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Analysis I IndiGo and SpiceJet earnings presage a torrid period ahead for Indian aviation

The weak earnings of the two airlines indicates difficulties faced by the industry and efforts to cut costs by retrenchment and salary cuts have their limitations.

July 29, 2020 / 06:54 PM IST
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IndiGo (InterGlobe Aviation), the country’s biggest carrier by domestic market share and fleet, declared a loss of Rs 2,884 crore in Q1 FY21. The company declared its result within minutes of rival SpiceJet declaring a loss of Rs 807 crore for Q4 FY20. While the two numbers are for two different quarters and do not allow apple to apple comparison, it says a lot about the state of aviation in the country and throws light on the finances of SpiceJet.

For IndiGo, this was the worst ever quarter and came exactly a year after the airline recorded its best ever quarter on the back of Jet Airways suspending operations last year.

SpiceJet’s Q4 FY20 resultSpicejet’s loss of Rs 807 crore for Q4 FY20 was marginally lower than IndiGo’s Rs 871 crore loss. But Spicejet is only 40 percent of IndiGo in terms of fleet. For the same period last year, the airline had recorded a Rs 56.3 crore profit. The airline has seen 13 of its B737MAX aircraft being grounded since last March and the quarter saw the airline budget Rs 134.5 crore as compensation, while for the year it was Rs 671.8 crore! None of this is yet vetted by Boeing and there continues to remain uncertainty about the exact number. At the same time the airline has also admitted that it has deferred some payment to various parties including vendors and express inability to determine all such costs and penalties!

Also read: Boeing 737 Max aircraft to return to services in Q1 CY21, says SpiceJet

The airline reported a net loss of Rs 934.8 crore for FY20, of which Rs 807 was recorded in the last quarter - a quarter which wasn’t fully affected by COVID-19 as the next one, for which the airline has not declared its results. The airline’s financial position remains precarious with a cash or cash equivalent of Rs 28.15 crore at the end of last fiscal.

The green shoots for SpiceJet could well be the cargo operations. The airline had started a subsidiary, SpiceXpress, and the revenue from freight and logistics services went up four times over the same quarter last year.

IndiGo’s Q1 FY21 result

Up to 60 percent of Q1 FY21 was a washout for the airline, like all others as operations remained suspended until May 24. The resumption of services from May 25 has been capped both in terms of capacity and fares.

Operations were down 90.1 percent and income dropped by 88.3 percent, whereas costs reduced by only 51.8 percent. That’s why it is key to understand why the losses ballooned for the airline. The airline has seen its aircraft and engine rentals go down, most likely due to power by hour (PBH) deals in place, which helped the rentals go down due to lower utilisation.

The huge jump (412.3 percent) in cost per available seat km (CASK) can be ignored since the cost is being loaded on a limited number of flights and not across the fleet, thus showing very skewed numbers. CASK will normalise if the airline decides to reduce its fleet or more aircraft get into operations.

The airline has taken a leaf out of SpiceJet’s strategy and has focused on cargo with 10 aircraft dedicated to cargo operations. Unlike SpiceJet, IndiGo does not have a dedicated freighter arm and uses the aircraft for ferrying cargo. The airline has also been offering charters along with flights in the Vande Bharat Mission. The airline closed the quarter with 274 aircraft, of which a large number would be phased out over the next few quarters reducing costs.

The way forward?While the government came up with multiple sops for industries, there wasn’t anything worthwhile for aviation. There are certain metrics like loss per plane or revenue per plane do not work in a fast paced environment like India, where there is significant capacity induction and a true measure cannot be calculated

IndiGo’s Q1 result indicates that even though only 45 percent of the schedule is allowed, traffic is very low with the quarter having an average of 61.3 percent load factor. The COVID-19 pandemic also marked the end of the record load factors of over 90 percent for SpiceJet, which it witnessed for 58 consecutive months. While IndiGo looks to raise cash, SpiceJet’s auditors have continued to flag the existence of a material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern.

Times are difficult for the industry and efforts to cut costs by retrenchment, salary cuts and more are only a small percentage of the total costs. While IndiGo is batting for resumption of full-fledged services and doing away with fares cap, these two things may help other airlines survive and sustain a little longer. From here on, there could be two divergent ways for IndiGo and SpiceJet, with the former getting the focus on building a hub-and-spoke model, moving away from its core low cost carrier (LCC) philosophy and SpiceJet focusing on cargo and creating a niche there and being selective in passenger focus.

When SpiceJet declares its Q1 result, we would know how much value cargo brings to the table. While airlines in India are used to chase passenger traffic, IndiGo, with a fleet as large and having tasted success in cargo business, could well deploy additional planes for dedicated cargo operations.

Ameya Joshi runs the aviation analysis website Network Thoughts

Ameya Joshi
first published: Jul 29, 2020 06:54 pm