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budget carrier SpiceJet announced a loss of Rs 559 crore for the second quarter of financial year 2013/14, as compared to a loss of Rs 164 crore in the corresponding quarter last year. It is the biggest loss the airline has ever suffered in any quarter and indeed three times its loss of Rs 191 crore in the entire financial year 2012/13.
With India's second largest airline
Jet Airways also reporting its worst quarter loss of Rs 891 crore for the September quarter, serious concerns arise over the cost structure of the Indian airline companies and whether they can survive at all in the currrent operating environment.
SpiceJet's loss exceeded aviation consultancy CAPA's estimate of $60 to 80 million (Rs 360 to 480 crore) for the company in this quarter. "The low cost carrier's modest profitability in Q1 (Rs 51 crore) was not encouraging and the structural fault lines in the business are becoming visible. Given the current weakness in the market, SpiceJet may be headed for a record Q2 loss," a CAPA report published in August had said.
Analysts said the high loss was on
account of high operating costs, low yields and poor oversight. "Overall poor oversight resulted in the high loss figure," said Kapil Kaul, CEO, (India and Middle East), CAPA. "SpiceJet was without leadership for over months." *Sanjeev Kapoor, an aviation consultant, joined the airline as COO on November 1.
With this loss the accumulated losses of the airline stand at Rs 1137 crore. Its net worth is further eroded to a negative Rs 603 crore.
"The accumulated losses have fully eroded the net worth of the company. The appropriateness of the going concern assumption is dependent on the company's credibility to establish consistent profitable operations and generate positive cash flows as well as raise adequate finance to meet its short term and long term liabilities," its auditors, Batliboi & Associates noted.
The SpiceJet management said it was trying to raise finances. It also estimated its loss due purely to the weakening rupee at Rs 42 crore for the quarter. This was also reflected in increased maintenance costs as there was a bunching up of engines that were sent for repair and an additional burden of Rs 78 crore was incurred under this head. To mitigate losses, become more competitive and expand, the management said it was working "on a strategic plan that will help it rationalise costs, enhance revenues and refine network."
SpiceJet's passenger yield declined seven per cent, to Rs 3,711 from Rs 4,001 in the previous quarter. There was a nominal increase of 6.1 per cent in income from operations to Rs 1257.22 from Rs 1185.24 in the same quarter the previous year. Fuel costs for the airline went up by two per cent compared with the corresponding quarter last year and constituted 56 per cent of the total revenues.
In September a Bank of America Merrill Lynch (BofA ML) research report on SpiceJet had pointed out that the Spicejet stock underperformed mainly on account of falling demand, high fuel prices, the sharp depreciation of the rupee against the dollar and trying to compete with the irrational pricing by some carriers.
But the report also said the worst might soon be left behind. "SpiceJet is expected to add four to five international routes every quarter for the next two years This would likely increase international revenues from 11 per cent of total revenues in the first quarter of 2013/14 to 25 per cent by the end of 2014/15." The airline added two international routes - to Muscat and Bangkok - in the September quarter. As is well known, profit margins are higher on international routes than on domestic ones.
The report went on to suggest there would be sequential growth in yields for the airline in the third quarter of 2013/14, as domestic traffic has picked up since July this years and carriers too have revised fares upwards. "We expect Q3FY14 yields to show 15 per cent (approx) sequential growth which could lead to strong profits," the report said.
The markets had anticipated SpiceJet's poor performance and the stock closed at Rs 19.90 down by a per cent at the stock exchange on Thursday, hours before the results were announced.
CAPA has added that the next few months will be critical for the long term future of SpiceJet as "the carrier needs to focus on minimising red ink in Q2 and recovering some of these losses in Q3, which seems challenging at present. Seeking investment from a strategic or financial investor is high on the carrier's agenda."
*Sanjeev Kapoor is the COO of SpiceJet. An earlier version of the story has erroneously mentioned him as CEO of SpiceJet.
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