SpiceJet looks to place aircraft order as profits are posted

Dino D'Amore
By Dino D'Amore May 20, 2016 13:56

SpiceJet looks to place aircraft order as profits are posted

Ajay Singh, chairman of SpiceJet, again reiterated his hopes to place an order for more than 100 single-aisle aircraft and a number of turboprops (50 possibly) in the next two to three months. The airline has decided to use Rs 173 crore as a one-time expense to upgrade its fleet. As such an order is now expected to be announced at the Farnborough Air Show. Currently, SpiceJet’s fleet is predominantly Boeing and Bombardier aircraft.

During the first quarter of 2016, SpiceJet’s total revenue rose by 10% to Rs 1,474.98 crore, from Rs 791 crore in Q1 2015. SpiceJet’s Q1 net profit was up more than three times at 730 million rupees (Rs73m crore) or US$10.8 million from 225 million rupees in Q1 2015. These Q1 figures include one-time gains of about 637 million rupees, and also one-time expenses of 1.73 billion rupees. The Q1 gains were down to lower fuel costs. This is a fifth straight profitable quarter for SpiceJet, and for the full year net profit stands at Rs 407 crore, against a loss of Rs 687 crore for last financial year. Ebitda (earnings before interest, taxes, depreciation and amortisation) was at Rs 146 crore against a profit of Rs 80 crore in the same quarter last year. On a yearly basis, the profit was Rs 640 crore against loss of Rs 397 crore last year.

Expenses fell by 10%, with fuel cost at Rs 328.66 crore this year (FY16), against Rs 366.63 crore last year (FY15). Total expenses came down by 20.26% to Rs 4,773.50 crore against Rs 5,986.37 crore.

SpiceJet stated that it has “increased its unit revenue through a consistent rise in load factor”. Singh added: “We decided to use the financial cushion to clear all debts and legacy issues. Every single legacy issues has been addressed and accounted for in this quarter. We have also provided for every single claim on the company’s books. Except three, all claims have been settled,” he added.

This is great news and it is good to see Indian airlines making money again. But I calculate that if oil prices rise by $28 then all airlines in India save for Indigo would sink into the red, and there’s the rub: If SpiceJet places an order for aircraft now then it must engage with lessors for faster delivery times. It is no good placing an order with manufacturers for delivery in the distant future at which point the airline may or may not require the aircraft – this has always been a risk for airlines. The question for SpiceJet is whether the airline has done enough to attract high-quality lessors to the table to secure aircraft now while the going is good so that a cash cushion can be built-up for harder times? I think the airline management have made steps to ensure they will have lessors knocking at its door. We now wait to see if SpiceJet moves to order aircraft from manufacturers and then use sale-leaseback to fund the deliveries or whether it will go directly to lessors for faster delivery slots. If the former, it will show that SpiceJet is not so sure about its near-term prospects as it makes out, which will also present a significant risk down the line. SpiceJet management would do well to lay their hands on any equipment they can at speed if load factors are as high as stated.

Indian aviation is the real goldmine of the globe. It should be mirroring the growth of Chinese aviation but bureaucracy, red tape and a lack of local government officials willing to plough funds into infrastructure projects has led to a far slower aviation growth curve than all would have hoped for and expected. Moreover, it should be noted that Indians are far more travelled than the Chinese, which is primarily due to the huge Indian diaspora. This has a significant effect in that Indians moving into the middle class are far more ready to move overseas for work. Also, a far higher proportion of Indians have completed higher education overseas than the Chinese, for now at least. That said, China has a far larger middle class and as such the brain drain and indeed the drain of wealth is far less pronounced than in India. Indian domestic aviation is likely to grow at a far slower pace than international transits and this shows no sign of significant improvement in the short term.
Those looking for the next best market have all turned to post-sanctions Iran
Iran has a very large and highly-educated middle class with a very large number of airfields – in this regard it can match the UK or France. But it does not have the infrastructure to get these airports up and running at speed for myriad of airlines to fly to and from commercially. There also remains the problem of dealing with Iran on two fronts: one is getting the US dollars out and the other is potentially losing business from the likes of Saudi Arabia and the UAE once a deal with an Iranian company has been transacted. This draws the logical conclusion that aside from setting up a bank-backed venture somewhere such as Russia or South Africa to deal with Iranian aviation, the only people really able to assist the Iranians in building a fleet are mid-life aircraft traders. Iran should be looking to them to expand their fleets, especially in this low fuel price environment assisted in no small part by Iran. On new aircraft only the manufacturers can really assist, but with Airbus and Boeing export credit agencies currently out of action and delivery slots far off in the future, the big two aircraft manufacturers are seemingly hobbled. In the here and now, Bombardier has the slots and the export credit support but can Bombardier fund aircraft deliveries into Iran? Would they wish to? That leaves Embraer and Sukhoi as the two best remaining options for new aircraft at speed for the Iranians in all reality unless a lessor is willing to take a (big) chance? The bottom line is that Iran will be a great market but it will also be a slow burner. But one wonders what a president Trump would do to US – Iran relations?
When considering doing business with Iran, you need to consider that the bundles of red tape on any deal in US dollars are far worse than anything India can throw at you.
Dino D'Amore
By Dino D'Amore May 20, 2016 13:56