After a turbulent September quarter for airlines, recovery likely to be slow
For the September quarter, IndiGo and SpiceJet reported a net loss of ₹1,062 crore and ₹463 croreAt the time of announcing its September quarter results, IndiGo had cut its FY20 capacity addition guidance to 25% from 30%
The September quarter is traditionally a lean period for Indian aviation companies. Expectations from last quarter’s financial results of InterGlobe Aviation Ltd and smaller peer SpiceJet Ltd were therefore not running high. The airlines, however, failed to meet even these lowered expectations.
InterGlobe runs IndiGo, India’s largest airline by domestic market share.
For the September quarter, IndiGo and SpiceJet reported a net loss of ₹1,062 crore and ₹463 crore, respectively. Both airlines faced cost pressures. One reason why IndiGo’s performance was adversely hit was because the airline made a provision worth ₹320 crore towards maintenance on its older A320ceo aircraft, which led to a massive spike in maintenance costs. For SpiceJet, unabsorbed costs from the grounding of Boeing Co. 737 Max hurt in the September quarter. Moreover, older aircraft that SpiceJet had received from Jet Airways (India) Ltd, which shut operations in April, also added to the cost pressures. On the yield front, IndiGo fared better. “IndiGo’s yield expansion was higher than estimated—8.5% year-on-year versus 5% estimate; SpiceJet’s 1.9% year-on-year yield belied our 3.5% year-on-year growth estimate due to rising competitive intensity-induced pricing pressure," said analysts from Edelweiss Securities Ltd.
According to Paarth Gala, analyst at Prabhudas Lilladher Pvt. Ltd, “IndiGo’s yields were likely helped by higher fares in the international market where the airline is expanding rapidly. In any case, domestic yields are under pressure."
Going ahead, for IndiGo the journey may not be particularly smooth. “With IndiGo’s domestic demand moderating, competitive pressures have started to emerge, leading to softer yields. We expect its capacity growth to moderate to 24% in FY20 as demand slackens," said Edelweiss analysts in a report on 19 November.
At the time of announcing its September quarter results, IndiGo had cut its FY20 capacity addition guidance to 25% from 30%.
“On the other hand, we expect SpiceJet to be a larger beneficiary in FY21 as the efficient B737 is being inducted," added Edelweiss. SpiceJet has said that the Max service will likely return in January 2020.
Needless to say, investors should watch progress on this front closely.
In general, the fact that the December quarter is seasonally stronger may offer some comfort. It also helps that oil prices have remained relatively softer. Positive surprises in yields (a measure of pricing), if any, will make it easier for investors to shower some brownie points, as far as the stock performance is concerned.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!