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SpiceJet may gain from IndiGo’s move to cut capacity addition

Indi-Go's cut in its incremental capacity by 2-3 per cent reduces the industry's capacity which provides some scope for SpiceJet to show some aggression in adding more room.

, ET Bureau|
Updated: Dec 11, 2019, 08.46 AM IST
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BCCL
Spicejet-1---BCCL
SpiceJet may induct Boeing 737 Max planes in January next, which have higher seat capacity (220 as opposed to 180 in Boeing NG) and are more fuel-efficient (12-15 per cent) than Boeing 737NG (Next Generation) aircraft.
ET Intelligence Group: SpiceJet, India’s second-largest airline by market share, may benefit from the recent cut in incremental capacity by IndiGo Airlines for FY20.

In its recent communication to analysts, India's largest airline by market share InterGlobe Aviation, which runs IndiGo Airlines, cut its capacity addition to 22-23 per cent from the earlier guidance of 25 per cent for FY20. The airline cut its capacity addition guidance primarily due to engine-related issues of its Airbus A320neo aircraft.

Analysts believe that SpiceJet may gain reasonably from this cut. Indi-Go's cut in its incremental capacity by 2-3 per cent reduces the industry's capacity which provides some scope for SpiceJet to show some aggression in adding more room.

Spicejet snip 1

SpiceJet may induct Boeing 737 Max planes in January next, which have higher seat capacity (220 as opposed to 180 in Boeing NG) and are more fuel-efficient (12-15 per cent) than Boeing 737NG (Next Generation) aircraft. SpiceJet can deploy a part of its capacity in the next six months to gain from last-minute flight bookings which also promise high yields.

It may replace a few Jet Airways’ aircraft with the new Boeing 737 Max. IndiGo followed the same strategy in the past few years by pushing up its capacity in the past few years. SpiceJet also gained from the Jet Airways debacle.

Also, IndiGo may not able to add incremental capacity due to the Directorate General of Civil Aviation's (DGCA) directive (on concerns over safety of Airbus engines) which would keep its fleet size the same in the near term. Taking these facts into account, SpiceJet may gain some incremental market share in the coming quarters. In the past few quarters, SpiceJet has already gained close to 3 per cent market share at 16.3 per cent at the end of October this year.

Another favourable aspect investors need to bear in mind is the valuation discount between SpiceJet and IndiGo. In the past two years, the valuation discount between IndiGo and SpiceJet has been 30 per cent, which at present, has widened to 38 per cent.

According to Bloomberg’s analysts’ consensus data, the growth in earnings per share (EPS) for Spice-Jet for FY21 over FY20's estimated EPS is higher than IndiGo. For SpiceJet, the growth in its EPS for FY21 over FY20's estimated EPS is 145 per cent at Rs 11.62. For IndiGo, the growth in its EPS for FY21 over FY20's estimated EPS is 129 per cent at Rs 71.7.
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