SpiceJet: Estimated Q1 FY2016 Financial Performance

This was an estimate based on public operating data, not the reported result.

Key points

• Unit fuel cost was estimated to be 27 percent lower. Fuel was 43 percent of operating cost in Q1 FY2015, and fuel prices were down 28.4 percent.
• Passengers per unit of capacity rose 17.4 percent, but total passengers were 33.4 percent lower than in Q1 FY2015.
• Operating cost per seat km was estimated at INR 3.65, about 13 percent lower than in Q1 FY2015.
• Revenue per seat km may have been hurt by poor on time performance, stiffer competition, lower market share and a weaker network.
• The airline had at least broken even operationally, with an estimated operating profit of INR 80 to 110 crore or less.
• Net profit might be close to INR 100 crore.

What changed from last year

Q1 FY2015 had high fuel prices, a weak rupee, aircraft being returned to lessors and rising competition. Routes were still being trimmed. The airline reported an operating loss of INR 92 crore and a net loss of INR 124 crore, blaming one time costs, high fuel prices and a general economic slowdown.

In Q1 FY2016 fuel was nearly 30 percent cheaper and no aircraft had to be returned. SpiceJet wet leased three Boeing 737-800s for the peak season and handed them back in the middle of the quarter. They were replaced by a dry leased 737-900 that had earlier gone back to a lessor, and a wet leased CSA Airbus A319. The rupee weakened only about 6 percent. Routes were better planned, utilisation rose, hot meals returned, and the airline began charging for every seat choice, including middle seats.

At those fuel prices in Q1 FY2015, SpiceJet would have saved INR 219 crore of its INR 773 crore fuel bill, and an operating loss of INR 92 crore would have become a profit of INR 127 crore.

Costs

Fuel cost per seat km was INR 1.82 in Q1 FY2015. It was estimated at INR 1.33 in Q1 FY2016, down 27 percent, even though shorter flights meant more cycles and so more fuel burn per distance.

• Dry lease rentals: about INR 0.45 per seat km. Wet leased aircraft produced some capacity, and the 13 active Q400s to 17.5 active Boeings mix spread the Boeing rentals over more capacity.
• ACMI charges, including hourly wages: about INR 0.17.
• Airport charges: about INR 0.26, pushed up by more cycles.
• Maintenance: about INR 0.45. A higher dollar and more cycles raised it, and the ACMI lease diluted it. No redelivery costs were expected.
• Other operating costs: about INR 0.12.
• Employee costs: INR 0.42 to 0.44, after pay rises meant to stop pilots leaving.
• Depreciation and amortisation, including Q400s: about INR 0.11, a fixed cost that looks larger on lower capacity.
• Other expenses: about INR 0.33, the hardest item to estimate.

The total was an estimated INR 3.65 per seat km, within about 1.5 percent either way, using three separate methods. That is 12 to 14 percent below INR 4.20 in Q1 FY2015.

Revenue

In Q1 FY2015 SpiceJet had an 18.8 percent share of the domestic market. This fell to 11.6 percent in Q1 FY2016, although traffic grew 22 percent. Capacity fell 42 percent while share fell only 38 percent. A smaller share of a larger market, with more competition and less capacity, is not a good sign. Lower fuel prices and more competition brought average fares down. Other airlines also copied SpiceJet's ways of stimulating demand.

Poor on time performance made SpiceJet a less preferred choice for high paying, time sensitive travellers, which weakens its pricing power. Less cargo per flight also cut ancillary revenue.

Direct operating revenue per passenger was INR 5,015 in the peak Q1 FY2015 and INR 3,942 in the lean Q4 FY2015, a quarter that also had poor capacity. The Q1 FY2016 figure was expected to fall between these.

Profit or loss

To break even operationally even at the worst case cost of INR 3.70 per seat km, SpiceJet needed a direct operating revenue of INR 3.68 per seat km, assuming 0.02 of other operating revenue. That equals INR 3,974 per passenger, only 0.8 percent above the lean season Q4 FY2015 figure. Since Q1 revenue per passenger was sure to be higher, the airline had very likely broken even.

For revenue per passenger of INR 4,000 to 5,000, the operating profit could be as high as INR 7 crore to INR 268 crore. But lower capacity, stiffer competition, poor on time performance and less cargo probably held revenue back. If revenue per seat km was below the Q1 FY2015 figure of INR 3.96, the operating profit was likely around or below INR 80 to 110 crore, for a unit cost between INR 3.60 and 3.70.

Finance costs were expected to be around or below INR 25 crore, helped by Ajay Singh's negotiations. Other income, such as exchange gains, provisions no longer needed, insurance and warranty claims, manufacturer and lessor incentives and training income, might be around INR 20 crore. That could give a net profit close to INR 100 crore.

Next steps

To lift unit revenues the airline had to fix on time performance. Travellers saw SpiceJet as a brand that would not get them there on time, and repairing that view could take six months or more. In the 13 months from June 2014 to June 2015, SpiceJet had the lowest on time performance among private airlines for nine months.

The airline flew three aircraft types in four variants: Q400, 737-800, 737-900 and one wet leased A319. The A319 was ACMI, so the operational effect was small, though it could cause commercial problems. In the long run the airline should standardise on two types to make capacity management easier.

Conclusion

SpiceJet flew 18 Boeing 737s, one wet leased A319 and 13 Q400s to 41 destinations, 36 domestic and 5 international. Of 252 daily flights, 230 were domestic and 22 international. Q400s flew 116 and jets flew 136. A year earlier it had flown 362 flights a day to 55 destinations. IndiGo, by contrast, flew 639 flights a day to 38 destinations, 33 domestic and 5 international, nearly 8.5 flights from each destination. The two business models differ, but the comparison shows how much consolidation SpiceJet might still need.

Modest profit in Q1 FY2016 owed a lot to cheap fuel. For the nine months to 31 December, IndiGo's revenue per seat km, over two peak seasons and one lean season, was INR 3.92 and its cost INR 3.55, a profit of INR 0.37. Each 1 paise cut in unit cost saves IndiGo about INR 10 crore and SpiceJet almost INR 3 crore.

With Ajay Singh on board things were slowly improving. SpiceJet still carried debt and a poor reputation, and was in effect rebuilding close to the starting line. Its focus had to shift from financing to lowering costs and growing revenue, starting with the basics.