SpiceJet: Flying a bit lower in March quarter

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Higher year-on-year crude oil prices weighed on the performance of listed airlines in the March quarter. SpiceJet Ltd, which announced its fourth quarter results last Saturday, is no exception.

The airline’s fuel costs expressed as a percentage of revenue increased a massive 1,170 basis points in the March quarter to 33.9%, compared to the same period last year. In fact, counterparts Jet Airways (India) Ltd and InterGlobe Aviation Ltd (that runs IndiGo) too saw at least a thousand basis points increase in the measure. A basis point is one-hundredth of a percentage point.

For SpiceJet, some other cost components were higher too. Airport charges, other operating costs and employee expenses rose at a faster pace. The upshot: the airline’s Ebitdar declined 7% year-on-year to Rs315 crore. That’s at a time when revenue increased 10% compared to the previous year’s quarter.

Ebitdar is an important measure of profitability for airlines. It is short for earnings before interest, tax, depreciation, amortization and lease rentals.

Average fares for the March quarter declined 1% year-on-year. This compares favourably with the December quarter when fares had declined 7%. Analysts maintain SpiceJet’s revenue mix is superior to competitors.

Despite the correction in yields, SpiceJet’s RASK continues to be much superior to its peer and market leader IndiGo (by Re0.22/ASKM in the March quarter), though this gap has decreased from ~Re0.35 in the first nine months of fiscal year 2017, Santosh Hiredesai of SBICAP Securities Ltd said in a report dated 5 June. ASKM is short for available seat kilometres and RASK is short for revenue per ASKM.

Investors won’t complain, what with SpiceJet’s shares sharply outperforming the S&P BSE 500 index so far this calendar year. In 2017, the stock has gone up a stellar 97% till now.

Analysts say one reason that helped the SpiceJet stock perform better is that it was trading at a meaningful discount compared to bigger rival IndiGo and valuations had to bridge the gap. Also, SpiceJet has done well on the profitability front and investors are rewarding that.

The current year is expected to be better on the yields front, as further decline in pricing is not expected. “While a weak performance was in line with expectations for Q4, that IndiGo could actually report flat fares for Feb/March and Jet could report 2.2% Y-Y increase in domestic fares in Q4 point to an available pricing power in the Indian aviation space, especially after three successive years of fare decline,” pointed out an ICICI Securities Ltd report.

Investors should keep an eye on the capacity addition in the industry. Still, a relatively softer outlook on crude oil prices should support aviation stocks in this seasonally stronger quarter.

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