Headwinds ahead?

The roller-coaster ride for Indian carriers continued in the December 2019 quarter. After posting record profits in the June 2019 quarter and then ending deep in the red in the September 2019 quarter, both Indigo Airlines and SpiceJet turned around to put up a decent show in the December 2019 quarter.

IndiGo’s net profits in the December quarter more than doubled y-o-y to ₹490 crore, while SpiceJet’s net profits rose 33 per cent to ₹73 crore. This was a relief, given that the September 2019 quarter was a washout due to a spike in costs that negated strong growth in revenue.

Among other factors, SpiceJet’s December quarter profits were aided by the fact that it recognised ₹246 crore as ‘other income’ towards claims of reimbursement from Boeing for the grounding of its MAX aircraft. But for this, the airline would have posted a loss. Like in the June and September 2019 quarters, the company’s auditors have frowned upon this seemingly aggressively accounting practice this time too. Boeing has made an interim offer of compensation to SpiceJet, details of which have not been disclosed; the airline’s management is confident of collecting the other income that it has recognised.

Costs, including employee expenses, rose with expansion in the two airlines’ operations. But thankfully, this time the pace was slower than their revenue growth. It helped that fuel cost, a major expense for airlines, was benign in the December quarter. Both the airlines, though, continued to be impacted by forex losses on operating lease liabilities.

What also helped both SpiceJet and IndiGo in the third quarter is ancillary revenues which Lewis Burroughs, Head of Aviation, India, ICF Consulting India Private Ltd, says are “massively important,” and suggests a further unbundling of services to increase ancillary revenues.

Gains from Jet

Nripendra Singh, Industry Principal, Aerospace, Defense & Security Practice, Frost & Sullivan, agrees and adds that an increase in ancillary revenues has a direct impact on airline profitability without requiring high investments in the overall infrastructure. “With increasing competition in ticket prices and shrinking margins, airlines have no other option but to explore new avenues to generate revenue, thereby increasing the importance of ancillary revenues,” he argues.

The two airlines also continued to reap the benefits of Jet stopping operations in April last year in the December quarter as well. Lewis argues that with Jet stopping operations, the number of players vying for market share has reduced, which means there are fewer airlines putting pressure on the yields of existing players.

Sachin Gupta, Senior Director, Crisil Ratings, agrees and adds that the going away of Jet Airways has given more space to the remaining players. “So whether it is the passengers or slots, the remaining players are benefiting,” he says.

The fact that Jet slots are being given for a short period is not a worry for Gupta on the revenue front as he points out that if you see from a year before when Jet Airways was operating versus now when Jet Airways is not operating, obviously SpiceJet and IndiGo will be better off.

Crude impact

However, this is the story so far. And the prospects for the near future do not seem that good. Given the current global and local environment, with new countries being added to those already affected by the coronavirus, global crude oil prices staying subdued or even falling further is a possibility. That’s a positive for airlines. But on the flipside, the spread of the virus is also likely to see the number of flyers going down; that’s a negative.

According to Kinjal Shah, Vice-President, ICRA, following the coronavirus outbreak in China, crude oil prices declined materially — to $56 per barrel from $69 per barrel on January 6, this year.

“This was the sharpest decline since Q4 CY2018. ATF represents the single largest cost element for airlines. As such, the profitability of the airlines is significantly impacted by ATF prices. In our estimates, a decline in the ATF price by $1 at the current level will have a positive impact of 0.5-0.7 per cent on the profit margins of the airlines. This will thus partly compensate the airlines for the loss of revenues due to flight cancellations,” she says. ATF prices in India went down by 10 per cent at the beginning of this month.

Others like Singh have a different point of view, though. According to him, crude oil forecasts by most of the agencies across the globe have been revised for the remainder of 2020 due to travel restrictions prompted by the coronavirus outbreak. He adds that oil demand is expected to be around $61 per barrel for 2020, which will gradually scale up to $68 per barrel in 2021.

“Hence yes, a possible rise in crude oil prices and weakening rupee will adversely impact the profitability of the airlines,” Singh adds.

Echoing similar thoughts, Gupta points out that the Indian market is still relying on the low-cost fliers who fill up the planes. “When the occupancy goes up to over 90 per cent it is largely because an airline is able to fill up a large part of its inventory (seats) by people who would have booked discounted fares in advance. Now if the cost structure changes materially, which is what happens when dollar and crude go out of range, then the ability of the airlines to give those deep discount tickets really goes down,” he says. This too can adversely affect both occupancy and profit margins.

Then, of course, there is the continued global grounding of the Boeing 737 MAX, which is impacting SpiceJet’s current operations and expansion plans. The on-going feud between the two promoters of IndiGo is not helping the airline. Further, the March quarter is traditionally seen as a low season for the Indian market.

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