• Capacity cuts due to the Jet Airways crisis and Boeing 737 Max ban are expected to result in better yields for SpiceJet and IndiGo in Q4
  • As for Jet Airways, grounding of a good proportion of its fleet makes it difficult to predict the airline’s Q4 earnings

Mumbai: The March quarter (Q4) is typically lean for Indian aviation. This time though matters are expected to be better due to the capacity cuts owing to Jet Airways (India) Ltd’s financial troubles. Additionally, the global ban on Boeing 737 Max 8 planes and some flight cancellations from InterGlobe Aviation Ltd have also lowered seat capacity. InterGlobe runs IndiGo, India’s largest airline by market share.

The capacity cuts are expected to result in an improvement in yield. This is aviation speak for the measure of pricing. In fact, yield would be a key parameter to track for investors. However, better yields are expected to come at the cost of passenger load factors. For the December quarter as well, IndiGo and SpiceJet Ltd had seen their yields improve and load factors drop 3.2-3.4 percentage points on a year-on-year basis.

For Q4, Kotak Institutional Equities expects a 25% year-on-year growth in revenue passenger kilometres (or RPK) for IndiGo. Further, a 7% year-on-year increase in yields will aid overall year-on-year revenue growth of 34%. RPK represents the airline capacity that is fetching revenues.

Better pricing, along with lower input costs—helped by rupee appreciation and comparatively lower crude oil prices—should aid an improvement in airline profitability.

Subdued crude oil price environment will benefit the sector in general. According to Indian Oil Corp. Ltd’s website, average aviation turbine fuel (ATF) prices in Delhi fell 1% year-on-year in the March quarter. On a sequential basis, ATF prices declined 18%.

According to SBICAP Securities Ltd, aggressive induction of capacity will sustain ~30%+ growth in ASK (available seat km) for IndiGo. “Pricing is expected to improve (especially on routes that have witnessed curtailed capacity by Jet Airways—we estimate blended increase of ~10% YoY) in a seasonally weak quarter,” added the brokerage firm. ASK is a measure of capacity.

or SpiceJet, SBICAP expects yields to improve about 6-7% year-on-year even as ATF price reduction would aid margins. “Compensation from Boeing due to Max groundings will hold the key to profitability during the quarter,” it added.

Both, IndiGo and SpiceJet are expected to see improved unit spreads (RASK minus CASK). RASK is revenue per available seat km, and CASK is costs per available seat km. Both are unit measurements for airlines.

In general, investors should keep their ears open for management commentary on fares. As for Jet Airways, grounding of a good proportion of its fleet makes it difficult to predict the airline’s earnings for the March quarter. However, for investors, the progress on the resolution plan is crucial.