SpiceJet’s metro focus to bring gains in market share, yields

ET Intelligence Group: Jet’s flight from the Indian skies has ensured a smooth landing for SpiceJet, which is quickly gaining share in coveted metro routes that traditionally provide carriers high yields.

Over the past six months, SpiceJet has stepped away from its usual expansion strategy that previously involved flying into less crowded hubs. Instead, it is focusing increasingly on trunk routes that Jet served earlier.

“There is going to be a greater shift in market share in favour of SpiceJet as we moved faster than our peers did in grabbing metro routes,” chief financial officer Kiran Koteshwar said. “In the coming months, we will make inroads in metro markets. This provides us an edge.”

Furthermore, what would provide tailwind to revenues is the airline’s code share agreement with Emirates, one of the largest carriers globally. This would strengthen Spice-Jet's presence beyond home.

In the immediate future, two factors are expected to provide strong earnings visibility. The first is the airline’s aggressive capacity expansion. It plans to add 64 aircraft, taking its fleet size to 135. The proposed expansion in FY20 matches that of market leader IndiGo.

Second, more metro routes should boost the airline’s yield growth into double digits for the next few quarters. In April, the airline announced 106 new flights, of which 73 services would be connecting to Mumbai, 16 to Delhi, and eight flights connecting Delhi and Mumbai.

Separately, the industry’s capacity is increasing in the range of 10-11 per cent. Experts say airlines that have deployed high capacity for the next fiscal would continue to record double digit growth in yields as long as the industry’s capacity addition does not cross 20 per cent, a threshold seen to mount pressure on profitability.

So, the airline is attractive to potential strategic investors who can make the balance sheet stronger than what it is now. The airline has negative net worth. However, the CFO denied that SpiceJet is in talks with any international carrier for a stake sale.

In the March quarter, costs associated with grounding 13 Boeing aircraft and high fuel prices affected earnings. As a result, the full impact of slots secured was not reflected in the performance. Revenue increased to Rs 2,531 crore while net profit climbed 22 per cent to Rs 56.3 crore. The yield grew by 11 per cent to Rs 4,181.