Friday, August 11, 2017

What does SpiceJet's strong Q1 revenue indicate? flying may get costlier as airlines ought to improve margins

New Delhi: The average fare across the SpiceJet system last quarter was Rs 4,381 and the airline has claimed after announcing its first quarter results that average airfares on its system were much higher than the rivals. In fact, higher fares or yields (revenue per passenger) could have been the single most important factor in driving SpiceJet’s strong performance during the quarter ended 30 June. The airline reported an almost 18 percent surge in net profit to Rs 175 crore versus the same quarter in the previous year; revenues were up 23 percent and this was the seventh consecutive quarterly jump in topline.

So, why did airlines like SpiceJet hike fares last quarter? Perhaps, the time has come for us to get over dirt-cheap airline tickets and many flash sales seen same time last year. As the domestic airline industry rationalises capacity addition – it is adding fewer new aircraft into the system than planned earlier and filling up more seats on each aircraft as a consequence – it has become bolder on fares. So while capacity addition is slowing down, a healthy passenger growth means airlines can raise ticket prices. Yes, even the Low Cost Carriers (LCCs) which account for roughly two-third of the market. And this trend, of controlled capacity addition leading to higher fares, could stay for at least another 12 months.

Ansuman Deb, aviation analyst with ICICI Securities, says fares have already risen in Q1 because of moderation in capacity addition by SpiceJet as well as market leader IndiGo. When capacity is disciplined, fare outlook is better. And when fares increase, airline margins also improve. "The capacity outlook in the system is much more disciplined now, which will benefit yields of the sector and help improve margins".
11/08/17 Sindhu Bhattacharya/First Post