IndiGo performed well in Q3’16, but was it the airline’s best quarter in the fiscal in terms of performance? We dive into the numbers, comparing Q3’16 with three other quarters, while forecasting the airline’s performance in Q4’16 – the current quarter.
Excellent work in reducing unit costs in Q2’16, exceeded expectations.
Disappointing revenue performance.
Excellent ancillary revenues.
Accumulated losses around 200 crore, losses since start of operations around INR 150 crore.
Financial & certain performance data reported by AirAsia India is inconsistent, inaccurate, and unreliable.
Before we begin the analysis of AirAsia India’s performance, it must be noted that the quarter reports of AirAsia are unreliable, on at least four counts, as observed:
The quarter report for Q1’16 (“SECOND QUARTER REPORT ENDED 30 JUNE 2015”) states that in Q1’15, AirAsia India reported a net loss of RM 0.4 Million. However, the quarter report for Q1’15 (“SECOND QUARTER REPORT ENDED 30 JUNE 2014”) states that AirAsia India reported a net loss of RM 13.8 Million. This translates to a difference of RM 13.4 Million / INR 25.9 crore.
The quarter report for Q4’15 (“FIRST QUARTER REPORT ENDED 31 MARCH 2015”) states that in Q4’14, AirAsia India reported a net loss of RM 12.4 Million, which, based on the RM-INR conversion rate prevalent then, converts to INR 22.7 crore. However, the P&L statement in the same Q4’15 report states that AirAsia India had a net loss of only INR 8 crore.
The quarter report for both Q2’16 (“THIRD QUARTER REPORT ENDED 30 JUNE 2015”) and Q2’15 (“THIRD QUARTER REPORT ENDED 30 JUNE 2014”) states that in Q2’15, AirAsia India recorded a net loss of RM 15.7 Million, which converts to INR 29 crore based on the RM-INR conversion rate prevalent then. However, in the Q2’16 report, AirAsia India is stated as having incurred a net loss of INR 52.9 crore.
The flown capacity (ASK) reported by AirAsia India in its quarterly reports is 12%, 5% and 3% higher than what the airline has reported to the DGCA in Q2’16, Q1’16, and Q415. However, in teh two sources of data, the number of flights by the airline match perfectly, and the number of passengers flown are reasonably close.
As a result of (3), we will refrain from comparing Q2’16 data with Q2’15 data, but will only compare Q2’16 data with Q1’16 and Q4’15 data.
As a result of (4), we will refrain from using the AirAsia India flown capacity as reported in the quarterly reports, as this leads to very misleading performance numbers. We stick to the DGCA data.
We had already mentioned the first three points, but the discovery of issue (4) made us withdraw our earlier analysis and revise the numbers. This is the revised analysis.
Due to the ambiguity resulting from points (1), (2) and (3) above, the total losses accumulated by AirAsia India including Q2’16 is around INR 200 crore. Total losses since start of commercial operations (ignoring June 2014) stands at INR 150 crore as reported by AirAsia India.
Q2’16 (July 01st – September 30th, 2015) was AirAsia India’s first full quarter of 5 aircraft operations. In this period, the airline flew 416,182 passengers (excluding no shows: 401,905. No shows : 3%), which is a 38% rise compared to Q1’16, though the number of flights increased by 50%. This explains Q2’16’s load factors of 76%, as against Q1’16’s load factors of 83%. The load factors in Q2’16 were lower than the 79% witnessed in the other lean season – Q4’15. Load factors include no show passengers.
The airline operated 34 daily flights as of 30th September 2015, and flew its millionth passenger in the first half of August 2015.
Q2 is historically a lean season. Capacity in Q2’16 grew by 56% over Q1’16, despite flights increasing by only 50%. This is in line with the average stage length of each flight increasing to 1,208 km/flt from 1,146 km/flt. Low load factors, increase in average stage length, and the low pricing power in the lean season have together resulted in the average fare dropping to INR 2,684 in Q2’16 from INR 3,350 in Q1’16. In Q2’16, AirAsia India did not inaugurate any new routes, but added a frequency on the Bengaluru – Vizag sector, and hence, there was no significant effect of low yields due to new routes.
Ancillary revenues at the airline have picked up very well. From being just 8% of total revenue in Q4’15, to 10% in Q1’16, it touched 15% in Q2’16. This has been aided by the increase in cargo per flight, to an average of 1,205 kg per flight in Q2’16 compared to 1,074 kg/flt in Q1’16 and 971 kg/flt in Q4’15.
However, on a unit basis, the airline’s revenue per available seat kilometre (RASK) suffered a 27% drop from Q1’16 figures, to settle at INR 2.22/seat-km, due to the factors mentioned in the preceding paragraphs. The unit revenues are 22% lower than the Q4’15 lean season.
AirAsia India’s cost performance is very good, and has touched record low values in Q2’16.
Unit aircraft fuel expenses fell by 13% in Q2’16 compared to Q1’16, despite fuel prices falling by only 9%. Higher average stage length of 5% can only contribute little to improved fuel consumption. However, tankering and uplifting fuel from stations with low sales tax on fuel may explain a part of the lower fuel expenses. Sales tax at Vishakhapatnam is just 1%, Goa 12.5%, Guwahati 22%, Imphal 20%, and Delhi 20%. Delhi, Guwahati, Imphal and Vishakhapatnam operations, and increased operations to Goa in Q2’16 may have significantly contributed to the drop in fuel costs.
Inexplicably, the staff costs have dropped in Q2’16 compared to Q1’16, from INR 31 crore to INR 29 crore. While there is no obvious explanation for such a drop, it has resulted in the unit staff costs to drop by 41% in Q2’16.
Unit maintenance costs have increased by 2% in Q2’16.
Due to longer flights, capacity has increased by 56% but flights by only 50%, in Q2’16 compared to Q1’16 resulting in the 7% drop in unit user charges and related expenses, which are largely a per-flight expense.
Unit lease expenses have dropped significantly by 29% in Q2’16, attributable to increased aircraft utilisation, higher capacity and no aircraft having to remain on ground in Q2’16. Average lease rental per aircraft per month is INR 2 crore.
Other operating expenses, most of which are fixed, have been diluted by the higher capacity, dropping by 25% in Q2’16.
Other Income, which is treated as part of operations by AirAsia India, increased by 10%, positively impacting the bottom line.
The cumulative effect of increasing frequency, network changes, and increased aircraft utilisation, amongst others, has reduced unit total operational costs at AirAsia India by 21% (including other income which can also be a negative quantity as in Q4’15). This is a brilliant performance, though the drop in staff costs is yet to be clearly identified. One explanation is perhaps the reduction in training expenses due to stagnation of fleet growth, and perhaps the voluntary exit of certain crew.
Break Even Figures
In Q2’16, AirAsia India realised a per-passenger cost of INR 4,621, which is 10% lower than the INR 5,166 cost per passenger in Q1’16, but 15% higher than the INR 4,009 cost per passenger in Q4’15.
In Q1’16, AirAsia India incurred a loss of INR 1,469 per passenger. At the same unit passenger revenue of INR 3,154, AirAsia India would have needed a break-even load factor of 112%.
AirAsia India lost INR 1.04 per seat flown every kilometer, which is 5% lower than INR 1.09/seat-km in Q1’16, but 30% higher than the unit loss incurred in Q4’15.
AirAsia India’s cost structure is depicted in the pie chart. Fuel constitutes 36% of the airline’s expenses.
Cancellations and OTP
Only 6 flights were cancelled by AirAsia India, in Q2’16. The airline operated 3,032 flights, with an average on time performance (OTP) of 87%.
In Q3’16, AirAsia India inducted its 6th aircraft into operations, in the second half of November 2015. Daily flights have gone upto 40, with increase in frequencies and the inauguration of a new route, Delhi – Vishakhapatnam.
Our forecast for AirAsia India’s performance in Q3’16:
Quarter’s Load factors to increase to around 85%.
Capacity to increase by 12% and passengers carried (including no shows) to touch around 520,000.
Average unit passenger revenue may rise by around 20%+ compared to Q2’16.
Certain unit costs to slightly increase due to addition of 6th aircraft and sending one aircraft for half a month for scheduled heavy maintenance.
Certain unit costs to very slightly increase due to weather related delays and diversions.
Ancillary Revenue percentage to drop in light of higher average fare.
For break even, unit passenger revenue must rise by around 45% (compared to Q2’16)
Very slim chance of an operational break-even. More likely in Q1’17 (April – June 2016).
SpiceJet posted its third straight quarter of net profits, with the announcement of its Q2 results. The airline posted a net profit of INR 23.77 crore, but realised an operational loss of INR 27.91 crore. This loss includes the depreciation and amortisation expense of INR 30.36 crore. The airline has immensely benefitted from lower unit fuel costs which have dropped by 35% to INR 1.17/seat-km, compared to the same quarter last year. Higher load factors at the airline have driven up unit revenues by 7% over the same quarter last year.
Below is a detailed comparison of unit revenues between Q2’16 and Q2’15:
In Q2’15, the airline had an average sale (including ancillary revenue, which includes non-passenger revenue such as cargo) of INR 4,019 per passenger. In Q2’16, the airline had an average net sake of INR 3,750 per passenger. Although the airline was able to extract lesser per passenger, it flew more passengers, with the net effect being positive on the revenues.
Cargo performance has however been disappointing, with the airline flying on average 140kg lesser, per flight, in Q2’16 compared to Q2’15. This has resulted in a 7% drop in cargo carried per ASK. This however is partly explained by the shrinkage of the mainline jet fleet at SpiceJet.
Higher passengers, lower per-passenger sales, and lower cargo have resulted in a net 9% higher unit sales.
On the operating expense front, SpiceJet performed worse (on a unit basis) than the same quarter last year. The graph clearly shows that all unit costs have gone up, except for fuel, lease rentals, and aircraft redelivery expenses.
Average fuel prices in Q2’16 was 34% lower than in Q2’15. This has resulted in Spicejet’s unit fuelc osts falling by 35% (The 1% difference is due to the dissimilar fleet mix of Jets and Turboprops). Unit lease rentals have gone down due to a smaller fleet of mainline jets, and a higher utilisation of aircraft. In Q2’15, the airline re-delivered a large number of dry-leased Boeing 737s, which cost the airline much. In Q2’16, there were no re-deliveries of dry-leased aircraft, which has led to lower redelivery expenses.
All other unit costs are much higher, most notably due to the smaller scale of operations which has concentrated certain fixed costs. In Q2’16, the airline deployed 34% lesser capacity than in Q2’15. Yet, all these unit cost increases were offset by the drop in fuel prices.
In Q2’15, SpiceJet lost 69 paisa for every seat flown every kilometre. In Q2’16, SpiceJet lost 10 paisa for every seat flown every kilometre.
However, the unit EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) in Q2’16 was INR 0.01/seat-km, which was an earning of INR 1 paisa for every seat flown every kilometre.
What pushed the quarter to profits?
“Other Income” of INR 72.7 crore, which included 65.4 crore “consequent to finalisation / revision of terms of settlement of earlier lease terminations with an aircraft lessor for three aircraft” tipped the airline into net profits.
Comparison to Q1’16
Q2’15 and Q2’16 are a year apart. In that one year gap, the airline went througha near-death experience and changed hands, making the usefulness of such a comparison limited. A comparison with Q1’16 allows for a better understanding of how things are shaping up at SpiceJet.
Average load factors in Q2’16 were higher than in Q1’16, despite Q1 historically being a season of peak travel demand, while Q2 is historically a lean season.
In Q2’16, compared to Q1’16, SpiceJet flew 5% more flights, carried 5% more passengers, yet carried 10% more cargo, resulting in 5% more cargo per flight. The airline carried on the same number of average passengers per flight : 121, in both quarters. However, the airline operated flight lengths that were 2% lower than in Q1.
Unit revenues were understandably lower in Q2 due to lower pricing power. Net sales per passenger dropped from INR 4,215 to INR 3,750, which resulted in a 8% drop in unit revenues.
On the cost front, fuel prices on average in Q2 had fallen by 9%, but resulted in just 8% unit fuel savings at SpiceJet due to the shorter flights. Lease rentals have perhaps gone up due to the wet leased A319 aircraft contributing to smaller capacity per flight, and the mainline fleet growing in size with no significant change in capacity. This is due to some aircraft going for scheduled maintenance in this period, which has also driven up maintenance costs. The US dollar being higher by 3% in Q2 over Q1 may have also added to the increased expense. However, airport charges have remained almost unchanged. Q2’s higher capacity of 2% brought down employee unit costs by 2%.
Other operating costs and other expenses going up by 27% and 9% respectively cannot be easily explained. Other operating costs were expected to remain the same, while other expenses were expected to fall by around 2%. The increase may be partly explained by increased selling costs (higher agent commissions – which may also explain the higher load factors), increased marketing spend, and training, among others. The airline has done something that has attracted higher expenses in Q2.
In a previous piece, The Flying Engineer had estimated the operational profit of SpiceJet to lie in the INR “around or less than between INR 80 – 110 crore” range. The airline realised an operational profit of INR 70.7 crore. With the results declared exactly a week ago, we shall analyse the actual performance of the airline in Q1 FY 2015-16 (Q1’16).
We first start with costs, as an airline usually has a better grip on costs than revenues. Capacity is measured in seat-kilometres (Available Seat Kilometre – ASK), and costs and revenues, from operations, are referenced to unit capacity. We compare Q1’16 with the same quarter in the last financial year – Q1’15.
Average fuel price in Q1’16 was 28.4% lower than that in Q1’15. The fleet had also shrunk from a Bombardier Q400 : Boeing 737 ratio of around 1:2 to 1:1.3. This impacted fuel costs positively. Due to this ratio, a larger portion of the fuel burn was realised by the Q400s, which enjoy a flat 4% sales tax on fuel, as against as much as 28% sales tax in some airports, applicable to the Boeings. With operations being dominated more by the Q400s, which fly routes much shorter than the Boeings (upto 85% shorter routes on the domestic network), the average stage length had reduced, leading to an increase in the number of departures per unit capacity. More departures and hence landings per unit capacity translates to a higher fuel burn, but this was offset by the Q400’s lower fuel price and perhaps better fuel saving techniques employed at SpiceJet. Unit fuel costs fell by 30.3% despite fuel prices falling only 28.4%.
The changed turboprop : mainline jet fleet ratio also affected lease costs. The Q400s are owned, and hence no lease is paid for such airplanes. As a result, the lease costs of the Boeings (including the wet leased Boeings and Airbuses) were diluted over a capacity that was generated in a larger part by the Q400s. Unit lease rental costs fell by 12%.
Poor on time performance and increased cycles per unit capacity may have led to increased airport charges, though the Q400s do enjoy landing and navigation charges benefits. It is also possible that there may have been an increase in landing, navigation, other airport charges, in flight & other passenger amenities by authorities. Unit airport charges rose 14.8%.
Aircraft maintenance costs were dominated in larger part by the Q400s, which were also utilised higher. The US Dollar strengthened 6.1% against the rupee, which would have led to increased costs. Maintenance costs for each Boeing are expected to have remained largely unchanged. Unit maintenance costs rose by 14.9%.
The quarter witnessed no significant aircraft re-delivery activity, which dropped unit re-delivery expenses by 90.4%.
Other operating costs rose by 45.7% per unit.
Unit employee expenses were impacted by both having a smaller capacity, and the hike in salaries to crew to stop pilots from leaving the airline. This resulted in unit employee expenses rising by 25.5%.
Depreciation and Amortisation expenses are largely dominated by the Q400s. With lower capacity, this expense was rose on a unit basis. Unit Depreciation and Amortisation costs rose 36.2%.
Other expenses, which include a wide variety of costs including hotel and accommodation expenses for crew, dropped by 16.3% on a unit basis.
Overall, unit costs dropped by 12.8%, aided largely by the absence of significant re-delivery expenses and the steep fall in fuel prices. The airline has scope to further streamline costs in at least three areas, with the other areas being out of the airline’s control. When streamlined, either through practices or scale, unit total operational expenses may further fall by 4.3%. With the present scale of operations and in the present environment, this translates to INR 45 crore.
The cost structure at SpiceJet, Q1’16 v/s Q1’15 is shown below:
SpiceJet’s revenues were adversely impacted by lower airline capacity, poor on-time performance, and increased competition leading to lower prices. The first two factors may have made the airline lost high paying, time-sensitive and last minute (D0-D7) passengers. In the 13 month period June’14 to June’15, SpiceJet had the lowest OTP amongst private airlines for 9 months. Further, the cargo carried by the airline on a unit basis dropped by 4.9%, perhaps on account of Q400s dominating a larger part of the capacity. Unit sales fell by 1.1%.
Other operating income rose by 56%.
In total, operating revenues fell by 1% on a unit basis.
(If the Q1’15 P&L statement was not re-classified, unit revenue would have fallen by 2% during the comparison)
Per passenger Revenues
In Q1’15, the sales per passenger (includes ancillary revenue) was a good INR 5,006 per passenger (at re-classified P&L figures). In Q1’16, the the sales was INR 4,215 per passenger. This represents a drop of 15.8% in the sales per passenger.
Usually, a drop in the sales per passenger should not be a concern if the airline flies more passengers. However, a drop in net sales per passenger per ASK (the first number in the unit revenues and cost graph above) is a cause for worry. The drop was INR 0.05/seat-km). This shows that sales per passenger has dropped to a level that overall leads to lesser revenue despite very high load factors.
To put things in perspective, the below graph shows the per passenger sales required to achieve the same net sales from operations, with varying load factors. For example, flying with load factors of 55% at INR 6,939 sales per passenger will generate the same sales as flying 90% load factor at INR 4,240.
In Q1’16, SpiceJet had load factors of 90.5% (Domestic + International). In Q1’15, SpiceJet had load factors of 79% (Domestic + International). If SpiceJet was to have realised the same revenue in Q1’16 with only 79% load factors,the airline would have needed a per passenger sales of INR 4,833. However, the airline in Q1’15 (same quarter, last year) had a per passenger sale of INR 5,006.
This means that had SpiceJet flown with Q1’15 load factors and per-passenger sales, would have realised an increase in sales of 3.6% or INR 39.53 crore in Q1’16. This shows that increase in load factors does not always imply an increase in either Revenue per seat kilometer (RASK) or total revenues.
To have realised this additional INR 39.53 crore, SpiceJet should have generated sales of INR 4,366 per passenger (+INR 151) in Q1’16 at 90.5% load factors.
Of course, unit revenues (RASK) is the most reliable method of gauging performance. But, in the case where RASK falls, the argument above is used to show that the load factor game must be played carefully.
The above argument does not consider the fact that per passenger sales and/or RASK (RASK and per-passenger sales are not directly comparable) can be safely reduced when per passenger costs and/or CASK also reduce. Ultimately, profit is driven by the difference of revenues and costs, and not determined by either revenues or costs alone.
Unit operating profit rose by 201%, despite a fall in unit revenues, largely due to a fall in costs. Fuel today accounts for 35% of the SpiceJet’s operating expenses. Last year, for the same quarter, fuel accounted for 43% of SpiceJet’s operating expenses. If aircraft fuel prices were at the 2014 April-June levels, the airline would have flown into the red.
Had the airline maintained the unit revenues (RASK) of Q1’15, the airline would have generated an additional INR 11.4 crore over the Q1’16 operating revenue of INR 1,106 crore.
Other income at the airline was INR 26.7 crore, against INR 28.9 crore in Q1’15 (re-classified).
Finance Costs in the airline was INR 25.5 crore, against INR 48.7 crore in Q1’15
Profit before tax
In Q1’16, other income (not from operations) and finance costs are almost equal, cancelling out each other. This makes profit in Q1’16 solely due to operating profits, unlike the Q4’15 quarter (ending March 31st 2015) where the airline stepped into profits due to the insurance payoff. Operating loss in Q4’15 was INR 102 crore. Operating loss before depreciation and amortisation expenses was INR 72 crore.
Hot and Spicy or Red?
The Hot and Spicy part is the reduction in finance costs. The Red part in in the operational costs and revenues. Overall, the airline has the potential to perform much better, and hence we’d consider the performance Red, despite the profit. The turnaround has started, but the airline is not yet ‘there’. Costs have to lean and revenues must grow. Good on time performance (OTP) is key. As seen above, sale per passenger and RASK have taken a hit, perhaps largely due to the poor OTP of SpiceJet, and in part due to competition.
Comparison to Estimate
In the estimate of SpiceJet’s Q1’16 performance (click here to read), our estimate of total operating expenses was lesser by 0.26%, while our estimate of revenue from operations was higher by 1.67%. Changes in accounting practices (re-classification, as declared in the Q1’16 financial results) have also impacted the estimate errors. The lower or our estimate of the airline’s operating profit was higher than the actual by 13%. Below is the comparison:
SpiceJet had a great opportunity to report profits in Q3’15 (the quarter ending December 31st, 2014). It didn’t. Before the quarter could conclude, the airline had stalled.
Then there was a stall-recovery. The Marans got out and Ajay Singh got in. The very next quarter, Q4’15, saw the airline posting a net profit thanks to an insurance claim from a Q400 that was written off at Hubli.
Legacy issues, one time costs, redelivery expenses, economic slowdown, high dollar rates, and high fuel prices were some of the reasons given in the past. This time around, the situation is much better. Ajay is doing a good job renegotiating contracts in manners that benefit the airline.
10 year old SpiceJet’s performance in Q4 FY’15 has been promising. SpiceJet as an airline has been promising in certain quarters, profitable in some others, and disappointing in many. One problem that has plagued the airline is impatience. The constant change of top management results in one, big problem: insufficient time for any strategy to bear fruits, no matter how brilliant.
That is because any strategy has a trial and error phase – essential to coarse and fine tune the strategy to the environment – both internal and external to the airline.
In Q4’FY15, SpiceJet changed hands, yet again. The Marans are out, and Ajay Singh is back in. In the quarter, the aircraft lost a Q400 to an accident at Hubli. Active fleet size was down to 17 Boeing 737s and 13 Q400s – a total of 30 airplanes, down 50% from the days of 57.
Things got so complicated at the airline that the one element required to run an airline was missing – Simplicity.
The circumstances surrounding the airline, and the situation it was in Q4’FY15 was very different from what was in Q4’FY14. Yet, comparison is worthy to put things in perspective.
Q4’FY15 saw SpiceJet as a shrunk airline – lesser routes, smaller fleet, lesser departures. The number of flights were lower by 43%, to an average 179 a day from 312 in Q4’FY14. Load factor difference was a positive by 13% – which meant the airline carried more passengers per flight, on average. This had two effects – the number of passengers carried was down only 37% despite 43% lesser flights. This also affected the cargo uplift, which was down 8% due to lesser free cargo space available. The average flight length was 752 km – down 9% from 826km. Capacity was down 52%.
SpiceJet is yet to stabilise its operations. An airline has two aims: safe and convenient flights for passengers, and value for shareholders. Part of convenience are frequency and on time performance, with the latter more important.
SpiceJet’s on time performance isn’t one of the best, and that is something that the airline needs to, and perhaps is, working on. SpiceJet has had the highest number of cancellations among all airlines in the month of January and March, and the second highest among established airlines in the month fo February. Stabilisation of such operational parameters is key to SpiceJet becoming a preferred airline.
Down to the rupee
Unit revenues speak volumes about an airline’s efficiency.
We look only into Income from operations (Net sales), and ignore all other incomes, as this is the real measure of the airline’s core activity’s performance.
Q4’15 had a revenue of INR 4.15/seat-km (or per ASK= RASK), which is 3% higher than what was realised last year. This shows that the increase in load factors had a positive impact on unit revenues, thanks to the strategies employed by the former CCO Kaneswaran Avili and the VP Revenue Management Fares Kilpady. This also reflects network rationalisation.
When an airline shrinks, costs get complicated. There are certain costs that are hard to shrink, such as employee costs, as layoffs are subject to an airline’s culture. Employee costs per ASK shot up 63% to INR 0.57/seat-km. Further, staff salaries were upward revised after Q4’14.
Although the airline shrunk its fleet, it were the leased Boeing 737s that moved out, not the owned Q400s. Capacity dropped, but the depreciation and amortisation costs associated with the aircraft didn’t. This resulted in the associated costs rising by 48% to INR 0.16/seat-km.
Airport charges went up by 18%, in part due to the reduced flight lengths, which means the airline had more take off and landings for the same capacity. This may have also negatively impacted aircraft maintenance. Spares pool policy may have also had an impact. If an aircraft went for a C-check in this period, costs may have been impacted too. Maintenance costs per ASK went up 3%.
Other operating costs went up 17% to INR 0.16/seat-km.
Other expenses, which includes administrative expenses went down by 5%.
Lease rentals per unit went down 18% to INR 0.61/seat-km, owing to higher utilisation of aircraft which diluted this fixed cost.
Aircraft fuel costs went down 31% to INR 1.52/seat-km largely due to the fall of ATF prices.
Fuel, Maintenance, Staff, Lease and amortisation (as Q400s are owned, and is the equivalent of lease costs) and other operating expenses form a chunk of the expenses, and these 5 together account for 92% of expenses. These costs together went down by 12% to INR 3.62/seat-km in Q4’15 against INR 4.13/seat-km in Q4’14.
Redelivery expenses are one-off expenses and went up 626% to INR 0.35/seat-km. Other expenses are arguably not part of the operating expense consideration set.
With this, the operational cost per available seat kilometre (which excludes one-off redelivery costs and administrative ‘other expenses’) is INR 3.98/seat-km, which is 10% lower than the INR 4.44/seat-km in Q4’14.
With an operational RASK of INR 4.15/seat-km, and an arguable operational CASK of INR 3.98/seat-km, the airline was arguably operationally profitable by INR 0.16/seat-km.
Core operating costs and revenues are stressed upon as this is a reflection of the performance and efficiency of an airline’s core activity. However, an airline will need to be efficient throughout the structure. SpiceJet realised a loss of INR 102 Cr due to the total operating RASK and total operating CASK amounting to INR 4.15/seat-km and INR 4.71/seat-km, respectively.
Extraordinary Income and bottom line
Insurance companies paid INR 161 Cr for the Q400 that was written off after an accident at Hubli, Karnataka. SpiceJet received INR 61 Cr. This, along with other income of 91 Cr added INR 153 Cr to the books. Finance costs drained INR 28 Cr. Overall operating loss drained INR 102 Cr.
The airline realised a net profit of INR 22 Cr, and the insurance pay off was responsible for the tip over into the black.
Comparison with AirAsia India
While a comparison between a small start-up airline and a larger, older airline is fair to neither airline, a comparison will help show what’s possible.
Unit costs (per seat-km) of staff is leaner at SpiceJet as it is a larger airline, however, this can fall further. SpiceJet cannot escape amortisation & depreciation costs as Q400s are owned, while AirAsia only leases airplanes. Fuel expenses per ASK are higher at SpiceJet due to the higher fuel burn per ASK of the Q400, the possibility of higher burns due to ATC congestion at metros, and higher load factors.
All of AirAsia’s airplanes in Q4 were new, and almost fresh out of maintenance when delivered, needing hardly any maintenance. Such may not have been the case at SpiceJet, which could have taken up the maintenance cost up.
User charges are higher at SpiceJet as AirAsia India does enjoy certain benefits from Bangalore airport – the only airport it used to fly into in Q4. SpiceJet flew into all metros.
Aircraft operating lease expenses appear lower at SpiceJet as of the 30 aircraft in the fleet, only 17 were leased. Q400’s lease costs do not figure in the lease expenses.
Other operating expenses are lower at SpiceJet due to a larger fleet diluting costs. However, ‘other operating costs’ for SpiceJet may not be the same as AirAsia India’s.
Where SpiceJet can trim its cost are in the ‘other expenses’. However, AirAsia India has lower administrative costs as many resources are shared with the AirAsia Group.
The cost structure (see pie charts) of both airlines show the cost structure for both airlines. Generally, a cost structure which has a larger share of fuel cost indicates a leaner structure.
A chance to renew
What the management did in FY 2014-2015 to SpiceJet has been impressive – revenue management and market stimulation has resulted in a positive impact on unit revenues even with higher load factors and promotional fares. Such practice, if continued, may benefit the airline in the current fiscal.
The airline scaled up its fleet in Q1’16 temporarily through the wet-lease of 3 Boeing 737s. Unverified information point to 2 additional Q400s joining the fleet, and an active evaluation of wet-leasing Airbus A320 aircraft. Whatever the aircraft type, and however questionable it may be, the airline is going to, and needs to increase its fleet size.
SpiceJet has another opportunity to keep the system lean as it regrows. Good contracts, scaling up and high asset utilisation will reduce fixed costs. Good market study, prudent and well researched network growth, leveraging the benefits of the Q400 to do what the market leader cannot, and differentiation of in-flight services can allow SpiceJet to realise good unit revenues even in the light of competition.
Revenues aren’t much of a problem at SpiceJet, but can be bettered through better core service – frequency and on time performance. Costs are the biggest problem in the airline, and will need to be trimmed down significantly.
SpiceJet has what it takes to grow to an extent that allows it to compete non-head-on and healthily with the market leader. Focus on basics and differentiation are key.
AirAsia India’s journey so far has been interesting. What was a pleasant surprise was the airline reporting its lowest ever net loss in an operating quarter – of INR 19 Cr. This, despite Q4 being a season of low travel demand, and in the same quarter having had numerous delays and cancellations. It was also the first full quarter of three aircraft operations.
AirAsia India claims to have an attractive cost structure. In this piece, we analyse their figures for Q4 FY’15.
In the months of January, February and March 2015, AirAsia India flew 222,502 passengers. No show passengers were 15,055. These two total to 237,557 seats that were sold. No show accounted for 6% of all sold seats. Total seats flown were 300,240, and flown passenger load factor was 74% for the quarter, while seats sold load factor was 79%.
The airline carried a total of 1,620 tonnes of cargo on 1,668 flights, which averaged to 971 kg of cargo per flight – a very good number.
A total of 2,260 hours were flown in the quarter. With three aircraft, this averaged to a daily average aircraft utilisation of 8:22 hrs per aircraft per day. This low average utilisation reflects the cancellations and delays in the quarter due to crew shortage. While the airline was originally scheduled to fly 22 flights a day, the average flights per day in the three months were lower due to the same reason.
12,155 of the airline’s passengers were affected by cancellations and delays of more than two hours in the quarter.
Market share stood at a constant 1% throughout the quarter.
AirAsia India realised an operating expense of INR 95.3Cr in the quarter.
37% of AirAsia India’s costs are due to fuel. The next biggest is staff salaries which make up 25%. Lease comes next at 19%. These three together make up 80% of the airline’s costs. In this period, the airline had three aircraft: VT-ATF/ATB/RED. All three are new enough to have no maintenance issues or checks, and hence maintenance is only 3%.
Average lease cost per aircraft is INR 2 Cr per month.
AirAsia India realised an operating revenue of INR 74.4Cr in the quarter. Of this, 92% was due to passenger ticket sales, while 8% was due to ancillary revenue.
The average fare per passenger (excluding taxes and fees) for the quarter was at INR 2,884. Revenue per available seat kilometre (RASK) was at INR 2.75/seat-km, while Cost per available seat kilometre (CASK) was at INR 3.53/seat-km.
At the same load factor, average fares could have been increased by INR 878 per passenger to operationally break even.
At the same average fares, operational breakeven load factor stood at 103%.
Both figures above assume constant ancillary revenue. Ancillary revenue per flight was INR 35,320.
Average operating cost per block hour was INR 421,311 (US$ 6,600).
Average cost per kilometer flown was INR 635/km.
AirAsia’s losses are on a steady decrease. With five aircraft operating in Q1’16, better routes, and the strong travel demand, the airline may spring a surprise with its Q1 performance.
A sixth aircraft is expected to join the fleet in June. Q2’16 – a lean season- will be an interesting quarter to watch, with a mild possibility of a break even. The airline may either break even or post profits in Q3’16.
The airline added Imphal to its booking engine on 28th May 2015.
In the quarter ending December 2014 (Q3FY’15 – India), AirAsia India, an associate of AirAsia due to the latter’s share of 49% in the India venture, posted a net loss of INR 21.7 Crores.
In the same quarter, spanning the months of October, November, and December 2014, the airline faced a significant challenge. The airline was faced with a shortage of senior cabin crew, effects of which were largely seen in November and December – very significant delays of many flights (up to 5 hours and more) and the cancellation of some. The airline was forced to play around with its schedules to match the flight duty time limitations (FDTL) of its senior crew, which resulted in the delays and cancellations.
Cancellations at AirAsia India rose from 0% in October to 2.65% in November, and dipped to 1.92% in December. In the quarter, a total of 4,019 passengers were affected by delays more than two hours (2% of the passengers carried in the quarter), and 513 passengers were affected by cancellations (0.2% of the passengers carried in the quarter), as per DGCA data.
In the quarter, the airline flew a total of 201,000 passengers, out of 253,852 seats, resulting in a load factor of 79.2% for the quarter. In the month of November, passengers carried dropped to 61,000, down 5,000 passengers compared to October, while load factors increased to 79.8%, up from 76.2% in October, perhaps indicating that the loads in November were driven by servicing affected passengers.
December is a month of high domestic travel demand. December 2014 was AirAsia India’s first month of operations in a high demand season, which resulted in domestic load factors rising to 81.5% – its highest since start of operations. Considering that the target customers for AirAsia India are leisure travellers, AirAisa India was expected to have recorded higher load factors. This figure was the lowest among all airlines in India for the month, either due to the airline’s limited network or an image that was impacted by the high number of cancellations and delays that continued into December.
AirAsia India ended the quarter with a fleet of 3 Airbus A320 aircraft, of which two are used (from AirAsia Malaysia), and one is new (directly received from Toulouse). The third aircraft entered commercial operations on 18th December 2014.
In the quarter, the airline added only one destination to its network – Pune, on the 17th of December 2014, while doubling the frequency on the Bangalore-Jaipur sector, and halving the Bangalore-Chennai frequency. The airline presently services Chennai, Cochin, Goa, Chandigarh, Jaipur, and Pune from Bangalore, and Jaipur from Pune.
As per AirAsia, AirAsia India will receive just three additional aircraft in the year 2015, raising its total fleet to just six (6) aircraft by the close of calendar year 2015. All three aircraft will be used (older) airplanes from AirAsia Malaysia. In the same year, the group will receive only five new airplanes from Airbus, of which one will be for Malaysia AirAsia, two for Phillipines AirAsia, and two for Japan AirAsia which presently has no aircraft.
AirAsia India is forecasted to have a load factor of 81% in Q4 FY’15 (Q1 CY 2015). This may seem difficult considering the airline is entering another lean season, and its past performance in both lean and peak seasons hasn’t been encouraging enough to support this forecast.
However, one tactic that the group may resort to is to feed traffic from Malaysia AirAsia and Thai AirAsia into Bangalore, which can then be picked up by AirAsia India to offer more connections in India, such as Jaipur, Chandigarh and Goa to passengers of the other two AirAsia associate airlines.
Says Tony Fernandes, AirAsia Group CEO, “For a new airline, the AirAsia brand is strong in India and the load factor of 80% recorded in 4Q14 speaks for itself. Looking at the growth potential there, an additional aircraft was added in India during the reported quarter hence it ended the year with a total of 3 aircraft. Though the associate, due to the local regulations, is only allowed to operate domestic routes in its first five years of operations, AAI has the advantage of getting traffic feed from MAA and TAA which also flies in to AAI’s hub in Bangalore. This differentiates AAI from its competitors."
AirAsia’s A320NEOs will be delivered only at the end of calendar year 2016. Further, in 2015 and the next few years, the group will not be taking in large number of aircraft every year like before, in an attempt to preserve cash.
For the quarter, Thai AirAsia was the only associate to record a net profit. Indonesia AirAsia, Malaysia AirAsia, Philippines AirAsia, AirAsia Japan and AirAsia India recorded net losses. Indonesia AirAsia and Malaysia AirAsia however recorded operating profits.
Air Costa, the Vijayawada based regional airline, has realized an operating profit in the month of December, 2014.
ATF sales tax at Andhra Pradesh, which was reduced to 1% from 16%, has positively benefited the airline. Three out of four aircraft rotation patterns have at least one stop at Andhra Pradesh, which allows the airline to tanker fuel out of the state. The Embraer E170s, which used to pay a flat sales tax of 4%, now pay only 1% within the state and 4% outside the state.
The airline’s tie up with Sovika Group to carry a target of 500 tonnes of cargo a month in the unused belly space of the aircraft has also contributed to the airline’s revenue stream via ancillary revenues starting December. It is estimated that the airline makes around INR 1 Cr per month for 500 tonnes of cargo.
The airline flies 34 flights a day between 15 city pairs, connecting 9 stations with four Embraer E Jets – two 112 seat E190s and two 67 seat E 170s. Of these, the airline enjoys a monopoly on three pairs: Jaipur-Chennai, Tirupati – Vishakhapatnam, and Vijayawada-Vishakhapatnam sectors, and a duopoly on five others. On the other sectors, the airline enjoys competition from just two other airlines. Two out of 15 routes are Tier II – Tier II city pairs, while just two city pairs are Tier I – Tier I. The other 11 are Tier I – Tier II city pairs : the market that has the highest growth potential. The airline stopped flying the Bangalore- Chennai sector – a short, crowded sector that is not suited for a 100 seat regional jet in the light of stiff competition especially from economical 70-80 turboprops and higher capacity Boeing 737-800 and A320 aircraft. While the turboprop is the right sized aircraft with favorable economics, for jet aircraft, this sector is unviable. However, deploying a Boeing 737-800 or an A320 on this sector can be commercially managed through low airfares that fill up an entire aircraft to break even. The E190 cannot compete due to its very significantly higher operating costs than an turboprop and its higher cost per seat compared to a mainline jet, on such a short, already crowded sector.