Stock Review: KINGFISHER & SPICEJET

An increasing focus on low cost-carrier model in the coming quarters will stand in good stead for airlines companies, which reported severe losses in June 2011 quarter.
Though in adopting a low-costcarrier-focus will result in a decline in revenue per km paid passenger, it will help airlines companies save rising operational costs due to high aviation turbine fuel and capacity addition.

In June 2011 quarter, the losses of Kingfisher Airlines widened to Rs 263 crore from Rs 187 crore in the previous year's June quarter. The company's earnings before interest depreciation tax amortisation and rentals —measure of an operational performance of an airline company -- declined to 13% in June 2011 quarter from 20.5% in last year's June quarter. This steep decline in the operational performance is due to the sharp increase in the fuel costs of the company, which formed around 44% of the company's net sales against 35% in a year before June quarter. This is despite the fact that the company clocked a load factor of 85% better than the industry average of 78% in the June 2011 quarter.

With an increasing tendency among corporates and ordinary travelers to opt for necessary and unavoidable travel due to increasing overall costs, it will be sensible on the company's part to promote its low-cost carrier offering: Kingfisher Red.It is expected to lease more aircraft from its present capacity of 66. This strategy will help the company to take full advantage of domestic price-conscious traffic and service its debt of around Rs 6,200 crore as of March 31, 2011.

SpiceJet, on the other hand, being a low-cost carrier, has a distinct advantage of catering to price-sensitive travellers. Experts believe that since the company follows an asset- light model — its entire fleet is at presently leased, thus helping the company conserve cash and keep its debt to a minimum level. Also, the company has single-type aircraft, which helps it maintain its aircraft efficiently. Despite the fact that high fuel costs and interest expense turned the company from profit-making entity into a lossmaking one in June 2011 quarter, it has gained around 2.2% in market share to 13%.