The fourth quarter of last financial year made official an open secret that was, well, openly known in the domestic aviation sector. If not for the ‘Other Income,’ most of the airlines in the country would be in dire straits.
Take the case of the three listed companies. The financial results, which were announced in end-May, show that the Other Income column was instrumental in keeping their financials healthy. Net profit of Jet Airways edged past the red line because of income outside the core operations. IndiGo and SpiceJet too have to thank income from other sources for keeping them in shape. Therein lays the state of affairs of the domestic carriers. Look at the numbers: Jet Airways reported a net profit of ₹36 crore (consolidated) for the fourth quarter. If not for the other income, which nearly doubled from ₹165 crore to ₹310 crore, the legacy carrier would have suffered a loss.
The airline carried a surplus of ₹74.56 crore into quarter four as ‘transfers’ from its frequent flyer programme. This money accrues to the company when fliers don’t use their frequent flyer miles, which then lapse. An industry executive noted that not many companies use these as Other Income as they are notional.
Jet Airways also earned profit from aircraft sale and leaseback, which doubled to ₹263 crore from a year ago. It made profits from land development which went into the Q4 results. Therefore, if not for the other income, the airline would have posted a loss of around ₹275 crore. IndiGo saw its net profits taking a dive of 25 per cent, at ₹440.31 crore. The profits during Q4 would have been much lower but for a leg up from other income, which grew 59 per cent to ₹293 crore. This included income from fixed deposits and mutual funds, which were about ₹177 crore. “Other income for IndiGo rose sharply owing to a forex gain of ₹82.6 crore,” says Vishal Rampuria, an analyst with HDFC Securities.
Its Gurugram-based peer SpiceJet’s turnaround story got a support from other income, despite its marginal increase. got a comparatively smaller help from its Its other incomegrew marginally to ₹47.8 crore, from ₹42.5 crore a year earlier. Still, its net profit went down by as much as 43 per cent. For the fourth quarter, SpiceJet net profit fell ₹41.6 crore. This was largely because of higher fuel cost and lower yield on account of demonetisation.
While the management of SpiceJet can take some pride for the airline’s ninth successive quarter showing profits, there are issues that need immediate attention. For example, an increase in fuel cost was as high as 46 per cent in Q4 which eroded about ₹160 crore of profit. The airline will have to find ways to increase revenues and offset the rising fuel bill.
Crude pain
All the three listed airlines were hit by higher crude oil prices during the quarter and fuel costs as a percentage of revenue increased by 1,000 basis points. Amit Agarwal, acting CEO of Jet Airways, admitted as much during a call with analysts. Total fuel cost for the company increased from₹1,071 crore in the fourth quarter of fiscal 2016, to 1,700 crore in corresponding quarter of fiscal 2017, an increase of nearly 59 per cent. On the positive side, passenger traffic growth has been strong over the past two years. “The benign crude prices, higher economic activity and rising income levels has supported this growth. The penetration level, as measured by annual seat per capita, remains low and offers huge potential,” says Vishal Rampuria of HDFC Securities.
The airlines can also take some solace from the fact that the load factors in the Indian domestic air transport market are at an all-time high, of mid-80s.
Vasuki Prasad, manager commercial planning and analysis at Vistara Airlines says, “While the fall in revenue growth rates may be a cause for concern, the truth is that the industry is still growing, YoY.” He pointed out that that the aircraft deliveries to Indian carriers are slightly above the average growth since Jan 2014. On an average, 3.4 aircraft have been delivered every month, since Jan 2014.
At the same time, capacity constraints at the airports in Delhi, Mumbai and Bengaluru will limit the growth momentum but may force growth in other domestic destinations. The recently launched UDAN scheme may propel growth in the domestic market. The use of larger aircraft on domestic routes, may allow airlines to circumvent slot constraints.
(The article first appeared in The Hindu BusinessLine.)