A disappointing quarter for IndiGo and SpiceJet

After record profits in the first quarter of this year, the two listed low-cost airlines in the country came back to the same story — being in the red.

IndiGo reported a loss of ₹1,066 crore compared to a loss of ₹652 crore in the year-ago period. SpiceJet’s loss of ₹463 crore was also higher than in the year-ago period (₹389 crore).

IndiGo’s revenue from operations was up 31 per cent y-o-y to ₹8,105 crore in the September 2019 quarter, while that of SpiceJet grew 52 per cent y-o-y to ₹2,845 crore. This was driven primarily by higher passenger numbers and continued capacity growth — up 24 per cent y-o-y for IndiGo and up 51 per cent for SpiceJet.

Also, with about 9 per cent increase in yield (₹ per km), IndiGo continued to gain from higher pricing power from the grounding of Jet Airways, but this benefit was marginal (yield up just about 2 per cent) for SpiceJet.

The net result, however, was that the two airlines posted losses which, analysts say, was expected. Every quarter brings its own opportunities and glitches and so did the quarter ended September this year. According to Jagannarayan Padmanabhan, Director, CRISIL Infrastructure Advisory, aggressive expansion plans, slower economic growth and heightened competition were some of the key reasons for the losses during the latest quarter.

Most precarious phase

Nripendra Singh, Industry Principal, Aerospace, Defence and Security Practice, Frost & Sullivan, provides another perspective when he says that the implosion of the country’s second largest airline (Jet Airways) and persistent technical issues plaguing two of the most popular passenger models flown by India’s airlines pushed India’s aviation industry to “its most precarious phase in the last five years impacting both the LCCs negatively.”

On a not so optimistic note for the two LCCs, Padmanabhan adds, “This pain is expected to be present for the next quarter as well. India will have the maximum number of aircraft this year (~620), the previous peak was early this year before the implosion of Jet Airways. This means the additions have offset all of the Jet fleet in 10 months and this is expected to grow, going forward.”

‘Long-term outlook strong’

However, despite these poor results, the two airlines are projecting an optimistic air.

Ajay Singh, Chairman, SpiceJet, says, “There might be turbulence for one or two quarters but the long-term outlook is pretty strong.” Singh also maintains that rather than taking a quarter to quarter view of the industry there is a need to take a long-term view.

Explaining IndiGo’s latest quarter results and also why he is optimistic, Ronojoy Dutta, President and Chief Executive Officer of the airline, says that the results were impacted by Mark-to-Market (MTM), engine issues and employee costs, all of which went for pilot training.

For IndiGo, the pilot training costs spiralled as the airline inducted aircraft at a fast pace it was not able to train enough pilots. Hence, the airline decided to double the number of pilots that it will train every month to 50, which is a cost to the airline.

Getting more pilots on-board and training costs saw employee costs jump more than 50 per cent y-o-y for IndiGo. Forex losses on operating lease liabilities as per IND AS 116 (in force from April 2019) added to the pain. In all, IndiGo’s expenses were up about 28 per cent y-o-y in the September 2019 quarter.

“We are telling people three things: MTM is here to stay, engine costs go away by the end of 2021 and pilot costs will go away by June 2020. We will be looking for profitability in the next few quarters,” Dutta adds.

For SpiceJet too, the transition to IND AS 116 was among the pain points and resulted in non-cash loss of ₹180 crore in the quarter. The airline’s employee costs, too, saw a sharp jump with the expansion of the fleet.

In SpiceJet’s case, however, there is another pain point. Its losses would have been higher but for ₹177 crore recognised by the company as “other income” towards claims of reimbursement from Boeing for the grounding of its Max aircraft.

The company’s auditor, S.R.Batliboi & Associates, has frowned upon this seemingly aggressive accounting. The auditor says that had this income not been recognised, the loss in the September quarter would have been higher by ₹177 crore. The auditor had raised a similar objection regarding the June 2019 quarter results too when SpiceJet had recognised ₹114 crore as other income.

Commenting on the “other income” portion highlighted in the auditor's report, Nipendra says that this indicates an income that has limited certainty of realisation. SpiceJet officials, however, deny this, saying that they have been “very conservative,” while taking this into account.

“Besides, they also highlight the uncertainties arising from SpiceJet’s dispute with erstwhile promoters and certain resultant possible non-compliances of applicable provisions of law,” Nipendra adds.

Word of caution

Looking ahead, analysts provide a word of caution.

According to Padmanabhan, a call between growth at all costs to profitable growth, that is, appropriate ticket prices and increasing the passenger load factor, will be critical for inching towards profitable growth.

Nripendra adds that the overcapacity which got corrected by Jet’s shutdown is expected to make a comeback in the sector and will force airlines to bring down fares to fill those extra seats.

“In a mad rush to keep their PLFs high, airlines might be heading for profit-less growth from the fourth quarter onwards. This is in sharp contrast to the record-profit run of IndiGo and SpiceJet. Trends suggest that overcapacity took the life of Kingfisher Airlines (in 2012) and Jet Airways, but all airlines are still chasing market share by adding more capacity than required,” he says.

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