What does SpiceJet's strong Q1 revenue indicate? flying may get costlier as airlines ought to improve margins
Higher fares or yields (revenue per passenger) could have driven SpiceJet’s strong performance during the quarter
New Delhi: The average fare across the SpiceJet system last quarter was Rs 4,381 and the airline has claimed after announcing its first quarter results that average airfares on its system were much higher than the rivals. In fact, higher fares or yields (revenue per passenger) could have been the single most important factor in driving SpiceJet’s strong performance during the quarter ended 30 June. The airline reported an almost 18 percent surge in net profit to Rs 175 crore versus the same quarter in the previous year; revenues were up 23 percent and this was the seventh consecutive quarterly jump in topline.
So, why did airlines like SpiceJet hike fares last quarter? Perhaps, the time has come for us to get over dirt-cheap airline tickets and many flash sales seen same time last year. As the domestic airline industry rationalises capacity addition – it is adding fewer new aircraft into the system than planned earlier and filling up more seats on each aircraft as a consequence – it has become bolder on fares. So while capacity addition is slowing down, a healthy passenger growth means airlines can raise ticket prices. Yes, even the Low Cost Carriers (LCCs) which account for roughly two-third of the market. And this trend, of controlled capacity addition leading to higher fares, could stay for at least another 12 months.
Ansuman Deb, aviation analyst with ICICI Securities, says fares have already risen in Q1 because of moderation in capacity addition by SpiceJet as well as market leader IndiGo. When capacity is disciplined, fare outlook is better. And when fares increase, airline margins also improve. "The capacity outlook in the system is much more disciplined now, which will benefit yields of the sector and help improve margins".
SpiceJet could thank rival IndiGo for this pricing discipline in the domestic airline industry. IndiGo had been adding capacity at a rapid pace and marching ahead on market share front when trouble with the Neo engines (new Airbus aircraft which are more fuel efficient) forced it to slow down the pace. IndiGo’s capacity addition moderated to less than 20 percent from 22 percent guidance last quarter and the airline has already warned that net capacity addition could fall to about 20 percent till 2020 from an earlier guidance of 25 percent. SpiceJet’s capacity addition was anyway low, Deb said. So in fact, IndiGo’s slowing capacity addition is helping rivals inch up yields, even as it benefits IndiGo’s earnings anyway.
As per Boeing’s current market outlook for 20 years (published every year), India is the highest aviation growth market in the world and is likely to expand at 8.9 percent compounded annual growth rate over the next 20 years. The current aircraft induction rate in India is around 4.5 aircrafts each month or about 55 each year. Boeing forecast says this will expand to reach 8-9 new aircraft addition per month or 100-110 per year by 2019-20 as Boeing starts 737 Max deliveries to SpiceJet and Jet Airways from mid 2018. Further, Boeing estimates that in the next 20 years, India will need to add about 1,800 aircraft on an existing base of 450 aircrafts (CAGR of 7.2 percent). Remember, domestic air traffic crossed the 100 million mark in 2016-17 with a CAGR growth of 15 percent.
Anyway, the first quarter of this fiscal has been good for Indian airlines in general despite a spike in fuel prices as passenger loads remained healthy. The increase in yields (revenue per passenger) will help their bottomlines going forward, irrespective of fuel price increase. In terms of overall costs, things remain in favour because crude prices, though rising, remain range bound and currency fluctuations are favourable with a strong rupee.
Market leader IndiGo, largest by passenger traffic base, reported an almost Rs 9 crore daily net profit in the first quarter, beating analyst estimates by posting the highest ever quarterly profit. IndiGo has nearly 40 percent market share, but on non-metro routes it controls over half the market. Put simply, this means that 4 in 10 domestic fliers choose IndiGo but on non-metro routes, every second flier chooses this airline. According to data compiled by analysts, IndiGo has been increasing its share in the domestic market at the expense of Jet Airways and Air India.
Brokerage Motilal Oswal said in a note to clients earlier that in the 13 successive quarters starting from Q1FY15 when IndiGo had just about 32 percent share, it has inched up to 41 percent now. Over the same period, Jet Airways went from controlling a fifth of the market (21 percent) to 17.58 percent now. And Air India went from 17.42 percent to 12.77 percent. SpiceJet also came down from almost controlling a fifth of the domestic market in Q2FY15 to 12.96 percent now. Market share is a direct consequence of capacity and IndiGo has seen the fastest capacity addition among all domestic airlines. But like we said, with slowing capacity addition going forward, IndiGo’s rapid market share gain could slow down even as rivals start earning better yields.
Anyway, despite reporting a good set of numbers, SpiceJet’s cost management in Q1 came in for criticism. There was a slight disappointment on the cost front, especially on SpiceJet’s aircraft maintenance costs which surged 52 percent year on year, a Mint report said quoting unnamed analysts. It goes on to quote CFO Kiran Koteshwar, saying maintenance costs seem inflated because of a higher proportion of wet leases last year, thanks to which some portion of maintenance costs were included in aircraft rentals. Clubbed together, maintenance and rentals costs rose only 16 percent year-on-year.
Meanwhile, on the capacity addition front, SpiceJet plans to add six Boeing 737 aircraft during the third and fourth quarters besides adding two more Bombardier Q400s. Earlier this year, the carrier had placed an order for up to 205 Boeing aircraft ; the airline also has an order for 20 737 Max 10 planes while another 20 conversions from the previous order have also been placed. In addition, it has ordered up to 50 Q400 turboprop planes with Bombardier to ramp up presence in the regional market.
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