A good crisis separates the men from the boys, goes the adage. If the judgement of stock market investors counts, SpiceJet Ltd doesn’t come out looking very good. In the past one year, when the airline industry grappled with lower yields, a spike in crude oil prices and a weaker rupee, the company’s shares have fallen 48%, while those of InterGlobe Aviation Ltd (which runs IndiGo) have corrected only 6%.

At first glance, a comparison of the Q3 results of the two airlines suggests there isn’t much that separates the two. Both airlines broke even last quarter, following a strategy of chasing yields at the cost of lower load factors. But some analysts are concerned that SpiceJet’s profits were boosted by an unusual jump in other operating income. This was on account of cash incentives booked while inducting new aircraft.

These incentives have been recognized upfront in profit and loss under other operating income, analysts at SBICAP Securities Ltd said in a note. The normal practice is to recognize such incentives through the duration of the lease of the aircraft. Even so, given that aircraft induction will recur in the near term, these incomes will also recur.

Like IndiGo, SpiceJet also reported a drop in load factors and an improvement in yields. Its load factors declined 340 basis points from the same period last year to 90%. SpiceJet’s yield’s increased 3.2% year-on-year, according to SBICAP’s calculations. This points to the difficulty the industry has faced in raising tariffs in the Q3.

One hundred basis points equal one percentage point.

The good news, however, is that airlines are persisting with fare hikes, which, alongside the easing of costs, should result in better profits going forward. “Our air fare tracker, which shows a 15-day advance air fare of 653 domestic routes, states average industry yield improved ~15% YoY during Jan-Feb 2019 on declining capacity of Jet Airways," analysts at Elara Capital said in a note.

A moot question then is whether the push for higher yields will affect load factors. But what is the point of high load factors which don’t yield commensurate profits? In the December quarter, SpiceJet reported a marginal net profit of Rs55 crore, better than the expectations of a loss analysts were expecting. With fuel costs having fallen considerably since, the outlook on profitability is now far better.

Further, SBICAP Securities says delivery of the fuel-efficient Boeing 737 Max aircraft, which is expected to improve overall operating economics of the aircraft by 8-9%, has commenced, although it is still early days to gauge the benefits of this. In that backdrop, performance in the current quarter and the next one will be critical to watch out for.

Despite these tailwinds, the fact that SpiceJet shares continue to trail far behind those of IndiGo shows that investors, shaken by last year’s crisis, are still preferring to play safe and bet on the market leader.

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