AirAsia’s India entry no threat to SpiceJet for now

Investors in local airlines need not fret about the slide of 40 per cent in the stock of lowcost carrier SpiceJet in the last three months, given the fact that its fundamentals remain strong and the current demand-supply scenario in the aviation industry supports its business model. There could be a couple of triggers for the stock plunging.


One, the proposed entry of AirAsia and, two, its plans to kick off operations from Chennai where SpiceJet has its base. A pioneer of the lowcost carrier model in Asia, AirAsia is known to focus more on short-haul routes and for maintaining a lean cost structure. A focus on short-haul routes helps ensure higher revenues rather than the long-haul ones, which lead to higher fuel cost and don’t always ensure a strong load factor.

In maintaining a lean cost structure, AirAsia has expanded across Asia through its subsidiaries. Its strategy of maintaining a quick turnaround time for its aircraft is a reflection of how the company is focused on saving costs. In other words, the airline maintains little time between two flights for each aircraft daily, helping it save fuel and other operational costs, clearly showing that earnings count more than anything else.

This may well pose a serious threat to SpiceJet, which has followed a similar strategy in the last few years. But the concerns relating to SpiceJet may be a bit overblown. SpiceJet now has a market share of over 20 per cent in the local market.

India’s aviation industry continues to be a low-penetration market with very low connectivity to non-metros. Moreover, 30 per cent of SpiceJet’s flights are to non-metros. Compared to this, its peers have an exposure of close to 17 per cent to these cities. SpiceJet flies to 42 Indian cities and has acquired 15 Bombardier Q400 to enhance its connectivity to tier-II and tier-III cities. Thanks to this connectivity to smaller cities, SpiceJet is relatively insulated from competition.

Besides this, AirAsia may not resort to a price war which would imply that there may not be a threat to SpiceJet’s earnings in the near term. AirAsia is expected to commence operations in the second half of this fiscal.

Analysts estimate that it may not garner more than 4 per cent market share in FY15, which indicates that it may not be in a position to indulge in cutting air fares significantly and unduly influence airfares. According to the latest data of DGCA for November, the industry demand declined by 7.3 per cent, while capacity was down by 6 per cent.

This indicates that only the low-cost carrier model may work in the coming quarters given the fall of close to 3 per cent in passenger growth in the January-November 2012 period. Being a strong player in the low-cost segment, SpiceJet is expected to do well in the March quarter.