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.

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