Why Ajay Singh's re-entry in SpiceJet can revive the sector

SpiceJet’s share price has hit the upper circuit on news that one of its original promoters, Ajay Singh is likely to be back in the pilot’s seat. There are two main reasons why this is good news for SpiceJet. 

First, Ajay Singh is coming back to the airline with a group of investors and will be pumping in the much-needed Rs 1,500 crore into the company.

More importantly, Singh brings to the table his operational expertise in running a low cost airline.

In 2010, when Singh sold SpiceJet to the Marans, it was a profit making entity with cash reserves of close to Rs 450 crore. The Marans managed to run the company into losses which currently stands at Rs 3,000 crore (accumulated), along with liabilities of Rs 1,400 crore.

Singh, on the other hand, ran a tight ship and followed the low-cost carrier model of US-based Southwest Airlines.

During his tenure, all of SpiceJet's aircraft were of the same make, which reduces operational cost. This is because as per government guidelines, each aircraft has to have a crew that is certified for that particular make. The Marans introduced the Bombardiers in its fleet and had to increase staff strength to man these aircrafts, as well as to maintain and service them.

But this strategy did not work as the 78-seater Bombardiers were meant for smaller cities. Thus, even if the airline flew only once a day, it would still have to open a station and have a full strength of people operating it.

If Singh operates SpiceJet like he did in his earlier avatar, he will have to cut down on these routes and go back to the basics of operating only one set of aircraft.

Business Standard has quoted Singh as saying that to cut costs, SpiceJet will lay off about 1,000 employees across functions in the next few weeks. These employees will be given offers to rejoin the airline once the fleet is expanded. SpiceJet has already reduced the number of flight from 340 to 200. Its Boeing 737 fleet has been cut to 17 from 35 in July 2014.

Singh seems to be confident of turning the company around by the next financial year. He has been quoted as saying that "Oil prices are low, we have a pro-growth government in India. If you can deal with the past liabilities of SpiceJet and get the costs low, I think it's a great time to be in aviation, breaking even in the next financial year is what we should be aiming for."

However, key to reviving the airline is how much money is actually going into the company. If Singh and his team of investors are asked to make an open offer, since control has changed thereby triggering the takeover code, then around Rs 250 crore will be spent in mopping up shares from the open offer. The airline already has Rs 1,400 crore of liability and investors would like every rupee to be pumped into the business rather than chasing shares out there. 

Experts say that the company might get an exemption from making the open offer as the money can instead be used for reviving the company which is a positive step for the shareholders. But the risk is this would set a precedent for further deals in the market.

Irrespective of the open offer, revival of SpiceJet will be at a time when new players, especially AirAsia are in the market, which follow more or less the same low-cost carrier model as SpiceJet. Chances are that predatory pricing days might be over, unless Air India decides to play the same old game.

Singh’s model was on efficient operations rather than discount pricing to woo customers. His re-entry might not only be good for the company but also for the sector.