High-flying Spicejet loses speed over rising costs

Pressure on yields set to continue in December qtr THE COMPASS

Spicejet’s 51 per cent increase in revenues to ~2,845 crore i n t he September quarter was driven by a sharp increase in passenger volumes and a marginal uptick in yield.

The airline’s capacities increased by half in the quarter, while passenger volumes rose 29 per cent over the year-ago period.

However, what belied hopes of the Street was the muted increase in yields at 1.9 per cent, compared to the 3.5 per cent estimated by the Street. Indigo’s passenger yields, in comparison, rose 9.4 per cent.

According to analysts at JM Financial, Spicejet’s below-par yield increase was due to a significant increase in fleet during the first half of FY20, which impacted its route optimisation efforts.

The pressure on yields is expected to continue throughout the current quarter (Q3). While Q3 is a traditionally a strong quarter, flash sales by airlines and a fall in prices in metro cities indicates flat yields for the sector. This doesn’t bode well, especially at a time when costs are rising for both Indigo and Spicejet.

The 51 per cent increase in expenses (excluding rental and fuel) for Spicejet and 32 per cent for Indigo has negated the gains in the top line.

Higher scale of operations led to a surge of 56 per cent in employee costs for both carriers. Maintenance costs surged for both Indigo and Spicejet in Q2, and is expected to continue (especially for Indigo) for the next few quarters. Both posted a loss at the operating level.

Even though the reported loss by Spicejet, at ~462 crore, was much higher than analyst estimates, the figure would have been even higher by ~180 crore had the company not recognised reimbursements from Boeing related to the grounding of the 737 MAX.

The higher losses, pressure on yield in the current quarter, and a cut in target prices, all led to a 6 per cent drop i n the Spicejet stock. Brokerages, however, prefer the smaller airline given the valuation comfort it enjoys over Indigo. Spicejet will gain from higher load factors and fuel efficiency once the 737 MAX returns to its fleet in Q1FY21.

What belied hopes of the Street was the muted increase in yields at 1.9 per cent, compared to the 3.5 per cent estimated by them