SpiceJet: Seasonally weak Q2 could add to company's accumulated losses

Freighter and logistics segment now accounts for 32 per cent of the company’s revenues.
The reduction in aviation turbine fuel (ATF) prices, for the second time in September, came as a breather. 

Yet, InterGlobe Aviation (IndiGo) and SpiceJet closed 0.3-1.6 per cent down in trade on Wednesday. 

Given that the cut in ATF prices followed price hikes in June, July, and August, gains remained limited.  

Fuel is the single biggest cost head for airlines, accounting for 40 per cent of revenues. Muted Q1 results, a seasonally weak September quarter, and moderating passenger traffic all weighed on sentiment.

Average volumes — in the 16th week of resumption in air travel — declined to 115,000 passengers, against 124,000 fliers last week. Analysts at ICICI Securities say these are early trends and should improve at a rate depending on the trajectory of the Covid-19 impact.

The pandemic led to an 83 per cent year-on-year fall in SpiceJet’s revenues. The carrier is operating at less than half of pre-Covid schedule, and has much lower load factors. While passenger revenues were understandably lower, the focus on cargo operations helped sales from the segment rise 144 per cent.

The freighter and logistics segment now accounts for 32 per cent of SpiceJet’s revenues.  Though not comparable to the March quarter as passenger services in the pre-Covid period were much larger, cargo operations were under 3 per cent of revenues in the quarter. 

While cost-control measures and lower fuel costs come as a positive, the weak operating leverage led to consolidated losses of Rs 600 crore. This has further aggravated the net worth situation, with liabilities exceeding assets by Rs 2,170 crore as of June 30. 

Higher compensation from Boeing and the return of MAX aircraft into operations by the March quarter are positives. However, losses are likely to continue over the next few quarters, and net worth could be in the red to the tune of Rs 5,000 crore for FY21, according to BOBCAPS. 

While listed aviation stocks SpiceJet and IndiGo control three-fourths of the passenger volumes between them, investors should avoid these companies for now, given the weak operating metrics as well as elevated valuations.

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