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IndiGo and SpiceJet’s September 2020 quarter results reflect both the pain and the hope that the aviation sector in the country is going through in its fight against the Covid-19 pandemic.
IndiGo’s consolidated loss of ₹1,195 crore and SpiceJet’s consolidated loss of ₹106 crore in the September 2020 quarter were much lower than their loss of ₹2,844 crore and ₹601 crore in the June 2020 quarter.
Better sequential performance
The relatively better sequential quarter performance was largely due to domestic operations for the entire September quarter unlike in the June quarter when the airlines flew for only about 37 of the 91 days.
Further there was also an increase in domestic operations with airlines being allowed to fly up to 60 per cent of their pre-Covid levels as compared to 33 per cent in the June quarter.
However, analysts are not seeing much promise in these improved numbers. According to Waseem Khan, Industry Analyst, Aerospace, Defense & Security Practice, Frost & Sullivan, the losses posted by the two airlines are a clear indicator that the recovery of the aviation industry is going to be pushed beyond what was expected earlier.
“The delay is primarily due to the weak demand for air travel and cap on airfares,” Khan says.
Khan adds that in India, Q2 and Q4 usually witness high demand for air travel, and the cap on airfares is restricting the airlines’ ability to manage their revenue.
When domestic flying resumed on May 25 fares were capped at the higher and lower levels.
The decision was taken to ensure fares do not go out of control and are reasonable for the airlines also.
The government has also said that at least 40 per cent of the seats have to be sold at a fare that is less than the mid-way point of the band, which is approximately ₹6,700 or below in the case of a Mumbai-Delhi one-way flight ticket.
“As the airlines are unable to plan their pricing strategies, this has a negative impact on their profit margins,” Khan says.
Agreeing with Khan, Jagannarayan Padmanabhan, Director - Transport, Crisil Infrastructure Advisory, adds that the revival of the sector is going to be a long tailed one with recovery to pre-Covid levels happening only by October-December 2021 and beyond. “The current situation is one of rapid development and change,” he adds.
Cap on fares
According to Padmanabhan, cap on fares certainly restrict the airlines in taking pricing decisions based on market dynamics.
“Combined with restrictions on maximum capacity, contrary to expectation it has sometimes proved to be beneficial as well and yielded higher per seat realisations,” he says.
Padmanabhan adds that the recent government decision to enhance domestic flying to 70 per cent of pre-Covid levels, will certainly help the bottom-lines and decrease the current burn rate of the airlines.
When asked which of the two airlines is in a better state to withstand the pandemic, Khan maintained that as per their Q2 financial results IndiGo has current assets worth ₹196,87.6 crore whereas SpiceJet has current assets worth ₹2,544.3 crore.
“Additionally, IndiGo plans to raise funds from the market (₹4,000 crore via equity shares) to generate more cash flows. Even if SpiceJet plans to raise funds via equity shares, weak market sentiment is likely to limit the company's ability to generate the expected cash flow,” he adds.
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