US airfares down 3.6% in second quarter 2013

By BA Staff

The average domestic air fare decreased to $378 in the second quarter of 2013, down 3.6 percent from the average fare of $392 in the second quarter of 2012, measured in constant 2013 dollars, the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS) reported.

Huntsville, Ala., had the highest average fare, $547, while Atlantic City, N.J., had the lowest, $159.

BTS, a part of the Research and Innovative Technology Administration (RITA), reports average fares based on domestic itinerary fares. Itinerary fares consist of round-trip fares unless the customer does not purchase a return trip. In that case, the one-way fare is included. Fares are based on the total ticket value which consists of the price charged by the airlines plus any additional taxes and fees levied by an outside entity at the time of purchase. Fares include only the price paid at the time of the ticket purchase and do not include other fees, such as baggage fees, paid at the airport or on-board the aircraft. Averages do not include frequent-flyer or “zero fares” or abnormally high reported fares.

The second-quarter 2013 fare was down 18.4 percent in constant 2013 dollars from the average fare of $463 in 1999, which was the highest average fare of any second quarter, adjusted for inflation. The 18.4 percent decline took place while there was an increase in overall consumer prices of 40.5 percent. In the 18 years since BTS began collecting air fare records in 1995, inflation-adjusted fares declined 16.9 percent compared to a 53.1 percent increase in overall consumer prices.

U.S. passenger airlines collected 70.6 percent of their total revenue from passenger fares during the second quarter of 2013, down from 1990, the earliest year for which airlines’ revenues and expenses are available, when 87.6 percent of airline revenue was received from fares.

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SpiceJet posts record Rs. 559 crore loss in Q2 FY2014. Needs urgent capital infusion.

by Devesh Agarwal

Gurgaon based low fare carrier SpiceJet Ltd., continued the record of disastrous performance in the Indian airline industry when it announced a record Rs. 559 crore loss for the second quarter, ended September 30, of the fiscal year 2013~2014.

This compared to the Rs. 163.5 crore loss from the same quarter last fiscal, and a Rs. 50.5 crore profit from the first quarter of this fiscal.

On October 23, India's largest private carrier Jet Airways reported a monstrous loss of almost Rs. 1,000 crore.

The airline blamed the poor performance on the precipitous drop in the exchange of the Indian Rupee vs the US Dollar which occurred in the quarter and contributed Rs. 42 crore to losses. In a statement released late this evening, it said

“The civil aviation sector in India continues to struggle under the burden of several adversities mainly the Indian rupee that saw unprecedented weakness during the quarter,”

Poor demand due to a slowing economy saw a drop in income to Rs. 1,257.22 crore from Rs. 1,701.543 crore in the first quarter, though marginally better from Rs. 1,185.244 crore from the same quarter last fiscal. A 9% growth in number of passengers out-stripped the 17% increase in capacity measured in available seat kilometres (ASK), resulting in a 7% in average passenger yields from Rs. 4,001 to Rs. 3,711. Desperate sales at cut-throat fares have also taken their toll.

A lack of capacity discipline by virtually every Indian carrier, especially domestic leader IndiGo, and Jet Airways, continues to exasperate the soft demand situation, and we see the same indiscriminate financial indiscipline as we did in 2008.

Expenses shot up to Rs. 1,791.623 crore against Rs. 1,641.933 in the first quarter, and Rs. 1,357.305 crore from the same quarter last fiscal. Aircraft maintenance costs shot up almost 64% from Rs. 199 crore to Rs. 325 crore largely driven by Rs. 78 crores in engine maintenance expenses due to a bunching up of shop visits.

Fuel costs fell from 45% of total expenses to 39.7% but thanks to the plunge in income, increased from 43.8% to 57% of income.

Continuing losses have put the airline in a precarious financial position. It is estimated the airline requires a minimum Rs. 1,500 crore capital infusion. While the airline has announced the appointment of Sanjiv Kapoor, the former chief executive of GMG Airlines of Bangladesh, as its Chief Operating Officer, it still lacks a Chief Executive, since the departure of Neil Mills, nearly three months ago.

The silver lining for SpiceJet is that parts of the third quarter and the fourth quarter sees high air travel due to the festival season and returning Indian travel.


The supply-demand imbalance is heading for a precipice with expected the commencement of new airlines AirAsia India, and Tata-SIA.

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Jet Airways Q2 FY 2012~2013 quarterly results financial analysis

Photo © Devesh Agarwal. Used with permission.

India’s largest private carrier, Jet Airways, reported a net, post-tax loss of Rs. 99.7 Crore for the second quarter of fiscal year 2012-2013, representing a sharp improvement from the Rs. 713.6 Crore net loss recorded in the same period last year.

This 84.8% improvement in results, pushed Jet Airways’ net margin up to a very manageable (-)2.4%, that too in what is typically the worst quarter for India’s airlines.

The sharp rise in revenues is the primary driver of these improved results.

Financial and operating parameters

Jet Airways grew revenues by more than 25.8% in the last quarter buoyed by the general improvement in the revenue environment following the implosion of Kingfisher Airlines. Unit fares (revenue per available seat kilometre – R/ASK) were up more than 25.5% year over year, though this was matched by a 2.8 point drop in passenger load factor (PLF) to 75%. The fall in domestic PLF (where fares rose the most) was particularly precipitous, falling 6.5% to a low 65.6% from 72.1%.

The fact that Jet Airways still posted a loss despite close to 26% growth in unit revenues is simply proof of how far the industry had fallen and how much ground there is to still make up. Fuel expenses have finally begun to level off, though they still increased more than 14.5% on a per available seat-kilometer (ASK) basis.

In this quarter the culprits were instead the amorphous “Other Operating Expenses” line on the Profit and Loss (P and L) statement, which jumped 25.9%, but especially aircraft lease rentals, which jumped a whopping 49.3%!!!

During an analysts conference call, Bangalore Aviation raised the issue of the sharp rise in aircraft lease rental costs with Jet Airways management, and they responded:

“The lease rentals have gone up for two major reasons. We added six aircraft which were on ownership basis on the previous quarters which are now on a lease basis so effectively we did a sale and leaseback on them. We also added as compared to the last year 8 leased aircraft into the system, 6 of which were 737-800s and two of which were 737-900s and more importantly the rate of exchange impact. For the last year same quarter the rupee to dollar was largely at 45-46 to a dollar and this year it was more like a 55-56 so that is a 20 odd percent impact in terms of lease cost, which is 100% dollar denominated. So 20 plue percent is because of the rate of exchange impact, the balance is because of change in the mix of owned versus leased as well as incremental leased aircraft that we got into the fleet.”

Unfortunately, the declining performance of the Rupee, with the macro-economic and political factors behind that, represent a significant headwind that is, and will continue to, hamper the Indian airline industry for several quarters to come, though year over year comparisons will become easier assuming the Rupee stabilizes at current levels. When so much of the world economy is run on US dollars, this type of valuation for the local currency hurts airlines the most.

International Operations

Once again, the dichotomy of Jet Airways was apparent – the international operations, which had temporarily swung into a net loss during the fuel spike over the past year, swung sharply, improving 119% to a robust net, pre-tax profit of Rs. 45.2 Crore versus a net loss of Rs. 238.3 Crore a year ago. Meanwhile, the domestic operations continued to falter, posting a Rs. 153.5 Crore net loss (though this was a 67.7% improvement year over year).

Jet Airways has been aggressive in suspending non-profitable destinations, and from a pure financial perspective we applaud most of the moves that Jet Airways has made in recent months in terms of consolidating capacity on its international network and simultaneously shedding unprofitable routes while adding capacity on profitable sectors. In particular, Jet’s recent move to terminate Delhi-Milan, which has long been rumoured to have been unprofitable, and in our opinion, is superfluous to Jet ‘s core international strengths.

On the subject of Jet’s tumultuous European operations, Bangalore Aviation also queried Jet Airways management on our report of a planned Bangalore Munich flight. During the analysts call, Jet confirmed that the flight is indeed planned to operate towards the end of the winter schedule, but details are still being worked out.

Outlook

Looking forward, there are both challenges and opportunities for Jet Airways. If the general improvement in conditions for the Indian airline market hold, the traditionally strong, third fiscal quarter (October through December) should be highly profitable for Jet Airways.

We are optimistic the airline is focussing on the bottom line in many aspects, including value added income from in-flight sales of food, route rationalisation, and building flexibility in its fleet. In particular, the adding of business class in to JetKonnect which offers Jet the flexibility to shift aircraft between the low cost JetKonnect into the full-service Jet Airways will allow them to take full advantage of the temporary boom in business class demand during the next few months.

Jet will continue to face issues of brand confusion due to the common configuration of JetKonnect and Jet Airways aircraft, and the airline also risks becoming uncompetitive to the business traveller as it cuts back on routes. Jet also has to integrate the soon to be delivered A330-300s into their fleet and international operations. This will increase operational complexity, and will render the carrier's Boeing 777-300ER fleet in to further irrelevance, both of which will increase costs and drive down profitability.

On the positive side, fuel prices are stabilising, and for the first time in the last four years, fares are rising in India. Jet Airways is poised at the cusp, it is up to the team at Jet Airways to deliver a few quarters of great results.

With inputs from Devesh Agarwal

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SpiceJet Q2 FY2012~2013 quarterly results financial analysis

Earlier this week, Indian low cost carrier SpiceJet posted a Rs. 163.5 Crore net loss for the second quarter of fiscal year 2012-13. While this represented a 32% better result than the same period last year, it is still a heavily disappointing result, giving the recent surge in the fortunes of India’s airlines after the shut-down of full service carrier Kingfisher and the corresponding rise in fares.

Revenues grew a robust 57% to Rs. 1207 Crore, but even still, a net margin of -13.5% is almost flipped 180 degrees from the ideal result.

Revenues were certainly buoyed by general fare increases and the continued maturation of Q400 markets.

What makes the quarterly results particularly abysmal is that SpiceJet has finally gotten its primary challenge of the past few quarters, fuel costs, under control thanks to the general global stabilization in oil prices. Year over year gas prices grew by a relatively modest though still challenging 11.6% on a per seat-kilometre basis.

What is concerning is that the dizzying rise in fares over the past quarter, over 30% on some sectors, should have more than outweighed the fuel price growth. There seems to be poor cost discipline in the airline's other cost-line items, primarily aircraft maintenance, which grew more than 17% on a per seat kilometre basis, and aircraft lease rentals, which jumped a staggering 26.2% percent year-on-year per seat kilometre.

These two cost line items, and indeed the fuel expenses as well, help drive home an essential point – SpiceJet’s losses are driven by capacity growth; i.e. poor capacity discipline by SpiceJet.

While a small part of SpiceJet’s maintenance cost increases are due to the natural aging of their 737NG fleet, the primary driver behind increased maintenance costs is the high rate of growth that SpiceJet continues to pursue. For the quarter, SpiceJet recorded a whopping 20% increase in available seat kilometers – and the increase in fleet size and aircraft utilization due to this capacity are the drivers behind the rise in maintenance and aircraft lease costs, as well as a primary factor in the 600% rise in depreciation costs.

Given the current environment in India, where fares are finally enjoying the sort of sustained quarterly fare increases necessary to overcome the ludicrous policy of over-taxation which double the impact of persistently high fuel prices, why is SpiceJet pursuing a 20% capacity growth?

Part of the answer is, undoubtedly, that their outstanding order for 20 737NGs, which locks them into almost continual route and fleet growth, at least for the next few quarters. But another part is what I see as the mentality that is prevalent amongst all of the Indian carriers, a market-share chasing mentality that values profitless growth over the profitable status quo. While there are exceptions to this rule, GoAir being the chief amongst them, Indian carriers have over the past decade consistently pursued growth at any cost.

Now this pathway has come back to haunt SpiceJet. Don’t get me wrong, there are profitable avenues of growth available to SpiceJet, chiefly on under-served regional sectors using the Q400, and on regional international routes out of Delhi. However, thanks to the over-commitment to new aircraft, SpiceJet’s strategy has instead been to add new routes and frequencies on heavily competitive domestic sectors, primarily on inter-Metro sectors. Then the accumulated losses on these flights simply add to SpiceJet’s debt load, making it harder for them to find financing for the Q400s and reinforcing the negative feedback cycle of profitless growth.

It is also interesting to note that SpiceJet has seen the steadily creeping interest expenditures. While SpiceJet is far away from the interest burden that crippled Kingfisher, and bankrupt US carrier American Airlines, and have hamstrung Jet Airways in recent months, this should be a cause for long term concern and constant observation.

Current finance charges are close to 4.8% of revenues, up sharply from less than 1% just a year ago. It is important to note, SpiceJet actually had Rs. 747.10 lakhs worth of interest costs, it has not accounted for, in this quarter, stating ongoing litigation at the Bombay High Court – a charge that would have made the already dismal results look even worse.

Moving forward, there is undoubtedly potential for SpiceJet to grow and improve its financial performance, especially if it can find financing for the next set of Q400 deliveries. The key for SpiceJet is capacity discipline – they need to find some way of bringing revenues in line with costs.

Cost-cutting is difficult since more than 75% of their costs are effectively fixed in the short to medium term. The easiest way to do this is by holding your supply (capacity) constant, which will in turn drive an increase in fares and thus increased revenues. However, this strategy will be tested by the constant fleet additions by competitors IndiGo and Jet Airways, as well as a constant observation by the government to keep fares "in check", a populist interference that will only grow as elections get closer.

A more plausible strategy would be the Blue Ocean growth being driven by CEO Neil Mills. The carrier is applying and getting route permissions for un-served and under-served international routes like Kabul, Guangzhou, etc. SpiceJet has to follow a similar strategy for the domestic market too. SpiceJet is gradually serving tier two and three cities from Bangalore, but is still not basing a full Q400 fleet here. Bangalore Aviation is given to understand that the airline is looking for a "good deal" from BIAL, the airport operator, but is not finding one, since the airport is under-capacity at present.

Given these macro-economics, for the short term, SpiceJet may continue to pursue a aggressive capacity growth path of more than 15% per quarter, and this will keep pressure on profitability. The faster the airline shifts strategy the faster the chances of it flying out of the trap.

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Kingfisher's Q2 FY13 record loss of Rs. 1,115 crore is more than five times its revenue

One of the many Kingfisher aircraft stripped and left

Financial beleaguered Kingfisher Airlines saw its second quarter revenue for fiscal year 2012~2013 plunge a massive 87% to just Rs. 200 crore (Rs. 2 billion) from almost Rs. 1,553 crore in the same quarter a year ago.

The airline which has not operated a single flight since October 1, due to strikes and a suspension of its operating license saw its quarterly losses before tax, balloon by over 60% to Rs. 1,115.5 crore, compared to losses of Rs. 693.8 crore from the same quarter last year.

Clearly the claimed "holding plan" of the airline is not working. The first quarter results earlier this year saw quarterly revenue plunging 84% from the same quarter a year earlier, and the quarterly pre-tax losses were almost Rs. 694 crore. Large at that time itself, but diminutive by this quarter's numbers.

In the first quarter, losses at the airline were 3x the revenue, this quarter, the losses have jumped to 5.5x i.e. the airline lost Rs. 5.50 for each rupee it earned.

The leader of the lending consortium, State Bank of India (SBI), which has an estimated exposure in excess of Rs. 1,200 Cr. to Kingfisher Airlines, yesterday, is almost begging the airline's promoters to inject a minimum of $ 1 billion (approx. Rs. 5,500 crore) before this month's end for its revival.

The airline released essentially the same statement as from last quarter

Kingfisher Airlines has been in a holding pattern, operating a limited schedule since March 2012.

Kingfisher Airlines is preparing a comprehensive plan for re-start of operations which will be shared with the DGCA and bankers.

The airline is in discussion with various stakeholders to ensure that there are no future disruptions. Kingfisher Airlines expects to resume operations in the near future.

If the airline had an investor, don't you think it would have put out some plans till now?

Share your thoughts via the comment system.

You will observe, Bangalore Aviation has not done any analysis per se on the results. What can we analyse?

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Air traffic plunges 11.5%, as air fares rise. Jet Airways group crashes almost 21%, IndiGo down 11%.

Talk about irony. In March this year, Dr. Dinesh Keskar and Bangalore Aviation were discussing the double digit, yet profitless growth occurring in the Indian airline industry.

Less than six months later, air traffic continues its fifth consecutive month of decline. Within, just the third calendar quarter, (second quarter of the fiscal year 2012~13), air traffic plunged over 11.5%, from 4.537 million passengers in July, to 4.018 million in September. August at 4.369 million passengers was down 3.7% from July, and September was down 8.03% from August.

No airline could avoid the contagion. Jet Airways group is down a whopping 20.63% for the quarter, dropping from 1.207 passengers in July to 0.958 passengers in September. Even market leader IndiGo which is steadily growing its fleet, is down a significant 10.77%. SpiceJet is down 8.04%, Air India down 5.95%, and Kingfisher down 9.62%. GoAir performed the best, losing 2.85% of its passengers.

Year on year for the nine month period January to September this year 43.839 million passengers travelled by air domestically, compared to 44.218 million last year. Down 0.9%.

For the month of September, IndiGo continued its market leadership, but it appears the fare war unleashed by Air India has gained it passengers at the expense of all other airlines. Air India even beat Jet Airways, carrying 0.775 million passengers compared to 0.729 million by Jet Airways.

Put the blame for this contraction on the significant increase in airfares over the last six months, driven by the collapse of Kingfisher Airlines. Airlines are reducing the excess capacity, which has already increased fares over 20%. For the winter schedule which commences October 28, Indian carriers will fly 20% less flights than last year. 10,935 vs. 13,541 flights per week. Experts, expect air fares to rise another 10%~15% during the winter season which is also highest in terms of demand.

No airline crossed a passenger load factor of 70%, even the traditional leader IndiGo which used to regularly be in the top of the eighties or low nineties.

How will this capacity decrease impact passenger numbers? What is your view? Share a comment.

Also, do you think such major fare increases bodes well for the Indian consumer? Share your thoughts.

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