Yet again, it was a quarter of contrasts for airlines in India. With a key difference, though. Unlike Jet Airways that stood out like a sore thumb in the first nine months of fiscal 2017-18 with a sharp dip in profits, it was SpiceJet that bucked the trend in the March 2018 quarter with profit growth in contrast to the profit crash of peers.

Also, striking was the sharp reversal in the performance of market leader IndiGo Airlines — from stellar profit growth in the prior three quarters to a washout in the latest March quarter.

The airlines’ bottom lines tell the story. In the March 2018 quarter, IndiGo’s profit crashed 73 per cent y-o-y to ₹118 crore, the lowest since its 2015 public offer. Jet Airways posted a loss of ₹1,036 crore compared with a profit of ₹602 crore in the year-ago period. However, SpiceJet saw its profit grow, even if at a modest 11 per cent y-o-y, to ₹46 crore. But for the ‘other income’ of ₹258 crore, IndiGo would also have ended up in the red like Jet Airways.

The weak show in the sector is disconcerting because it comes on a low base; the year-ago period (March 2017 quarter) was also a weak one, impacted by demonetisation, rising costs and low fares.

The pull-back in performance in the March quarter is apparent from the airlines’ showing in the nine months ended December 2017 — when IndiGo’s profit had zoomed 74 per cent y-o-y to ₹2,125 crore, SpiceJet’s profit had risen 34 per cent y-o-y to ₹521 crore and Jet Airways managed to stay in the black even though its profit fell about 70 per cent y-o-y to ₹268 crore.

This decline and difference in the latest March quarter were driven by two old bugbears — a steep rise in the cost of aviation turbine fuel (ATF), and weak pricing power (inability to price tickets to meet costs ). This more than offset the benefit of continued strong passenger traffic growth (nearly 24 per cent y-o-y growth overall) and high load factors in the sector.

Rising costs

The steady rise in ATF prices since last July picked pace in the recent March quarter. At about ₹61,681 a kilolitre in Delhi (Indian Oil prices) in March 2018, the fuel was about 14 per cent costlier than it was a year earlier. The rally was due to the uptick in global crude oil prices over the past year and weakness in the rupee since the beginning of 2018. This resulted in a sharp 30–34 per cent y-o-y rise in the airlines’ fuel costs in the March quarter.

The upper hand of rising ATF cost over yields is reflected in the airlines’ fuel cost as a percentage of their sales. For IndiGo, this increased to 40 per cent in the March 2018 quarter from 36 per cent in the year-ago period. For Jet Airways, it rose to 35 per cent from 29 per cent, while for SpiceJet, it increased to 36 per cent from 34 per cent. With the chunk of its revenue coming from domestic routes and relatively less from international routes compared with peers, IndiGo faced the highest pressure on the fuel front. Jet Airways and SpiceJet had some cushion from comparatively lower fuel costs thanks to their international routes and regional connectivity routes, respectively, that suffer lower taxes.

It didn’t help that other costs too increased.

IndiGo’s total cost per available seat kilometre (CASK) rose 7.4 per cent y-o-y in the March quarter, and excluding fuel too, its CASK increased 5.3 per cent y-o-y. SpiceJet’s CASK rose 8 per cent and excluding fuel, it was higher 5 per cent. Jet Airways’ CASK rose 4 per cent but other cost control measures helped the airline moderate its CASK (excluding fuel) by about 1 per cent. CASK, a key metric, measures an airline’s unit cost and gives an idea about its cost efficiency.

Yield pressure

While costs headed North, tough competition in the domestic skies and increasing capacity deployment saw many airlines, especially IndiGo, lose the pricing power that seemed to have returned in the first nine months of 2017-18.

Competitive pressures saw IndiGo’s yield (average fare per kilometre) fall 5.6 per cent y-o-y in the March 2018 quarter. Jet Airways too felt the pressure, with its average fare per passenger declining about 1 per cent. It was on this front that SpiceJet stole a march over its peers — its yield was up 8 per cent, indicating better revenue management and operations on less competitive routes that allowed significant pass-through of rising costs. That said, even SpiceJet was not able to recover the entire increase in fuel cost, with the airline saying that crude oil prices had impacted its bottom line by about ₹81 crore.

Capacity and yield outlook

Higher capacity deployment in the sector could continue exerting pressure on yields. A factor that aided yields and airlines’ performance in the nine months ending December 2017 was the engine trouble that kept IndiGo’s capacity (available seat kilometres) growth under check — about 15 per cent y-o-y.

But the airline’s capacity growth picked up to 21 per cent in the March 2018 quarter; this may have played a major part in queering the pricing pitch. With the engine troubles expected to ease in the coming year, IndiGo expects capacity increase of about 25 per cent in 2018-19. Being the largest player in the domestic skies with about 40 per cent market share, IndiGo’s capacity addition has a bearing on fares not only for itself but the entire sector. Other airlines such as SpiceJet too are adding to their fleet. These additions in capacity could keep fares under check and prevent pass-through of cost hikes.

Passenger traffic continues to grow at a healthy pace for the sector and most airlines. Revenue growth (20-24 per cent y-o-y in the March quarter for IndiGo and SpiceJet) should also continue at a good pace. But for the traffic and revenue growth to translate into profit growth, pricing power is important. This may be at risk due to step-up in capacity growth. The pressure on the sector’s earnings this year could also get compounded by the fact that earnings grew strongly in the nine months ended December 2017 — this ups the benchmark and translates into a high base effect.

On the positive side, IndiGo re-introduced fuel surcharge late last month on domestic trips — ₹200 on routes less than 1,000 km and ₹400 on routes longer than 1,000 km — to counter the continuing rise in ATF cost since March. The other airlines could also follow suit. Pricing discipline could ease the pain in the sector.

Besides rising costs and low pricing power, Jet Airways was bogged down throughout the year by weakness in its international operations due to economic troubles in West Asia. This could continue though the airline’s cost control efforts can provide some relief.

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