Analysis: SpiceJet third quarter fiscal 2013~2014 results – excess capacity killing industry

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Earlier this week, low cost carrier SpiceJet reported its latest round of disappointing financial results, reporting a Rs. 172.80 crore net loss for the third quarter of fiscal year 2013~2014 (3Q FY14), swinging from a net profit of Rs. 102.01 crore during the same period last year. The carrier blamed high fuel prices and rupee depreciation for the net loss, as well as a poor pricing environment due to excessive expansion by SpiceJet and fellow low cost carriers IndiGo and GoAir.

Operating revenues grew 14% year-over-year (YOY) to Rs. 1,807.73 crore, as the carrier’s international expansion and the addition of roughly seven new aircraft on net contributed to revenue growth. SpiceJet also resorted heavily to bulk-discounting and fare sales to fill its seats during the period. While the third quarter is typically the strongest period for Indian airlines, the residual effects of a depreciating currency, excessive discounting of fares, and slowing macroeconomic growth (especially in Delhi where SpiceJet is unusually concentrated) meant that revenue results were soft for the period.

On a unit basis, revenue per available seat kilometre plummeted 6% YOY to Rs. 3.6 on 20% YOY capacity growth as measured in available seat kilometres (ASKs). While the carrier did report a mild increase of 3.2% in revenue per passenger to Rs. 4,551, it was more than offset by the devaluation in the value of the rupee. Still, the weak demand environment meant that even this modest increase in fares led to a 4.5% decline in load factor to 70.5%. Based on our calculations, the carrier’s break-even load factor is slightly over 76.5%.

Turning to expenses, total operating expenses jumped an alarming 32.1% to Rs. 1,962.31 Crore, led by a 31% increase in fuel costs to Rs. 941.12 Crore, representing 48% of total expenses. On a per-ASK basis (which is the best way to evaluate the expense performance of carriers in a high growth phase), fuel expenses rose roughly 9.1%, and this could be attributed almost entirely to the depreciation of the rupee, as government owned oil marketing companies have totally passed on these price increases to the airlines. Other cost-line items saw major increases, with maintenance costs rising 53.3% YOY to Rs. 238.95 Crore and airport charges rising 39.8% YOY to Rs. 127.59 Crore. SpiceJet in particular was slammed by airport charge increases in Delhi since so much of its capacity is concentrated in the nation’s capital.

Operating margin came in at an abysmal -8.5%, flipping negative from a strong 6.4% the year before. According to SpiceJet, the net adverse effect of currency devaluation was Rs. 63 Crore, not including the increase in fuel prices driven by this effect. This headline should not be allowed to mask the larger structural problems in SpiceJet’s business model. India’s LCCs are all suffering due to the economic malaise, but SpiceJet in particular has made several mis-steps over the past year and a half that have put it in its current position.

It’s international operation, while a necessary risk, has failed to yield results in the manner that its nascent Bombardier Dash 8 Q400 operation has. Here SpiceJet is as much a victim of timing and circumstance as anything else – it launched these new routes right as Asia and India were transitioning into a period of lower growth. Still, on the domestic side, SpiceJet might do well to look inwards. It is basic economics to understand that controlling supply (capacity) is the best way to raise fares in the airline industry, yet despite costs that they know are going to rise, Indian carriers continue to dump capacity onto the market. Competitor IndiGo, this week added the 75th aircraft to its fleet. Today, they are paying the price for the economic largesse in ordering too many aircraft during boom years, but a little capacity discipline (perhaps by deferring orders or cancelling them all together) would go a long way towards allowing the existing airline players to regroup before the next wave of start-up carriers hits when Air Asia India and the Tata – Singapore Airlines venture tak-eoff to join Air Costa in plying the skies.

Regardless, SpiceJet’s financial performance in the quarter was particularly disappointing. And as the airline industry and Indian economy as a whole hurtle towards a pivotal moment in the upcoming general elections, the carrier who seemed to be turning the corner in FY 13 has once again faltered.

– Vinay