Flight Plan

IndiGo and SpiceJet soar on ‘Jet lag’

Anand Kalyanaraman/Ashwini Phadnis | Updated on August 21, 2019

Domestic airlines IndiGo and SpiceJet have reported record profits. But there are challenges ahead, say Anand Kalyanaraman and Ashwini Phadnis

The month of June spelt a lot of good news for the two listed domestic airlines, IndiGo and SpiceJet, as they reported their highest ever quarterly profits in the quarter ending June 30, 2019.

At ₹1,203 crore, IndiGo saw its net profit jump nearly 43 times as compared to ₹27.8 crore net profit in the year-ago period while SpiceJet reported a profit of ₹262 crore compared to a loss of ₹38 crore in the year-ago period.

There are various reasons for this upswing in their profitability, some of which are short-term. On top of this list is the suspension of operations by Jet Airways, which saw IndiGo and SpiceJet take over the slots vacated by the grounded airline.

According to analysts, the demise of Jet Airways reduced 15 per cent of domestic market capacity which, in particular, helped SpiceJet and IndiGo due to their ability to fill in this gap.

Says Gagan Dixit, Aviation Analyst, Elara Capital, “As per our slot analysis of Delhi and Mumbai Airports, SpiceJet received 43 per cent and IndiGo received 35 per cent of Jet Airways’ Mumbai+Delhi slots during March-May 2019.”

Strong pricing power too helped the two private players. Dixit says that the quarterly results of these two airlines were helped due to around 10 per cent y-o-y (year-on-year) growth in passenger fares, along with a 3-5 per cent market share gain by both the airlines.

IndiGo’s yield (₹ per km) was up nearly 13 per cent y-o-y, while SpiceJet’s average fare was up 11 per cent y-o-y. Average fares help determine the yield for an airline.

Capacity expansion also continued at a brisk pace for both the airlines (about 30 per cent y-o-y), aided in part by the shift of passenger traffic from Jet Airways. In the June quarter, IndiGo added 18 aircraft while SpiceJet added 32 aircraft. Together, higher yields and passenger numbers resulted in revenue from operations jumping sharply — 44 per cent y-o-y to ₹9,420 crore for IndiGo, and 35 per cent to about ₹3,000 crore in the case of SpiceJet.

As significantly, benign costs — especially that of fuel which accounts for almost 40 per cent of the operating costs of domestic airlines — too helped the two airlines.

As a percentage of sales, IndiGo’s fuel cost fell to 33 per cent in the June 2019 quarter from 42 per cent in the year-ago period, while that of SpiceJet fell to 35 per cent from 37 per cent in the same period.

Kinjal Shah, Vice-President and Co-Head, Corporate Sector Ratings, ICRA Ltd, points out that the average ATF prices during Q1 FY2020 were lower by 1.2 per cent y-o-y; this helped curtail airlines’ cost per available seat kilometre (CASK) thereby widening the RASK-CASK spread.

“This has helped the improvement in the profitability of the airlines,” she adds.

RASK (revenue per available seat kilometre) and CASK are globally accepted unit measures of airline revenue and airline cost respectively. The higher the spread between RASK and the CASK, the better an airline’s profitability. Historically, June is a strong quarter with schools and colleges being shut, which too helped the two airlines.

What also helped IndiGo and SpiceJet was that the year-ago period — the June 2018 quarter — was a very weak one for Indian carriers due to high fuel costs. The low base effect magnified the growth in the recent June quarter.

SpiceJet’s bottom line also got a boost from ‘other income’ of ₹114 crore that it recognised as aircraft and supplemental lease rentals towards claims of reimbursements from Boeing for the grounding of its 737 MAX aircraft. The airline claims that its results would have been much better but for the MAX grounding.

Air pockets ahead

As both the airlines move ahead with their fleet expansion plans, they are likely to continue on their growth path. But an encore of the strong June show is not a given. One, the benefits of domestic pricing arising from Jet’s grounding may not continue much longer since the domestic supply gap is being filled at a steady pace.

Next, the bitter promoter dispute at IndiGo shows no signs of abating and this could have a bearing on the airline’s growth. At SpiceJet, the continuing troubles with the grounded MAX aircraft could also slow down its growth pace.

Besides, the ongoing economic slowdown in the country could reflect in passenger growth numbers. This is already being noticed as, after close to 52 months of double-digit growth, domestic air traffic registered single-digit growth in the last three months.

Shah provides another perspective of what lies ahead for the domestic aviation market. She says that with the expected capacity addition, the competitive intensity in the domestic aviation market is only expected to increase, going forward. “This will result in discounting of fares, as in the past, thereby leading to moderation in profitability,” she says.

Published on August 21, 2019

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