Founder pulls Indian budget carrier SpiceJet out of stall
A few months ago, the Indian budget airline SpiceJet seemed on the brink of a fatal stall.
In December, the carrier’s financial problems reached a tipping point as its fleet was grounded, forcing SpiceJet to cancel more than 1,800 flights.
Dozens of pilots had already quit the airline in the months before this. Many believed that SpiceJet was sure to go the way of Kingfisher Airlines, which ceased operations in 2012 because of its financial woes.
But fast forward to today and the airline is still flying and appears to be starting to turn its fortunes around after Ajay Singh, the airline’s co-founder who sold his stake in 2010, stepped in to save SpiceJet in January this year by taking a majority stake.
The low-cost carrier is now expanding its fleet and it recently announced a profit for the January to March quarter following seven quarters of losses. Mr Singh, who is now the chairman and managing director of the airline, has injected 8 billion rupees (Dh462.9 million) into the carrier.
The decade-old airline is “starting to get back on its feet” and the quarterly profit of 225m rupees was “the first tangible evidence of the ongoing revival”, Mr Singh said as the carrier’s results were released. He added, however, that “we still have a lot of work to do”.
The airline attributed its profitability for the quarter to “negotiating settlements and renegotiating several major contracts to bring down costs”. It has launched a series of flash sales in an effort to fill seats, which seems to be paying off, with figures showing an 81 per cent load factor for the first three months of the year.
Speaking in New Delhi this month, Mr Singh said that the focus was on regaining customer confidence, and the airline was continuing to look at options for attracting investment.
Part of its new strategy is connecting Dubai to more “mini-metros” in India, a spokesman for SpiceJet says. In March, it revealed that it would cut its Pune to Sharjah route and replace this with flights between Pune and Dubai.
Analysts say that the change in leadership has undoubtedly had a significant effect.
“This takeover served two basic purposes,” says Satish Modh, who was in the aviation sector for 28 years and worked on a turnaround plan for Air India before becoming director of the Vivekanand Education Society Institute of Management Studies and Research.
“First the airline received the much-needed funds. Second, the association of the founder, Mr Singh, brought back the investor confidence in the airline.”
It has also helped to improve the airline’s corporate governance image, he adds.
Areef Patel, executive vice chairman of Patel Integrated Logistics, says it is “not yet a turnaround” but it “is definitely a positive sign considering the shambles in which SpiceJet was operating, mainly due to lack of funding and high operating costs”.
Mr Patel says: “Ajay Singh has hands-on experience in handling the operations. He is brand-conscious. He has made the right moves since he has taken over – may it be cutting services that are high on costs, revisiting contracts and giving more responsibilities to the middle-level management which has helped SpiceJet to save on employee cost.”
In the financial year that ran until the end of March 2014, SpiceJet lost more than 10bn rupees.
“SpiceJet has now come out the other side of the darkness a more agile, stronger and more adept airline as a result of the changes made,” says Saj Ahmad, chief analyst at StrategicAero Research. “Had these structural endeavours not happened, SpiceJet was primed to fail. If SpiceJet continues to gnaw away at costs, especially in a low fuel price environment, then it has the prospects of financial strength to position it for growth.”
But there could still be some turbulence ahead for the airline, analysts warn.
India’s airlines are operating in a challenging environment. There is a huge amount of competition in the market, with new airlines Vistara and AirAsia India launching flights this year and last year, respectively.
SpiceJet has its own set of hurdles to overcome.
“There are many challenges at this stage,” says Mr Modh. “The airline needs outside sources of funding for a couple of years … and sustained on-time performance before it wins back customer confidence.”
Harsh Tikmany, a director of his family-owned fashion design business in Mumbai, travels frequently in India and took a SpiceJet flight from Mumbai to Kolkata on Tuesday night. The low price of the flight was the main attraction, he said, explaining that it was the cheapest of all the airlines flying the same route. But he says that the carrier has developed a poor reputation for punctuality and it would need to work hard to shake off that image. “SpiceJet is the least preferred airline in India right now,” he says.
There are also operating challenges that will need to be addressed, experts say. The airline has a fleet of Boeing and Bombardier planes, which has proved costly for the company.
“For an airline of this size maintaining a fleet of two types of aircraft is too expensive due to higher maintenance and inventory cost,” says Mr Modh. “The airline also needs two sets of pilots and in-flight crew, which increases its operation and training costs.”
If fuel prices rise quickly, this could also pose an obstacle to the airline’s recovery.
SpiceJet’s growth strategy at this stage will be crucial.
“The factors like on-time performance, safety and customer loyalty are needed for every airline,” says Mr Modh. “SpiceJet needs something more than that – a worked out three to five-year plan looking at the constraints of funds and two types of fleet.”
With the industry in a low season, the next few months could prove to be telling for SpiceJet. “I think the next three months will be key to the industry as a whole,” says Mr Patel. “It is more of a dull period considering raising the revenues. As time goes on SpiceJet will need funds to operate. This is something that would be a major concern for the company. A new management that, so far, has sent strong positive signals to the investor, will they be able to keep up the good show is the question?”
Mr Ahmad says that SpiceJet “needs to walk before it can run”.
“Fuel price escalation, difficulties in lease payments and short-term cash flow will be prime hurdles,” he says. “One only need look at the disaster that was Kingfisher to see how easy it is to get things wrong in India, especially when the framework for aviation in the country is utterly prehistoric.”
But he says if SpiceJet does manage to get its strategy right, it could turn out to be “one of India’s rare airline success stories – an airline on the brink that has turned itself around”.
SpiceJet’s decade of turbulence
SpiceJet takes to the skies with the Indian entrepreneur Ajay Singh in charge and its headquarters in Gurgaon in north India.
The media tycoon Kalanithi Maran buys a 58 per cent stake in the airline as Mr Singh sells his holding and leaves the company. Dubai World’s Istithmar, which held 13.4 per cent in SpiceJet, sells off its shareholding as it deals with its own liquidity issues. The airline is turning a profit.
SpiceJet starts to post losses because of competition between carriers leading to lower fares and because of high taxes and fuel prices.
Auditors start to raise concerns about the financial viability of SpiceJet.
The carrier finishes the financial year with a record loss of more than 10 billion rupees (Dh578 million).
Losses mount for the carrier amid reports that SpiceJet is struggling to pay vendors.
SpiceJet’s fleet is grounded briefly as fuel suppliers refuse to fill the companies planes because of unpaid debts. Authorities ban the airline from taking bookings for flights more than a month in advance. Mr Maran’s Sun Group says it cannot put more money into the airline. It emerges that Mr Singh is working on a rescue package.
Mr Maran agrees to transfer his stake and the management and control of SpiceJet to Mr Singh.
The airline launches a “cheaper than trains” fare sale to fill seats with prices starting from 599 rupees for one-way flights, inclusive of taxes.
SpiceJet posts a profit of 225.2m rupees for the three months to the end of March.
The airline is on the upswing and there are plans to expand the carrier’s fleet, Mr Singh says in New Delhi at a conference to talk about the airline’s tenth anniversary.
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Updated: June 20, 2015 04:00 AM