SpiceJet may find Q2 also tough

HYDERABAD: Irrational pricing of fares and excessive competition adopted by the airline industry could crimp profit margins of low-cost carrier SpiceJet for the second consecutive quarter, a senior official told ET on conditions of anonymity.

Despite an impressive 35% growth in its revenues in the first quarter this financial year, SpiceJet made losses amounting to 79 crore as competition from full-cost carriers stopped the company from raising ticket prices.

Even higher fuel cost restrained the airline from charging the passengers an increased fare because the full-fledged carriers reduced prices to increase load factors and gain market share.

Since July 2010, low-cost carriers reduced their fares by 11% despite aviation turbine fuel (ATF) prices increasing by 40%. ATF accounts for one-third of the operating cost of an airline.

"It is becoming difficult to operate at these fares. We expect market conditions to improve, but there will certainly be pressure on our margins in the coming quarter," said the same official quoted above. However, he was optimistic about its performance and said the airline will return to profitability in a year's time.

In May this year, India's national carrier Air India slashed its fares by 50% on domestic flights in the economy class to improve its load factor to 85%, from 68%. A Merrill Lynch report on the performance of Indian airlines released in July this year expects SpiceJet to post losses on account of a fall in load factors and yields.

The report downgraded both SpiceJet and competitor Jet Airways and said low fares charged by struggling legacy carriers would reduce yield by 3-4% in the current year. The company sees growth in the horizon only if fares catch up with costs. "Spurring growth in the coming quarters would all be down to the irrational pricing that is there from some of our competitors stopping. As soon as financial accountability comes in, you will see the market picking up because the underlying demand is there anyway," Neil Mills, chief executive officer, SpiceJet told ET.

Vishwas Udgirkar, sector analyst with audit firm PWC, said: "In my opinion, operations will not be sustainable at these fares because the prices are not reflective of the cost structures. There is no difference between the fares of the low-cost carriers and the full fledged ones." SpiceJet, the airline promoted by Sun TV owner Kalanithi Maran, currently operates 200 flights a day connecting 22 Indian cities and two international destinations. It carried 8.6 million passengers in the financial 2011 flying 14% of India's passengers.