Wednesday, September 20, 2017

Summer relief

The start to the new financial year couldn’t have taken off more smoothly for the country’s airlines. All the three listed carriers — IndiGo Airlines, SpiceJet and Jet Airways — posted good profit growth, after a forgettable 2016-17. In the June quarter, market leader IndiGo’s profit rose 37 per cent y-o-y to ₹811 crore, while that of its low-cost peer SpiceJet increased about 18 per cent to ₹175 crore. Full service carrier Jet Airways more than doubled its profit y-o-y to about ₹54 crore.

In contrast, in 2016-17, IndiGo’s profit shrank 16 per cent, SpiceJet’s profit fell 4 per cent while Jet Airways took the worst hit with a 67 per cent profit crash. Much of the pain last year was in the December 2016 and March 2017 quarters when rising costs, especially fuel, low fares due to competition, and demonetisation took a toll despite healthy passenger growth.

A key difference in the June 2017 quarter was the improvement in yield (average fares) — this was up 9 per cent y-o-y for SpiceJet, 2 per cent for IndiGo and about 3.5 per cent for Jet Airways.

This is a relief after concerns of big capacity additions across the sector keeping fares under pressure. In 2016-17, intense competition and fare wars resulted in IndiGo’s yield dipping more than 10 per cent, while that of Jet Airways and SpiceJet fell 3 per cent and 2 per cent respectively. Also, traffic growth was faster than capacity growth. The June quarter is a seasonally strong one and passenger numbers continued to grow briskly — up 19 per cent y-o-y for SpiceJet, 25 per cent for IndiGo and 8 per cent for Jet. Traffic growth (revenue passenger kilometres) was higher than capacity growth (available seat kilometres) for all the three airlines. This along with higher fares translated into revenue growth of 26 per cent for IndiGo, 23 per cent for SpiceJet and about 10 per cent for Jet.
Not all is kosher though. Despite appreciation in the rupee, pressure on the cost front continued, primarily due to higher fuel prices that offset the control over other costs. This resulted in the airlines’ operating margins staying put or seeing a decline in the June quarter compared with the year-ago period.

Oil prices have risen from about $45 a barrel in June to about $55 now. This could mean higher fuel costs for airlines in a seasonally weak September quarter. It needs to be seen whether airlines have been able to pass this on. Also, while the June quarter profit growth in IndiGo and SpiceJet is a reflection of operating performance improvement, Jet Airways owes its profit doubling to ‘other income’ of ₹305 crore.

“Jet’s earnings have been propped up non-core streams such as income from aircraft leasing, amortisation of one-off gain from sale of Jet Privilege, and profit from real estate deal with Godrej Buildcon. If we exclude these non-operational income streams, the quarter would have seen a loss of Rs. 1.1 billion,” said Joseph George of IIFL Institutional Equities in a report.
20/09/17 Anand Kalyanaraman/The Hindu