Strong volumes boost SpiceJet's show

Company fares better than competition on most parameters

Led by strong passenger volumes which were up 33 per cent, SpiceJet recorded a 36 per cent growth in revenues for the June 2016 quarter. Net sales at Rs 1,506 crore performed marginally better than consensus expectations of Rs 1,499 crore, impacted by lower fares. What surprised the Street was the firm's better-than-expected operating profit.

Even as SpiceJet has increased capacity by 37 per cent, it continued to report high load factors (utilisation of aircraft). For the June quarter, load factor stood at 92.5 per cent, the fifth quarter in a row when loads have been above 90 per cent. In comparison, IndiGo reported a capacity increase of 25 per cent in the quarter, while load factors stood at 83.3 per cent.

Although passenger growth and ancillary revenues were strong (up 68 per cent year-on-year (y-o-y) to Rs 100 crore), revenue growth was hampered by the pressure on fares. Average fares were down three per cent to Rs 3,605 in the quarter. However, the company has done better as the market leader (IndiGo) reported a drop in average fares by 11 per cent y-o-y. Similarly, SpiceJet reported a one per cent drop in revenue per available seat kilometre of Rs 3.98, while for IndiGo the same was Rs 3.6 per cent, down 12 per cent year-on-year.

What has pegged back the performance is higher rental, maintenance and other expenses, which were up 56-61 per cent. On the higher rental costs, the company indicated it had taken more expensive wet lease aircraft (includes aircraft, crew, maintenance and insurance unlike dry lease, which is for aircraft only). Given rentals and maintenance are dollar-denominated, the weaker rupee (down five per cent y-o-y) dented its operating performance. However, fuel, which is the biggest chunk of costs at Rs 400 crore (26 per cent of sales), was up only 11 per cent. This, along with higher utilisation, propped up operating profit margins.

Operating profit excluding rentals was up 57.6 per cent y-o-y at Rs 451 crore; including rentals, too, it was up 53 per cent. Higher other income and lower interest costs also helped SpiceJet in doubling its net profit to Rs 149 crore, compared to the June 2015 quarter.

SpiceJet’s stock jumped 16 per cent to close at Rs 65. However, going ahead, investors will need to monitor competition as IndiGo has indicated it will match the lower fares of competitors. This could put pressure on yields for the industry.