No threat of overcapacity if overhead cost remains in control: SpiceJet

With crude price falling and rupee strengthening, the airline expects to go back to profitability soon

SpiceJet on Wednesday sounded a note of optimism saying that Indian airlines will soon start making money due to fall in crude prices and a stronger rupee. The airline, which registered a loss of Rs 3.89 billion in the July-September period against a profit of Rs 1.05 billion last year, said that the aviation market won't have an overcapacity problem as long as overhead cost remains in control.

“I don’t know why we keep saying there is overcapacity. If we go back to last two or three years, there was a capacity addition of around 16-17 per cent and demand increased by more than 20 per cent, the airlines made money - which means the capacity got absorbed. Overcapacity is an outcome of the ticket price and input cost. As long as costs are in control, capacity will get absorbed. That’s not an issue”, said Kiran Koteshwar, Chief Financial Officer, when asked if there was a need to rationalise the capacity.

The airline will induct 26 aircraft by the end of this financial year which includes 18 Boeing 737 Max and eight 90-seater Q400.

Despite a booming aviation market which is growing by 20 per cent every year, Indian carriers are offering tickets at such lower prices that they can hardly cover costs resulting in steep losses. Even market leader IndiGo, which has more than 40 per cent share of the aviation market, reported its first loss of Rs 6.52 billion - its first loss since the public listing.

“While India has experienced 46 consecutive months of double-digit (passenger) growth, it is still a challenging market for airlines to operate in,” International Air Transport Association (IATA) recently said.

Experts and airline executives had blamed aggressive deployment of aircraft as the reason why the industry was bleeding saying that the market was not ready to absorb such capacity and hence was unable to command a price. “Challenges are staggering as airlines battle for market share and not profitability by dumping capacity into the market at unprecedented levels enabled by fare regimes that are unsustainable. You are seeing this clearly play out as each of the airlines report their results for the second fiscal quarter,” said Vinay Dube, CEO of Jet Airways which posted a loss of Rs 12.61 billion.

Koteshwar, however, said in a market like India airlines will never find it feasible to increase fare beyond a certain point and hence will have to take control of costs. “India has historically been a price sensitive market. There is a sustainable fare point in India beyond which you can’t price. So you have to have an optimum cost structure,” he said adding that his airline has been able to price rationally so that it can recover the cost of operation.

According to Koteshwar, airline’s loss was mainly due to external factors like fuel price, currency fluctuation. “Almost all our cash loss was due to the fuel price increase and foreign exchange loss,” he said. As compared to the period last year, the airline paid Rs 2.72 billion more for jet fuel and Rs 0.78 billion more on account of rupee depreciation.

However, experts said that if the global crude price shoots up again accompanied by a currency fluctuation, SpiceJet may need to raise capital to run its operations. “The airline is well placed to manage profitability challenges especially as sale and leaseback incentives kick-in from the second half of   FY 19 but near-term market conditions indicate risks. Raising capital may become imperative if trends don’t reverse significantly,” said Kapil Kaul, CEO, South Asia of aviation consultancy firm Capa.