A winter of contrasts

The recent December quarter scorecard of the listed airlines is in many ways an encore of the contrast seen in the sector in the September and June 2017 quarters. While the two listed low-cost carriers – IndiGo Airlines and SpiceJet – again put up a good show, Jet Airways, the only listed full service carrier, continued to struggle. In a quarter considered seasonally strong, IndiGo’s profit rose more than 56 per cent year-on-year to ₹762 crore, while that of SpiceJet grew 33 per cent to ₹240 crore. Jet Airways, on the other hand, saw its bottomline shrink 46 per cent to ₹165 crore.

The divergence in the December quarter reinforces the contrasting fortunes among the sector’s players for quite some time now. In the half-year that ended September 2017, IndiGo’s profit grew 86 per cent, SpiceJet grew 35 per cent, but Jet’s bottomline crashed 82 per cent y-o-y. In 2016-17, too, when the sector reeled from rising costs, low fares and demonetisation, Jet Airways’ 67 per cent profit crash was far worse than the fall at IndiGo (16 per cent) and SpiceJet (4 per cent).

Foreign blues

Yet again, Jet Airways was dragged down by its international business that accounts for more than half the airline’s revenue and profit – much higher than that of its peers. Jet’s foreign operations have been under pressure due to economic troubles in West Asia, its key market.

Operating profit in the segment in the December quarter was nearly flat, compared with the year-ago period, due to pricing pressures. It’s not that the domestic business fared too well either, with the segment’s operating profit growing less than 3 per cent y-o-y.

Overall, the airline’s yield (average revenue per passenger kilometre) fell about 2.6 per cent y-o-y during the December quarter. In contrast, IndiGo’s yield improved 6.3 per cent, while SpiceJet’s yield rose 14 per cent. This is the third quarter in a row when IndiGo and SpiceJet have been able to improve their yield, a key positive in a scenario of rising costs, especially fuel.

Higher yields would also be a relief for the low-cost airlines, since big estimated capacity additions in the domestic skies were expected to put downward pressure on fares. Capacity addition in the sector in 2017-18 has been lower than expected due to engine troubles at IndiGo, while the traffic growth has remained healthy.

Thanks to traffic (revenue passenger kilometres) growing faster than capacity addition (available seat kilometres), IndiGo’s load factor in the December quarter improved 1.2 percentage points y-o-y to 88.5 per cent, while SpiceJet’s load factor rose 2.6 percentage points to 94 per cent. Jet Airways did better with a 4.4 percentage point rise in load factor to 84 per cent, but this seems to have come at the cost of yields.

 

 

Extras and cuts

That proved expensive for Jet, especially given the rising fuel prices. In the December quarter, Jet’s standalone fuel expenditure rose 29 per cent y-o-y, more than offsetting cost control on other fronts and resulting in total expenditure rising about 10 per cent. Higher passenger numbers also saw the airline’s operating revenue grow about 10 per cent. Even so, operating revenue was lower than total expenditure incurred. So, it was non-operating revenue that kept the airline in the black in the quarter.

But this, too, dipped sharply with the year-ago December quarter benefiting from substantial profit on account of profit on sale and leaseback of aircraft.

In contrast, healthy growth in passenger traffic, along with higher fares, saw IndiGo’s operating revenue grow 24 per cent y-o-y in the December quarter, outpacing its expenditure growth of 18 per cent. Other income also grew 58 per cent y-o-y.

Besides operational performance improvement and better revenue management, IndiGo’s profit in the December quarter benefited from credits received from Pratt & Whitney and Airbus related to aircraft groundings and delivery delays.

While the credits reduced aircraft and engine rentals expense, the airline did not quantify the benefit.

Even excluding this, IndiGo’s EBITDAR (operating profit before rent) was up around 37 per cent y-o-y, indicating a strong operating performance. SpiceJet, too, saw good growth of 23 per cent y-o-y in EBITDAR in the December quarter on an operating revenue growth of 29 per cent.

Outlook

The March quarter is traditionally a weak one for the sector. But the low base effect, due to the lingering effects of demonetisation in the year-ago period, should aid airlines in the ongoing March quarter. But expected higher capacity additions could throw a spanner in the works. IndiGo, the largest player in the domestic skies, has indicated capacity increase of 24 per cent for the March 2018 quarter; this is far higher than the 13 per cent capacity increase in the December and September 2017 quarters. Fast capacity growth in the sector, if not matched by commensurate traffic growth, could mean higher competition and pressure on fares. This, combined with high oil cost, could impact profits.

All the three listed airlines – SpiceJet, IndiGo and Jet Airways – have bid for and won routes in the regional connectivity scheme UDAN. How they perform here needs to be seen. For Jet Airways, its ongoing cost control initiatives hold the key, given the challenges in its international operations.

The airline’s ability or otherwise to increase yields will also need to be watched.

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