Aug 05, 2013, 04.32 PM IST | Source: CNBC-TV18

Muscat route addition to boost overseas profits: SpiceJet

Going forward share of international routes will furthers strengthen as the company has recently added Muscat in its list of destinations, says SL Narayanan, Group CFO, Sun Group.

Hopefully by the time the year ends the share of international revenues would be much higher than the 11 percent that we reported for this quarter

SL Narayanan

Group CFO

Sun Group

Low-cost carrier,  SpiceJet , which is owned by Sun Group despite being confident of improvement in airline market continues to worry about the high aviation turbine fuel cost, which makes for almost 50 percent of total cost of the company.

SL Narayanan, Group CFO, Sun Group raised concerns about increasing crude cost and strengthening dollar, which is a double whammy for airline companies.

“Since most of fuel is anyway imported any increase in the crude prices has an immediate impact on airline profitability. Then since crude gets paid for in US dollars in any increase in dollar prices is bound to impact us,” Narayanan said.

The company had a loss of Rs 600 crore in FY12, which was narrowed down to Rs 189 crore in FY13 and it has started FY14 with a profit of around Rs 51 crore. Explaining the reason behind such a turnaround Narayanan said that primarily share of international routes has increased in overall revenue mix, consisting almost 11 percent now.  Going forward share of international routes will furthers strengthen as the company has recently added Muscat in its list of destinations.

“We look forward to the rest of the year with a lot more confidence, a lot more of resoluteness and optimism because definitely it is a better playing field than it was a couple of years ago,” Narayanan said.

Below is the verbatim transcript of the interview

Q: First I want to clarify this earnings before interest, taxes, depreciation and amortisation (EBITDA) profit that you have reported. On point six in the profit and loss (P&L) report you mentioned that last quarter there was some exceptional item and this quarter that has been reversed, has that been added to operating income and is EBITDA because of that, and stripped off that would you still have reported EBITDA or is it something that you have classified below EBITDA?

A: No, I think the point to note here is our profits for the current year at Rs 50.55 crore is far better than the Rs 56 crore that was reported last year because last year is the time when we had the write-back, the exceptional item of engine credits of Rs 12.86 crore. So in that sense qualitatively this quarter’s numbers are far superior.

Q: So what led to this EBITDA positive number and are you confident that for the year as a whole as well you will report positive EBITDA?

A: Actually, we have been reporting positive EBITDA for quite some time. The thing to note here is it is profit after tax (PAT) positive, which is a lot better than the EBITDA number because what really matters is the net income. So, I think we are on a far better wicket this year. If you look at the way things have progressed from FY12 to FY13 to the Q1, we had a loss of Rs 600 crore plus in FY12, we narrowed it down to Rs 189 crore in FY13 and the current year we have begun very well with a PAT of almost Rs 51 crore and primarily because the share of international routes and the overall revenue mix is very respectable, 11 percent now and that with better yields and better loads and lower cost of fuel is what is driving the shift in profitability.

Q: Therefore, are you almost sure that this year you will be PAT positive?

A: The answer is emphatically. But without getting into making a very precise forward-looking statement all I can say is we look forward to the rest of the year with a lot more confidence, a lot more of resoluteness and optimism because definitely it is a better playing field than it was a couple of years ago.

Q: Is it, because we have just heard overnight Jet having slashed air fares. So while ofcourse one big competitor is not there and that appear to have created a more sanguine environment is undercutting back?

A: No, actually if you look at the scheme, in fact I also looked at that particular advertisement that came on the mail. It is actually a very well tiered kind of a fare. So, basically the low fares operate at 0-750 kilometres and there is a higher fare for more than 750 km, but less than 1,500 km. These fares are exclusive of taxes, so what really looks like very low fare is indeed a very respectable fare.

Q: So you don’t expect that realisations are going to be hurt in the current or the next quarter? You will be able to maintain what you reported in Q1?

A: Again without getting into giving precise forward-looking statements let me also tell you that this industry goes through very weak loads and yields during the quarters of September and March. The traffic picks up during summer months when lot of Indians go on travel, so June quarter is good. But the best quarter is December when a lot of NRIs come in and a lot of Western tourists come into India. So that is a time the industry makes most of its profits, fares are really high. So, there is no one answer to your question. But I would say that the rest of the year looks a lot better.

Q: What about market share, your market share had increased even in the domestic space. I thought the last number I heard was 19.7 percent, where do you stand as of June 30 or even as of even date?

A: Yes around 20 percent, little less than 20 percent is the market share and we think we should be able to hold that if not slightly improve that share.

Q: You spoke about the environment being better but we recently had another round of ATF price hike, would ATF prices be closer to the peak levels and going forward the kind of rupee depreciation that we have also seen and the kind of passing that the companies have done how is environment looking on that front?

A: That is something which continues to bother us because between the dollar and the crude prices almost 75 percent of the cost gets influenced because almost 50 percent of the revenues are accounted for the fuel. Since most of fuel is anyway imported, any increase in the crude prices has an immediate impact on airline profitability. Then since crude gets paid for in US dollars any increase in dollar prices is bound to impact us. If you add maintenance, cost of spares and expert pilots then the airline’s dependence on dollar is pretty strong.  I would say and in that sense any macro economic weakness which results in a weak rupee is certainly going to hurt us. So, this is an industry which will do a lot better if the macro economics turn for the better and we are hopeful things do get better on the macro front which will impact us favourably.

Q: If the current prices sustain in terms of the current exchange rate and the current crude prices as well the current ATF prices would you be in position to extrapolate this kind of Q1 performance into the whole year in terms of the profit after tax (PAT)?

A: There are certain things which are a given and as management we need to deliver reasonably good performance which is why we are trying to renegotiate the way we are supporting the airline, the various ways in which we are looking at profitability enhancements. We have just added the ninth international destination which is Muscat which will start by end of the month. So, hopefully by the time the year ends the share of international revenues would be much higher than the 11 percent that we reported for this quarter. We are also thinking of doing certain out of the box cost control strategies like import of ATF which should start anytime now which would gives us at least a 5 percentage point cost reduction in fuel. We can't do this for the entire fuel consumption that we have but at least in a small way if we start doing this the meager sums of money add up will become a very substantial sum and that is exactly the reason why we have been able to post a profit because things are quite challenging and as a team we are just trying to look at every possible avenue to reduce overall cost of doing business.

Q: We hear that the Jet-Etihad deal has been approved by one more regulator. Is that making a lot of airline guys flock to you, can you update us at all on when we might hear a stake sale from you?

A: I certainly can’t give any specifics here but there is certainly a lot of interest. However, at appropriate time we will make the right announcement but at this time things are too premature. However, I would say that there is a lot of interest going in.

Q: 2013 would be the year?

A: I wouldn’t know.

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