AirAsia profit up as SpiceJet confirms it is in talks with a foreign investor

Dino D'Amore
By Dino D'Amore May 22, 2014 09:50

AirAsia profit up as SpiceJet confirms it is in talks with a foreign investor

SpiceJet has confirmed that it is in advanced talks with a foreign investor: “We are in advanced stages of capital infusion discussions with an external entity that when completed will help us clean up our arrears and rebuild with confidence,” the airline said in a statement. As mentioned in our report last week, SpiceJet has to get working capital infused into the business at speed. It has a good track record when it comes to investment – Wilbur Ross made a strategic investment in 2008 which netted a 50% return over three years.

Meanwhile many worry about AirAisa figures for this current quarter given the unrest in Thailand. It creates another compounding factor for the low-cost leader in a year when it is coming under intense competition, even though the airline will ride it out, it will see its share price continue to be checked as investors awake to the reality that AirAsia is no longer the only low-cost giant on the block. Indeed AirAsia saw profits fall 55% in the last financial year, and much of this was from competition in its home market from Malindo. As such AirAsia shares have lost 28% of their value in the past 52 weeks versus a 6% gain on the Malaysian index.

Even so managing the ever changing landscape is something that AirAisa is good at clearly as AirAsia said that its first-quarter profit rose by 33% for the first quarter on the back of increased passenger numbers, foreign exchange gains and deferred taxes, even though operating revenue declined to Mr78.8m from Mr240.3m last year.

Net profit for the three months ending March 31, 2014 rose to Mr139.7m ($43.48 million), from Mr104.8m for the same period last year. Load factors improved by two points to 81% in the first quarter while ancillary income per passenger increased by a very impressive 7% year on year. The decision to defer seven aircraft deliveries this year and another 12 in 2015 was a wise move that others such as Lion Air should follow.

But this year we will see costs and red ink come onto the books from AirAsia’s low-cost Indian joint venture airline, which obtained an operating permit this month. This venture is going to be a real winner for AirAsia on connecting Indians with the rest of South East Asia no doubt, but domestic Indian operations are another matter entirely and in order to do well it will have to take market share from IndiGo which this week was confirmed by the DGCA to have 31.6% domestic market share with its 496 daily flights with 78 aircraft. This market share gives IndiGo a near 10% market lead from Jet on 21.8%. IndiGo has taken market share from Air India which has declined to 18.3% and SpiceJet which has fallen to 17.9% even though it has instigated the recent rounds of fare cuts for forward bookings. GoAir now has a 9.5% market share. But the DGCA figures reveal that Air Costa has not only cornered a near 1% market share in 2014 but it has also produced the highest load factors at 77.8% compared to IndiGo with 76.9%, making this airline one to watch. GoAir load factor is at 76.1% while JetLite’s is static at 76%, Air India and SpiceJet showed 73.3% load factor figures for April 2014 while Jet Airways remains just under 71%, which is poor.

The rise of Air Costa confirms what we were saying last week that strategic operations targeting different routes during the year is the way to go for SpiceJet. But as it does so it will open a gap in the market for AirAsia and Tata to slip into. Air Costa on the other hand, with its Embraer aircraft order, is going the other way, to become a pan-Indian domestic carrier with international operations also. Can they achieve this against the highly-competitive backdrop that is Indian aviation? If they can then we have to question what is wrong with the other business models in the market and that will lead us back to the editorial we wrote here in 2012 – Smaller aircraft will turn a profit in the Indian market. We shall see.

Dino D'Amore
By Dino D'Amore May 22, 2014 09:50
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