Carriers post better than expected performance despite costlier fuel and a fall in passenger load factors
Improving pricing at a time when load factors have dropped suggests that the quality of air traffic has improved
Indian airlines’ operating profits were expected to nosedive in the December quarter. Not only were fuel prices far higher, but even passenger load factors had fallen owing to unusually high capacity addition.
Analysts at ICICI Securities Ltd had anticipated Ebitda losses for all three publicly traded airlines—InterGlobe Aviation Ltd (which operates IndiGo), SpiceJet Ltd and Jet Airways (India) Ltd. Kotak Institutional Equities, which only tracks InterGlobe Aviation, had estimated losses for the market leader, which is as good as saying all Indian airlines would post losses.
Ebitda stands for earnings before interest, tax, depreciation and amortization.
But as it turns out, not only IndiGo, but even SpiceJet reported positive Ebitda. While analysts at ICICI Securities were expecting Ebitda losses of 5-6% of revenue for IndiGo and SpiceJet, they reported Ebitda of 2.8% and 4.6% of revenue, respectively. Of course, this still represents a sharp drop from the year-ago Ebitda of the two airlines. But amid expectations of losses, the fact that they reported profits were in itself a big relief for investors.
Yields at both airlines were much better than expectations. “The improvement in fares was pleasantly surprising, and was the key driving force behind the better than expected performance of all the three listed airlines for the December quarter," said Ansuman Deb, an analyst with ICICI Securities.
Market leader IndiGo’s yields increased 3.7% from a year earlier. This comes after the measure had declined for three consecutive quarters previously.
For airlines, yield is a relevant pricing measure and refers to passenger ticket revenue divided by revenue passenger kilometres flown.
“We saw a much better revenue performance (per available seat kilometre) in November and December. This improvement in our performance was largely because of improvement in yields, especially in the 0-15 day booking window during these months," IndiGo’s management said in its post earnings conference call. Note that IndiGo was facing pressure in the lucrative 0-15 days segment for three quarters prior to the December quarter.
SpiceJet and Jet both have seen their yields for the December quarter increase in a similar range as that of IndiGo’s.
However, it’s worth noting here that airlines have settled for lower passenger load factors in the bargain. IndiGo and SpiceJet saw their load factors drop 320-340 basis points on a year-on-year basis. Jet’s load factors declined marginally, supported to an extent by a decline in its capacity. One hundred basis points equal one percentage point.
Improving pricing at a time when load factors have dropped essentially means that the quality of traffic has improved, pointed out Deb of ICICI Securities. In short, passengers have had to pay more to travel.
Of course, not everything is hunky-dory. For instance, some analysts are concerned that SpiceJet’s profits were boosted by an unusual jump in its other operating income. IndiGo is facing a challenge because of a shortage of pilots, which is beginning to bite. “The scale of the problem is not large enough yet to warrant a cut in earnings estimates, although the situation needs close monitoring," said an analyst, requesting anonymity.
Jet has its own peculiar financial problems. It reported massive consolidated loss of ₹732 crore for the December quarter. Jet’s board has approved a bank-led provisional resolution plan, which estimates a funding gap of ₹8,500 crore to be met by equity infusion, debt restructuring and sale/sale and lease back/refinancing of aircraft, among others.
“While efforts are being made to rationalize costs and rejig the existing network to reduce losses, adequate capital support to execute the plan will be key for the airline’s revival," wrote analysts from SBICAP Securities Ltd in its Jet result review report on 15 February.
While Jet investors await more details, the good news for the industry is that the skies are clearer now in contrast to the cost pressures faced last year. 2019 started on a good note with a big relief coming from lower aviation turbine fuel (ATF) prices, as crude oil prices are relatively lower at the moment.
The pricing scenario, too, seems to be healthier. On yields, “the better environment that we had in November and December has continued so far", said IndiGo on 23 January in its call.
“Our air fare tracker, which shows a 15-day advance air fare of 653 domestic routes, states average industry yield improved ~15% year-on-year during January-February 2019 on declining capacity of Jet Airways," said analysts from Elara Securities (India) Ltd in its SpiceJet results review report on 11 February.
For all we know, if airfares persist with healthy trends and crude prices remain lower, the current quarter may turn out to provide a far bigger surprise than the December quarter. That should offer ample support to aviation stocks to enjoy a good flight.
Jet, of course, is a peculiar case as mentioned earlier, and its shares will move in tandem with developments on the liquidity situation.