Selecting Stocks for the Future Series is an initiative by us to identify stocks that can grow without being disrupted over the years to come. Paid members of Investors are Idiots.com will receive recommendations to invest or not to invest while free subscribers will be given basic facts for them to take their own decisions.
Indian carriers flew 10.17 million passengers in the month of May 2017, up 17.3% from 8.669 million flown in the corresponding month last year, according to provisional statistics released by the civil aviation regulator, the Directorate General of Civil Aviation (DGCA).
State-run carrier Air India marginally improved its market share in the domestic civil aviation business in May 2017. The carrier’s share rose to 13 percent from 12.9 percent in April 2017, though still below from 14 percent in January.
Low-cost carriers Indigo and Spicejet saw their market share drop marginally to 41.2 percent and 12.9 percent, respectively, in May (April — 41.4 percent and 12.9 percent, respectively). Visatara and AirAsia India ended the month with a market share of 3.3 percent each.
The passenger load factor (PLF) was highest for SpiceJet at 94.3 percent, followed by GoAir at 93 percent and Indigo at 91.1 percent. For Air India, it was 80.9 percent, marking an improvement from 78.7 percent in April and 74.6 percent in March.
SpiceJet is a low cost carrier that came back from the brink of extinction. The Maran’s sold Spice Jet to its original founder, Ajay Singh as the carrier was in deep financial trouble. Spice Jet’s stock price has risen by over 10x from lows on the resurgence of the carrier. Will it fly further? We give you the pros and cons and you can take the investment call on Spice Jet.
SpiceJet operates 364 average daily flights to 46 destinations, including 39 domestic and 7 international ones. The airline connects its network with a fleet of 35 Boeing 737NG and 20 Bombardier Q-400s. The majority of the airline’s fleet offers SpiceMax, the most spacious economy class seating in India, as an additional fee option.
Whilst the company is amongst the most efficient operators in the domestic airspace, Spice Jet is currently undergoing financial restructuring, including infusion of fresh capital to manage costs, and fund deliveries of new aircrafts going forward. It currently operates 17 leased B737-800 in the domestic airspace commanding 12.9% market share.
During FY17, Spicejet implemented cost savings measures by restructuring contracts and business processes, which saw 9% decline in other CASK (Total Cost net of finance income per Available Seat Kilometer) in FY17. Further, the company placed order of 205 aircraft for USD 22bn, which is the biggest order by an Indian airline with Boeing ever. Operational performance continued to stand out with PLF upwards of 90% for over 24 months (92% in FY17) as well as best-on-time performance.
The airline was awarded 11 routes under the UDAN scheme with 3-year exclusivity, while also increasing regional capacity by 25%. The incentives under the UDAN scheme will also lower costs in regional areas.
SpiceJet announced recently that it has signed a letter of intent (LOI) with Bombardier Commercial Aircraft, for up to 50 Q400 turboprop airliners. The LOI includes 25 Q400 turboprops and purchase rights on an additional 25 aircraft.
Purchase of additional fleet is expected to increase the debt and this would directly increase the debt servicing costs for the company.
Failure to keep the occupancy levels at 90% plus owing to any demand weakness will pressurize the RASK and hence a risk to the earnings/valuations.
Existing airports at Indian metros like Mumbai, Chennai and Kolkata running at peak capacity could prove to be bottlenecks for growth.
SpiceJet’s Q4FY17 net profit at Rs.416 million was impacted by a sharp uptick in fuel costs (up 42 per cent y-o-y) amid continued pressure on fares. While SpiceJet continues to enjoy superior RASK (Total Revenue net of finance income per Available Seat Kilometer), the premiums are expected to narrow down because of increasing competitive intensity.
The aviation industry continues to tread on the growth path amidst high competition to gain market share. The ability to manage costs effectively is of greater significance for airline companies going ahead.
ASK – Available Seat Kilometer
CASK – Total Cost net of finance income per Available Seat Kilometer
CASK ex fuel – Total Cost excluding fuel cost net of finance income per Available Seat Kilometer
EBITDAR – Earnings before finance income and cost, tax, depreciation, amortization and aircraft and engine rentals
EBITDAR margin – EBITDAR / Revenue from Operations
GDS – Global Distribution System
Load Factor – Revenue Passenger Kilometer / Available Seat Kilometer
RASK – Total Revenue net of finance income per Available Seat Kilometer
RPK – Revenue Passenger Kilometer
Yield – Passenger Ticket Revenue / Revenue Passenger Kilometer