After InterGlobe Aviation Ltd reported 13% growth in yields for the June quarter, investors were probably expecting smaller peer, SpiceJet Ltd, to follow suit. InterGlobe Aviation runs IndiGo, the country’s largest airline by market share.
Unfortunately, that hasn’t played out. Paarth Gala, associate (institutional research) at Prabhudas Lilladher Pvt. Ltd, said SpiceJet’s yield for the June quarter increased by just 2% year-on-year. Broadly, this is a tad below Street expectations. As such, Gala was expecting it to increase by 3%.
“The airline’s operations remained stressed for a large portion of this quarter due to the continued grounding of its superior B737 MAX aircraft," highlighted the management in the investor presentation.
This limited the airline’s ability to take its yields up, owing to passenger disruptions and re-accommodation; while simultaneously increasing its fixed costs on this category of aircraft, added the company.
Even so, SpiceJet clocked a handsome 35% increase in operating revenues, helped by capacity expansion. A combination of robust revenue growth and 3% decline in fuel CASK (cost per available seat km, a unit measurement for airlines) helped the company clock 88% growth in its Ebitdar. Ebitdar is earnings before interest, taxes, depreciation, amortization and lease rentals, which is a key measure of profitability for airlines.
At the net level, SpiceJet reported a net profit of about ₹262 crore, far ahead of the Street estimate of ₹137.5 crore. One of the primary reasons for this steep jump in profitability, versus expectations, is the sharp growth in other income. That’s because SpiceJet has recognized aircraft and supplemental lease rentals worth ₹114 crore, incurred during the quarter relating to the 737 MAX aircraft, as other income.
As such “adjusted profit of ₹140 crore is broadly in line with our estimates," said SBICAP Securities Ltd’s analysts in a note.
SpiceJet added 32 aircraft during the quarter, taking its total fleet count to 107 as on 30 June 2019. The company had expected its grounded 737 Max aircraft to resume normal operations by July-August. However, the uncertainty around the resumption of services still persists.
The company’s shares have outperformed the BSE 500 index considerably so far in FY20. “Sector consolidation is an opportunity for SpiceJet to recoup lost market share, but the ability to profitably deploy the massive increase in capacity will be the key to the stock’s performance," said SBICAP analysts in a report on 15 July.
Here, substantial delays in resuming the 737 Max operations could hurt capacity growth. Yields are paramount as well. Unfortunately, considering that the current quarter is seasonally weak, the scope for expansion in SpiceJet’s yields appears limited.