Multiple tailwinds for SpiceJet

Market share gains, profitable regional expansion bode well for volumes and yields

The SpiceJet stock gained 3.7 per cent on Wednesday, reacting to the news of the company gaining market share. Besides, last week’s announcement of the second phase of bidding for flights between smaller towns and cities under the regional connectivity scheme is another positive for the low-cost airline.

While the domestic passenger growth went up by 12.5 per cent year-on-year, SpiceJet logged 36.7 per cent growth in July. The company gained 160 basis points market share over the past two months, with half of the gain coming in July. Following engine-related issues, InterGlobe Aviation-run IndiGo recorded a growth of only 9.3 per cent, while that of GoAir stood at 3.6 per cent. SpiceJet’s market share could inch up further on account of supply disruptions, both for IndiGo and GoAir.

Though the domestic passenger growth at 12.5 per cent was the lowest in three years, analysts are not worried about its impact on the future growth, as the carrier’s July performance, according to them, was due to engine issues and impact of seasonality. 

Ansuman Deb of ICICI Securities says the underlying growth of the market remains strong, as traffic growth, excluding IndiGo and GoAir, is at 17 per cent — one of the strongest over the past five months.

While the engine-related issues could be temporary, Deb said it would have tactical implications, boosting the overall sector yields and FY18 earnings for players such as SpiceJet and Jet Airways. 

SpiceJet’s load factors continue to impress, with the July number coming in at 94.4 per cent. The company has been hitting the 90-per-cent-plus load factor for each of the past 27 months.

Santosh Hiredesai of SBICAP Securities said SpiceJet had benefited from its regional footprint as reflected in the strong revenue profile and load factors. Moreover, the regional routes are not unprofitable. Pricing on some of the routes in smaller towns and cities are reasonably good, resulting in higher yields compared to that of key metro routes. Given the increased competition on metro routes, SpiceJet with its sizeable capacity in regional routes has higher yields despite industry’s best load factors. 

Yields, which improved four per cent in the June quarter, are expected to be firm, given the balanced demand-supply situation. The key is to bring down the company’s non-fuel costs, as competitive intensity in regional routes starts to rise.

While the operational performance has been good, the Street will keep an eye out for the verdict on redeemable warrants issue related to former promoters, as any dilution on this account will be significantly negative.