Monday, November 17, 2014

Spicejet Q2 - Absolute Analysis

As SpiceJet declared results late on Friday evening, it was met with criticism from all Quarters. Prathamesh & I wrote a blog post Down but not out - Analyzing SpiceJet Q2 . The top management led by COO – Mr. Kapoor alleged that the media was covering the negatives more than the positives and as more and more people joined in, issues started getting mixed with many clubbing operations & finance. Prathamesh was the first to say that these issues should not be mixed.

Percentage can be deceiving as noted in the blog post and with many others; I was on the forefront to request SpiceJet COO – Mr.Sanjiv Kapoor, on twitter, to declare results similar to those declared by Jet Airways. Spicejet indeed published the additional data this afternoon, which shows the absolute numbers for few critical parameters like average revenue per passenger, CASK, RASK, ASKM.

The 12% increase in RASK is due to maintaining a balance of 9% reduction in average fare per passenger and 19% growth in Load Factor.

The most significant of these is a positive EBITDAR (Earnings before Interest, Taxes, Depreciation, Amortization, & Restructuring) or simply Revenue – Expenses. The reduction in capacity in the last few weeks, also looks like an effort to drop CASK faster than drop in RASK (Due to Cancellations). This will lead to combining flights on a smaller fleet with minimal cancellations to ensure that revenues outpace costs. Excluding fuel, the reduction of CASK from 2.62 to 2.31 has been fast and with further reduction in fuel costs, the overall number should come down too.

Indeed this has to translate into some key parameters and updating reasons to cheer, points to ponder over and Outlook for Q3

Reasons to Cheer
  • Increase in Load Factors
  • RASK up 12%
  • CASK down 7%
  • Load Factor up 19%
  • Reduced Losses YoY
  • All this will translate into increased chances of finding an investor, either an airline or VC

Points to Ponder over
  • Re-delivery of aircraft leading to reduced capacity
  • Impact on On Time Performance and loss of high yielding business travelers
  • 5 straight quarters of losses at a time when the airline needs funds desperately
  • Auditors concerns

Outlook for Q3

Historically, Q-o-Q operational revenue growth for Q3 over Q2 has varied from 30 - 50 %. Considering a fair 25% growth in revenue in Q3 to around INR 1800 Cr. (Q3 FY 14 revenue at INR 1796.3 Cr.) should help in churning out an operational profit. However, with the increase in cost aircraft re-delivery, the operational profit could be under pressure.

However, there will be a significant drop in capacity due to re-delivery of aircraft and thus the historic impact may not be seen this year. By latest counts, 4 B737-900 and 6 B737-800 have been returned in the last 8 – 10 weeks. This is a reduction of 2400 seats a day, considering a conservative estimate of 6 flights a day per aircraft. This reduction in capacity coupled with fares sold cheap during the multiple sale periods, leading to cancellations and combining of flights could well prove a difficult thing to manage from the revenue perspective. The planned seats to be sold at higher rates closer to departure, well may not be around because flights have been clubbed.

Saturday, November 15, 2014

Down but not out - Analyzing SpiceJet Q2

In September’12 the Indian Government, approved 49% FDI in Indian Airlines. Kingfisher was already in a holding pattern, trying desperately to get whatever help it can, after not having paid its employees for a considerable period of time, Jet Airways had a debt burden which kept mounting every quarter, IndiGo continued to report profits, and Go Air for once was expanding, consolidating and claiming profits. But a question to anybody in the industry or outside on who is better placed for getting investments – ended up with unanimous answer – SpiceJet. The airline had declared profits in Q1 (Apr-Jun 2012), exceptionally reduced losses in Q2 YoY (Jul-Sep 2012) and was expanding rapidly on domestic routes and launching international stations.

The Q400s had arrived and crisscrossed south and north of the country, Blue Skies policy on international route led to launching flights to places as far as Guangzhou – a first for Indian carrier, Kabul – Another first for a private Indian carrier, and between some unconnected city pairs – Ahmedabad – Muscat, Madurai – Colombo and so on.

Circa - 2014, and a lot of water has flown under the bridge for SpiceJet. It remains a mystery as to how and why Spicejet lost the plot and from being the most suited bride, is now struggling to find a match and as many believe, struggling to stay afloat.

A lot of parallels are being drawn with Kingfisher, but luckily salaries still are on time, International flights have not been pulled out after the initial network rejig, tax issue has been amicably solved, and the top management is ensuring that morale of the work force is high with constant presence on twitter, denying negative reports and introduction of new product and weekend uniforms. However, few aircraft are grounded and robbed for spares, At least 3 of 6 B737-900s returned to lessor and at least 4 B737-800s being returned to lessor in the past few weeks, with rumors of employees constantly looking out for opportunities.

The re-delivery of aircraft and grounding, along with the unfortunate “Buffalo” incident at Surat, the schedule and On Time Performance has gone for a toss, with regular delays across domestic network. The airline has skillfully managed to avoid negative publicity due to these delays and has ensured that international flights are not delayed.

The July – August, traditionally weak quarter, saw frequent sales by SpiceJet shoring up revenues, Load Factors and constant information by top management on RASK improvements across all platforms. While a common passenger may not even be aware about RASK, he or she is more than happy to have cheap tickets to travel and that has helped shore up Loads for the airline, which is giving it its much needed cash to meet operational expenditure if rumors are to be believed. The airline has not announced sale for a long time now.

The airline carried 32.83 Lakh passengers in Q2, which is a tad lower than much larger Jet Airways which carried 33.76 Lakh along with its subsidiary JetKonnect. With a market share of 19.6%, this was the best quarter in calendar year 2014.
The last Annual report talked about increased frequencies, improved OTP & Spare Capacity, none of which has been possible, due to grounding of aircraft and return to lessors. In fact, for the first time in its history, SpiceJet became the smallest carrier in Mumbai with least number of departures.

However the results do show some positive signs, but a lot needs to be done for the airline to survive and the recent spate of re-delivery, cancellations, rescheduling is not making it favorite with the passengers.

Issue of warrants to the promoter group should pump in some “much needed” equity into the firm after red flags by auditors over ‘going concern’ status in the previous quarters. The proceeds have been used to for working capital. Yet, currently the Liabilities outweigh the Assets by INR 1498.6 Cr. & it continues to be a concern.

On operational front, inspiring figures are forthcoming (as compared to previous Quarters) with capacity up 7.0%, RASK up 12.0% and CASK down 7.0%. The impact of fuel costs reduction wasn’t felt and exchange rate benefits were minimal and hence, these figures are notable. But Statistics can be deceiving and when all figures are given out in Percentage, one must have a cautious approach till you see the actual number. And yet again SpiceJet led by its top management has only made statements in percentage terms without giving out the actual numbers for either the RASK/CASK or ASKM, the parameters least understood by even the analyst community in India. No matter what percentage improvements and basis point improvements have taken place, the fact continues that the airline has reported losses in both the quarters this year.
One example, I keep giving to show the gravity of this is when Infosys says that their utilization of resources is 70%, which sounds good but when you translate that to absolute number, it means about 35,000 employees are on bench without work, which indeed is a vast workforce! 

Impressive growth in Other Income driven by ancillary revenues. Stands at Rs. 28.09 Cr. which represents a 70.4% growth Q-o-Q and 127.1% growth Y-o-Y. Hints at not only the success of avenues like SpiceMax suite, where the price conscious Indian is waking up to being charged for added benefits. Operating Revenues at INR 1425 Cr. clocked a growth of 16.4% Y-o-Y, which is extremely striking for a traditionally weak quarter. 

Going ahead, the return of aircraft to lessors, should help reduce Aircraft Lease Rentals and Aircraft Maintenance Costs, though might see a temporary increase in Aircraft Redelivery Expenses which have increased to INR 64.1 Cr. for H1 FY 15 as compared to INR 10.3 Cr. for H1 FY 14. However, this is likely to further reduce capacity and if schedule is not altered and reduced in line with capacity, unlike what is the case now, SpiceJet could be at receiving end from the passengers who are facing severe delays in many cases.

Reasons to Smile
Increase in Load Factor 
Drop in Fuel Prices

Some Worries
Re-delivery of aircraft leading to reduced capacity
Impact on On Time Performance and loss of high yielding business travellers
5 straight quarters of losses at a time when the airline needs funds desperately
Auditors concerns

Outlook for Q3
Historically, Q-o-Q operational revenue growth for Q3 over Q2 has varied from 30.0-50.0%. Considering a fair 25.0% growth in revenue in Q3 to around INR 1800 Cr. (Q3 FY 14 revenue at INR 1796.3 Cr.) should help in churning out an operational profit.

However, there will be a significant drop in capacity due to re-delivery of aircraft and thus the historic impact may not be seen this year.

SpiceJet should rest speculation on the fleet, and if there is a fleet plan in place, announce the same in public along with reduction in flights. Misinformation can be deadly, but No information can be deadlier and currently its heading into a phase of No information.

















Conclusion
Will operating profits or huge equity investments come true before worries about going concern becomes troublesome? Only future will tell. 
"A bankruptcy judge can fix your balance sheet, but he cannot fix your company" - Gorden Bethune, ex-CEO Continental 


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Co-Author : Prathamesh Kini

Tuesday, November 11, 2014

Draft Civil Aviation Policy - Another policy without substance


The draft Civil Aviation Policy was released by the Honorable Minister of Civil Aviation – Ashok Gajapathi Raju Pusapati yesterday. I had a lot of hopes from the policy since the last decade was plagued with policy paralysis in the Indian government. There is a stiff competition between which sectors suffered the most – Coal, Telecom, Industry or Aviation. The perceived scam in purchase of Air India aircraft, merger of Air India & Indian Airlines, lack of efforts to abolish the 5/20 rule( airlines require minimum 20 aircraft and 5 years of domestic operations to start flying international), non-classification of ATF (Aviation Turbine Fuel) into declared goods category attracting uniform 4% tax across the country, decision to go ahead with redevelopment of Chennai & Kolkata airports by AAI – leading to the disaster that they are today, as compared to world class facilities at Delhi, Mumbai, Hyderabad & Bengaluru, and many more. The list is unending.

However, prima facie the draft policy looks like listing of all problems that need to be resolved and have been in that state for a long time. The policy only highlights the problems without laying down the solutions or ways & means to tackle the problems. It promises to look after taxation issues on ATF, the 5/20 rule and route dispersal guidelines, but gives little on how and when this will be addressed.

There is a common saying – “The more things change, the more they remain the same”. Unfortunately I do not know who this saying is attributed to, but when you see the Strategic 5 year plan of the past government presented by the then MoCA (Minister of Civil Aviation) in 2010 and the Draft Civil aviation policy of this government, one tends to agree with the statement. Both start with quoting ICAO (International Civil Aviation Organization) statistics of generation of 610 indirect jobs for every 100 direct jobs in aviation.

The Strategic Plan 2010-2015 talks about Indian being recognized as a role model by FAA, which today has downgraded the safety rating to Category 2, Inclusion of 500 more aircraft in Indian skies and 300 more helicopters, One helipad every 100kms on highways, and many more, most of which continue to be Aspirational – similar to the section under which it is quoted in the Strategic Plan.

The new Draft policy talks about having airports as integrated multi-modal hubs with Rail / Road / Metro connectivity, access to manufacturing, business & tourism areas, up-gradation of 18 airports which amount to 86% of traffic, developing the 6 metro airports to have a hub & spoke model, Rationalization of ATF costs by having uniform taxes, Development of 6 metro airports as cargo hubs, Listing of AAI & Pawan Hans, changing the regional connectivity policy and reviewing the 5/20 rule, Air Navigation System & up-gradation of DGCA.

While these are welcome moves, the Revised Route Dispersal guidelines, which were formulated by a leading consulting firm are pending implementation for over two years, due to disagreement between carriers on the nature of the requirements. The airport at Bengaluru located about 40kms away from the city center recently got decent road connectivity. The rail connectivity envisioned while construction of airport is still elusive, many of the 35 non metro airports which saw modernization are already facing shortage of space (Eg: Jaipur) or are white elephants and AAI is incurring huge losses at these places (Eg: Aurangabad, Indore).

The Hub & Spoke model has been a success as Delhi – since there is no other airport in the vicinity which can attract so much traffic, but the same does not work well in the south, where Bengaluru, Chennai & Hyderabad compete fiercely with each other. So while SpiceJet based their Q400s in Hyderabad, a lot of the destinations are connected from Bengaluru and Air Asia changed plans and moved to Bengaluru from Chennai, yet there is no perfect Hub & Spoke at either of these places like there is at Delhi.

However, all has not been bad, implementation of GAGAN, changes in Air Navigation System and subsequent trials at Jaipur, up-gradation of ATC infrastructure at Mumbai and increase in runway capacity, are some of the silver linings.

One can only hope that the draft Civil Aviation policy gets into some tangible project plan, which is implemented phase wise with bounded timelines and the next 3-5 years, would see a serious change in the infrastructure & policy in Indian civil aviation. As more airlines take to skies, the pressure on infrastructure would be immense and similar to the boom in 2005-6 which most of us remember well and would hope is not repeated.


Saturday, November 8, 2014

The desert Sun Shine - Analyzing Q2 results of Jet Airways

“If Jet Airways would have reported operational profits, they would not have reported results post-closing hours on Friday” quipped Prathamesh Kini, a fellow aviation enthusiast with whom I’m writing this blog post. This was within minutes of my tweet indicating that Jet Airways have reported profits in Q2 – traditionally a weak quarter for Indian aviation.

The quarter was eventful for Jet, a joint press conference with Etihad - in which the airline announced its move to Full Service, being part of Etihad partners, announcing next round of Abu Dhabi feeders, facing flak for frequent exits at top level, having to deal with pilot shortage and facing DGCA rap for training issues.

The July – September quarter saw Jet Airways reduce its market share in the domestic market, and was down to 20.2% (9W+S2), which has been the lowest in three quarters of the calendar year. Jet & JetKonnect carried 33.76 lakh domestic passengers, a little higher than Spicejet but much lower than market leader IndiGo which carried 53.66 lakh in the same period. However, Jet was not the major benefiter of the 20%+ market growth, which was driven majorly by Spicejet, and the frequent discounted fares on offer. The same has also been acknowledged in the Jet Airways results presentation, which indicates the drop in capacity by 11.1% while the industry capacity has grown by 9.6%, and passengers flown down by 8% for the airline, while the market growth has been 14%.

A closer look at the profits, indeed indicate an operational loss and the reported profits of INR 69Cr because of the fund infusion due to sale of Jet Airways Frequent Flier Program. The majority stake sale of Jet Airways Frequent Flier program for over INR 900 crore, has been debated over. We look at this sale, as just another way to fund the airline, and being worked out to bypass regulatory issues due to selling additional equity to Etihad and increasing its stake in the Indian airline.

The airline has shown an impressive 16.4% revenue growth in Y-o-Y figures for corresponding Q2 quarter, seen traditionally as a weak quarter. This growth stands out because of the slight de-growth reported from Q2 FY13 to Q2 FY14. This revenue growth has come on the back of a notable increase of 13.6% in gross revenue per user to INR 9145 comparing Y-o-Y figures but a miniscule drop from INR 9158 figures quoted in Q2 FY 2013.

Though insignificant in absolute terms, the growth of non-operating revenue is another positive and certainly shows that Jet Airways is back in business.

The 33% increase in Selling & Advertising expenses to INR 496.6 Cr. seems to be driven by the numerous competitive sales promotions. Interestingly, the absolute increase of INR 120 Cr. translates to about 44% of the operating loss of INR 266 Cr. The management also seems to have had a firm control over fuel expenses which has registered a minimal increase, though the recent cut in ATF prices in India aided by drop in crude prices should aid the company improve operating ratio significantly in near future. This comes at a time when the aircraft utilization is reaching historical highs, on the back of additional flights to Abu Dhabi and the entire Gulf Region.
The management has started efforts to target both the top line and bottom line over the past year & efforts could lead positive operating values soon. Peter Lynch once said " The simpler it is, the better I like it" and hence we chose to ignore the complexities arisiing out of exceptional items.


The Average Gross Revenue per Passenger which has been wavy over the last few quarters should now stabilize and then grow as more and more Abu Dhabi and Gulf Feeders are introduced by next May. Thanks to the partnership with Etihad, the initial period in which the airline incurs losses on the new routes, would be minimal.



Points to Smile
Non-operating revenue up 146%
Average revenue per user up 13.6%
Breakeven load factor reduced to 83.4% from 98.2%

Points to Worry about
Salary Arrears of INR 63.6 Cr, which is nearly equal to the profits reported. The Management has not clarified on this and would possibly happen during the investor call.
Lower yields due to frequent sale by competition
Accumulated loss of INR147 Cr this year
Shifting significantly lower yielding routes of JetKonnect to mainline and pushing yields upwards

Outlook for Q3
Shifting to Full Service model
Brand confusion to continue till aircraft are repainted / rebranded
Few additional services in winter scheduled deferred due to pilot shortage