Price cuts, cash infusions and oil prices

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By TESTCustomwebLP TESTCustomwebLP February 26, 2015 21:09

Price cuts, cash infusions and oil prices

SpiceJet has reportedly received Rs500 Crore (Rs5Trillion) or about US$80m at today’s exchange rates, from promoter Ajay Singh who owns 60.31% of the airline (from 1.85% a year ago). That is one third of the promised Rs1,500.00 Crore that was promised last December.  The money arrived with SpiceJet yesterday with the other two Rs500 crore installments said to be arriving by April.

SpiceJet burned through the initial Rs 100 crore investment by Ajay Singh in an instant, clearing tax bills in the process to keep the government on side.

Ajay Singh is still awaiting approval from the Indian Home Ministry for his appointment as Director onto the board of SpiceJet.

So SpiceJet has some working capital but what will it do with those funds? I do not want to seem too hostile towards SpiceJet, but the airline management might want to start using this money to fund their latest price cuts, which we calculate means that all those routes cannot operate in the black under any circumstance.

Meanwhile, just after this announcement, Jet Airways lowered its base fares by up to a massive 35% on its international routes to compete against SpiceJet, its price cuts will also be applicable on certain Etihad network flights for a limited period.

Over in the USA we are seeing some price cuts too: Airline fares fell 3% year on year during January 2015 and down 1.4% from December 2014.

Lower fuel prices give some airlines a margin of price movement at the moment but for how long will that last? Who knows, but oil is going in the right direction. Yesterday the EIA showed that oil inventories rose to their highest level since records began in1982, up 8.4m barrels to 434.1m barrels at the end of last week as production continued to increase. US crude fell 2.6% to $49.65 a barrel on the New York Mercantile Exchange. Brent futures fell 0.7% to $61.16 a barrel on London’s ICE Futures exchange. So based on this data one could argue that oil will continue to fall during 2015.

Still history teaches us that it is always easier to lower air fares than it is to increase them and we have to hope that we are not seeing the start of a trend that will destabilize many airlines.

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By TESTCustomwebLP TESTCustomwebLP February 26, 2015 21:09