 "IndiGo, SpiceJet fail to keep tabs on non-fuel costs")
Low fuel costs have led the three listed airlines – IndiGo (InterGlobe Aviation), Jet Airways and SpiceJet to improve their profit in the March 2016 quarter and for financial year 2015-16.
However, not all the three airlines were able to contain non-fuel costs, which could become a problem going ahead if crude oil prices go up. Last week a top executive of a private airline had said that profits would erode and gains would be wiped out if crude oil moves over $60 a barrel from the current $50.
IndiGo and SpiceJet saw a spike in non-fuel costs in the fourth quarter, while Jet Airways was able to report lower non-fuel expenses, both in absolute and unit cost terms due to improved aircraft utilisation, renegotiation of contracts and increased web sales amongst others.
While airlines do not have any control over fuel costs, they can control non-fuel costs and improve operational efficiency. Analysts say that when fuel prices are benign, airlines should focus on bringing non-fuel costs lower to ensure profitability when fuel prices rise in future.
An airline's unit cost also called cost per available seat kilometre (CASK) measures the cost incurred in flying a seat per kilometre. CASK is calculated including and excluding fuel.
On a y-o-y basis, Jet Airways reduced its CASK (excluding fuel) by 10 per cent to Rs 3.32 in Q4 FY16. In absolute terms its non-fuel expenses were 9.6 per cent lower over same period last year.
In contrast both IndiGo and SpiceJet saw their unit costs (excluding fuel) go up in the fourth quarter. IndiGo’s CASK (excluding fuel) rose 9.9 per cent to Rs 2.02 while SpiceJet’s CASK (excluding fuel) grew 21 per cent to Rs 3.13 in the same period.
To put the data in perspective, Jet Airways’ cost structure is higher than IndiGo’s which means it spends more to transport a passenger over a kilometre than its low-cost peer. Jet Airways’ non-fuel costs were still higher at 73 per cent of revenues compared with IndiGo’s 59 per cent of revenues.
Jet Airways had booked one-off expenses in the same period last year. Non-fuel expenses in Q4 FY15 were higher on account of payment of about Rs 84 crore in salary arrears and a provision of Rs 175 crore towards income tax dues. The reduction in non fuel expenses and CASK (excluding fuel ) on a year-on-year basis would be lower if one adjusts these one time expenses.
“We have achieved significant cost reduction and synergies,” Jet Airways acting chief executive officer Amit Agarwal told analysts in a post results conference call. The airline added flights through improved fleet utilisation, increased sales on its website and undertook productivity improvement measures.
IndiGo’s non-fuel costs rose 28 per cent in the fourth quarter of FY16 on a year-on-year (y-o-y) basis due to a rise in staff expenses, higher depreciation due to changes in accounting policy and the rupee impact. Its employee costs were 44 per cent higher in Q4 FY16 on a y-o-y basis due to salary hike, employee stock option costs and an increase in staff to cater to proposed aircraft induction.
SpiceJet’s non-fuel costs rose 86 per cent during the same period largely owing to a one-off spike in maintenance expense and clearing legacy costs.
"SpiceJet reported a net profit of Rs.73 Crore for Q4 FY16, after taking a one-time expense of Rs.173 Crore towards stabilising and improving the reliability of its fleet. By taking the one time expense, we have now accounted for all legacy issues," an airline spokesperson said in an email response.
"SpiceJet reported a net profit of Rs.73 Crore for Q4 FY16, after taking a one-time expense of Rs.173 Crore towards stabilising and improving the reliability of its fleet. By taking the one time expense, we have now accounted for all legacy issues," an airline spokesperson said in an email response.
The rupee depreciated over six per cent against the dollar on a y-o-y basis and this impacted the airlines as 30-40 per cent of the expenses are dollar-denominated.
