HDFC Securities Institutional Research reports enhancement of yields and expansion of fleet
Headquartered in Gurugram, SpiceJet is a low-cost and fourth largest airline in the country by number of domestic passengers carried, with a market share of 12.6 per cent as of March 2017.The airline operates 312 daily flights to 55 destinations, including 45 Indian and 10 international destinations from its hubs at Delhi, Kolkata and Hyderabad.
The first quarter results of SpiceJet results came in slightly below expectations, although its topline grew 23 per cent to Rs 1870 crore, as yield improved four per cent.
Notwithstanding strong passenger growth, ancillary revenue growth was flattish at Rs 160 crore. The strategy of boosting revenue through a higher load factor continues. Presently, the growth rate is tapering down on a higher base and over the next five years, growth of 15 to 17 per cent CAGR is expected.
Both, the metrics available seat kilometer (ASKM) and revenue passenger kilometer (RPKM) growth were strong at 18.3 per cent and 20.5 per cent, respectively, with passenger growth at 18.4 per cent. Driven by the higher expected fleet for fiscal 2018 and 2019, the growth for ASKM has increased. The profit after tax (PAT) jumped 17.6 per cent at Rs 180 crore. Other income was down by 58 per cent QoQ at Rs 19.9 crore.
The fuel cost increased 34 per cent, as average and aviation turbine fuel (ATF) prices increased 16 per cent YoY. The EBITDAR margin dropped by 513 basis points (bps), owing to higher fuel and other costs. The employee costs jumped sharply, owing to new hiring for fleet expansion in the coming quarter. Presently, the cost structure of SpiceJet is stable.
For the April-June’17 quarter, SpiceJet had few wet leases. The lease rental declined and maintenance cost surged due to classification issue. The maintenance under wet lease was reported as lease rentals.
Yield pressure
SpiceJet has consistently maintained load factor at more than 90 per cent and its market share in last five quarters. For the quarter ended in June’17, load factor remained high at 92.3 per cent. The Yield also bounced back strongly with improvement of four per cent and is expected to remain firm owing to balanced demand-supply scenario.
Fleet spread out
During the quarter, SpiceJet has added four aircrafts. It now plans to add another six B737s and two Bombardiers in the second half of 2018. Additionally, it has further placed an order for 20 Boeing 737-MAX-10 aircrafts and up to 50 Bombardier Q400s. With this, it has further added to its strong order pipeline of aircraft delivery. The aircraft is expected to be funded through sale and leasehold. 22 per cent to its capacity deployed in international routes. The airline increased its fleet size to 55 compared to 51 in the fourth quarter of 2017 fiscal.
Short-term outlook
The profitability is expected to be good, owing to a balanced demand-supply market, along with the benefits of an appreciating rupee and crude oil prices. Low passenger growth is a key risk. The stance is structurally positive on the Indian aviation market. The ancillary revenue assumption is lowered given sluggish revenue in the first quarter.
In the estimates of fiscal 2018, dilution of warrant conversion is factored.Although dilution of 24 per cent of the warrants is considered, the arbitration verdict is expected in the next few months. Any verdict which does not lead to dilution will be positive and an upside risk to our assumption.