By Vinay Bhaskara and Devesh Agarwal
In a result that represents a positive sign for the prospects of the Indian airline industry moving forward, Gurgaon based low cost carrier (LCC) SpiceJet reported a Rs. 102 Crore (US $19 million) net profit for the third quarter of fiscal year 2012-13 (FY 12-13), a sharp improvement from the results in both the second quarter of FY 12-13 (Rs. 169.8 Crore net loss) and in the same period a year ago (Rs. 39.3 Crore net loss).
SpiceJet financials at the end of the article.
The move represents a sharp turn towards profitability for SpiceJet, and when combined with a previous profit in Q1 of FY 12-13, brings their year to date (YTD) net result to essentially break even (loss of Rs. 53.5 Lakh on revenues of Rs. 4282.5 Crore). Factors contributing to SpiceJet’s resurgence include the strong performance of the regional Q400 operation, as well as that of new international routes, manageable fuel prices, and a better revenue and capacity environment within the domestic Indian airline industry.
Looking at some of the specific metrics provided by SpiceJet, the airline recorded a 7% growth in passengers carried, 18% growth in capacity as measured by available seat kilometers (ASKs), and a 25% growth in number of departures or frequencies.
At first glance, it would seem that this performance completely contradicts our standard mantra of "capacity discipline and restraint at all costs", but a detailed look at at the composition of these growth figures shows out the strategy.
On the heavily saturated mainline domestic flights (basically flights in-between Metros/Tier I cities operated with the 737 fleet), passenger traffic actually fell by 2% and ASK growth was measured in the single digits.
At the same time, international passenger traffic grew by 80% and regional passenger traffic, serviced by the Q400 turbo-prop operation to Tier II and Tier III cities, saw a massive 82% growth in passenger traffic.
These latter two categories are the market sectors with limited competition, enabling SpiceJet to achieve better profitability. The buoyancy in passenger yields helped SpiceJet record a superb 29% increase from Rs. 3,421 to Rs. 4,412, the best quarterly revenue performance from SpiceJet in the last 18 months.
To clarify our views on capacity discipline are that growth for growth’s sake should not be pursued; simply throwing capacity onto the high competition routes between Metros so that aggregate passenger figures grow is a meaningless strategy that some of the Indian carriers (and airlines in general) fall into from time to time. Profitable growth opportunities in under-served or un-served markets should be pursued. Indian airlines should never abandon profitable growth opportunities; rather they should be smart and prudent about where, when, and how they grow. Just as growth for growth’s sake is pointless, so is capacity discipline for capacity discipline’s sake.
Getting back on topic, an important factor in a successful quarter for SpiceJet was, cost discipline. On a per ASK (Available Seat-Kilometre) basis, normalising for increased size of operations, cost growth was a very manageable 4.4%, and much of the increase can be attributed to the initiation costs and added complexity of new international routes. One of the other factors that contributed to the relatively modest rise in costs is the growing maturity of the Q400 operation. Much of calendar year 2012 was spent integrating the Q400s into the fleet and this temporarily increases an airline’s costs as new and existing personnel must be hired and retrained for the new aircraft type, new infrastructure put in place, and generally operational complexity increases in the short term; but these are all temporary costs, as the Q400 operation matures, SpiceJet will see a steady reduction in costs of the Q400 operations, as well as demand side market maturation i.e. increased fares and market penetration.
This effect has already begun to take hold, ergo the rise in yields, and the maturation driven cost-reduction will benefit SpiceJet over the next few quarters.
Equally important is the flattening of fuel costs, which had been the most significant driver in SpiceJet’s poor financial performance for the past two years. Once again, fuel costs rose a manageable 4.5% on a per-ASK basis year over year, which given SpiceJet’s extraordinary revenue performance was more than adequate performance. Part of the moderation can of course be traced to the stabilization of oil prices around US $90 per barrel (West Texas Intermediate measure), another part also stems from SpiceJet’s increased international and Q400 operations. Fuel purchases for all international flights do not suffer the usual exorbitant average 24% sales tax, that varies by state. Similarly, to promote regional connectivity, the Government of India mandates a uniform 4% sales tax instead of the average 24% for sub-80 seat aircraft, which covers the 78 seat Q400 operations. For example, in Delhi fuel prices for international flights are roughly 23% lower than domestic ones. In Kolkata it is 30% lower, in Mumbai 26%, and 29% lower in Chennai. Given that fuel represents over 50% of costs for most Indian airlines, these discounts are a serious boon for SpiceJet.
As SpiceJet increased its international flying and regional Q400 operations, as a proportion of total capacity, the relative fuel burden decreased thanks to the lower level of taxation. This saving in fuel costs will continue to improve as international and Q400 operations continue to increase as a proportion
As a whole, SpiceJet put in a very strong third quarter of FY 12-13. It will be interesting to see if this was a one-off occurrence, or if SpiceJet can sustain profitability moving forward. But in the present, SpiceJet CEO Neil Mills put it best
SpiceJet financial statement Q3 FY 2013
Download here.
