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.

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 

Co-Author : Prathamesh Kini

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