pricing in a seasonally strong 3Q despite the capacity crunch on Jet Airways’ closure—estimate yields to be up by a modest 0-3% year-on-year," SBICAP Securities Ltd said in a report last week.
Prabhudas Lilladher Pvt. Ltd expects IndiGo and SpiceJet to report modest year-on-year yield growth of 3.5% and 1.5%, respectively, in Q3. IndiGo’s yield growth is expected to be better owing to its expanding international operations.
Nonetheless, both airlines are expected to see good revenue growth led by capacity expansion.
On the costs front, lower year-on-year aviation turbine fuel (ATF) prices will bring some relief as fuel accounts for a lion’s share of an airline’s costs. Even so, the cost per available seat kilometre (CASK), a unit cost measurement, excluding fuel is expected to remain elevated.
“Cask is likely to remain under pressure for both IndiGo (due to maintenance costs, underutilization of aircrafts/ pilots) and SpiceJet (due to Boeing 737 Max grounding, operating less efficient dual class ex-Jet aircrafts)," said Prabhudas Lilladher’s analyst Paarth Gala in the Q3 preview report. “This coupled with mark-to-market losses due to depreciating rupee are likely to offset margin gains from soft ATF prices."
To sum up, even as IndiGo and SpiceJet are expected to report better results in Q3, after a disastrous Q2 show, the landing may not be smooth.
Investors appear to have duly noted the various challenges. Not surprisingly, shares of IndiGo and SpiceJet have dropped by about 26% and 33%, respectively, from their 52-week highs.
The outlook isn’t getting better. “We see a sharp cut in our FY21E earnings estimates of IndiGo primarily due to lower net fleet addition and higher fuel costs," wrote analysts at Centrum Broking Ltd.
For SpiceJet, Centrum sees a sharp earnings cut in FY21 mainly on account of a delay in return to operations of the 13 grounded Boeing 737 Max aircraft and higher fuel costs.