SpiceJet

 

 

The Low-Cost Carrier's Strategy Pays Off; Low Leverage An Added Attraction

 

SPICEJET yet again demonstrated the advantage of sticking to a lowcost carrier model in Indian aviation industry. For FY10, the company has been able to make handsome profit in comparison to its previous year. For the full year the company reported a profit of Rs 61 crore as against a loss of Rs 352 crore in FY09. More so, for FY10, the company's market share increased to 20% from 12.8% in FY09.

   This shows that in the last one year and also going forward, the low cost carrier would act as a turnaround strategy for players in the industry. Sensing this, Jet Airways — a full service carrier — adopted the same strategy and launched a new no-frills service branded as Jet Konnect.

   Not surprisingly, in the past one year, the SpiceJet's stock has showered investors with more than 100% returns and it has outperformed the Sensex by a considerable margin. In the past two trading days, the company's stock has seen six times increase in its trading volume to around four lakh along with delivery of around 55%. This shows that long-term investors have already factored in the sustainability of the LCC model and hence are accumulating the stock. Also for March 2010 quarter, the company became profitable from a loss-making last year's March 2009 quarter. For the March 2010 quarter, the company's profits were Rs 27.5 crore as against a loss of Rs 7.8 crore for the same period last year. On the operational front, the company's EBIDTAR—earnings before interest, depreciation, tax, amortisation, and rentals shot up from a negative 4% in FY09 to 19% in FY10.

   Buoyed by good December '09 quarter, the company also did good promotional campaign to improve its brand recall. This was step towards its next big leap — commencing international service. The company recently completed five years of successful domestic operations. Going forward, the company can leverage on its domestic success and wean away the price-conscious flyers on short-haul international routes. This will save it capital cost. Also, the company is leastleveraged among Indian peers. As of FY09, it had a debt of around of Rs 488 crore, while Jet Airways and Kingfisher Airlines had debt of Rs 16,900 and Rs 5,665 crore, respectively. All these add up to profitable quarters ahead provided the company doesn't go overboard on capacity addition.