With Boeings, SpiceJet strengthens revival plan

In January, SpiceJet made news for what is billed as the largest purchase of aircraft by an Indian airline ever. The low-cost carrier placed an order for 205 Boeings worth a staggering Rs 1.5 lakh crore. The new planes will start to arrive in 2018. 

From near bankruptcy to revival, SpiceJet has managed to pull off one of the most remarkable turnaround stories ever: it has almost zero debt on its books, above 90 per cent occupancy and eight straight quarters of profit to boot.

This is a far cry from the events of 2014 when Spicejet grappled with mounting debt and runaway losses. Its flights were grounded and its employees had started to leave after it failed to clear the dues owed to oil companies.

In January 2015, when Ajay Singh, the carrier’s original promoter, became its owner once again, his one-point agenda was to rationalise costs. “If you run after market share, you will run off the yield and will lose a lot of money,” says Singh.

Under its previous owner, Kalanithi Maran, who controlled the airline from 2010 to 2014, SpiceJet, according to Singh, had lost sight of yields in pursuit of sales. 

Although Singh was the original promoter of the airline, Maran acquired control of SpiceJet after he bought American private equity investor Wilbur Ross and the UK-based Kansagra family’s stake along with that of a clutch of independent investors.

When Maran acquired the airline, it was not only profitable, but it also had cash reserves of Rs 600-700 crore. After four years, by the end of December 2014, the airline ran a loss of around Rs 3,000 crore and its immediate payables stood at around Rs 2,200 crore.

Singh started rebuilding the airline ground up. He renegotiated contracts — with leasing companies, food suppliers, vendors, engineering service providers — and put the focus back on yields. In addition, unviable routes were struck off; frequency was increased on others where demand was high; and price stopped being a differentiating factor. The airline also scaled back its international operations, from 10 destination in 2014 to six today, and increased its fares to boost yields.

The oil advantage

Low crude oil prices were the key to SpiceJet’s quick turnaround. Brokerage JM Financial, in a report in February, said: “Industry-high load factors, cost rationalisation by the new management, coupled with lower jet fuel prices have helped turn around the loss-making airline, delivering profits for eight quarters in a row.”

When Kingfisher Airlines was grounded, crude oil was hovering at $80-100 a barrel, and when SpiceJet was grounded, it was at $60-70. As SpiceJet went along the revival path, prices fell to $40-60, which helped the management to gain operational efficiency. Besides, Kingfisher stopping its services left a vacuum in the market, opening up new opportunities for SpiceJet. 

In order to ensure customers and vendors knew what was happening with the airline, and with the goal of engendering trust in the airliner’s future, Singh communicated his turnaround plan widely through the media and remained open about the airline’s troubles with everyone. “Customers,” he says, “are quite forgiving, they like a good turnaround story.”

Indeed they did. While SpiceJet’s partners — Boeing, Yatra, MakeMyTrip and others — waited for it to emerge from the storm for their dues to be cleared, customers started to come back to the airliner as its performance improved. 

Occupancy of over 90 per cent for seven straight quarters has not been achieved by any airliner before globally, says Singh. The average occupancy for India’s aviation sector stands at 83 per cent. What drew people to the airline was its on-time performance.

“Today we have zero bank debt, we owe zero money to airports or oil companies or the government of India. Debt is nothing but 30 days’ credit,” Singh says. 

Internally, to boost the morale of employees, he brought back old hands who had an emotional connect with the airline and were on board with his strategy of keeping costs low and customers happy. 

Getting future ready

The Boeing deal is an extension of that strategy. These aircraft are 20 per cent more fuel efficient, and with renegotiated engineering and maintenance contracts, Singh hopes to considerably lower the airline’s operations costs. 

Without expanding on how he is going to fund the aircraft purchase, Singh says the cost of acquiring these aircraft and financing are also lower. Earlier the management had said one of the options it was looking at was to borrow from Exim Bank.

Yet, SpiceJet is not going for outright purchase. “The first few would be sale and leaseback deals and we have several offers. Going further, we will take a call, depending on what is cheaper for us at that point in time (buying or leasing). Our objective is that whatever we go in for should reduce the cost of financing,” he says. 

Bombardiers, the alternative to Boeings, make money but their acquisition costs are high. So, they make up only 15 per cent of Spicejet’s fleet. It currently has 22 Boeing 737-800s (189 seats each), four Boeing 737-900s (212 seats) and 14 Bombardier Q400s (78 seats) in service. In all, it operates 343 daily flights to 45 destinations (39 domestic and 6 international). The airline plans to increase frequency and add new destinations once the new planes start to arrive.

This focus on costs is crucial to maintain a steady course for SpiceJet. As jet fuel prices start to rise again, operating costs are set to balloon for airliners. Over the past year, the price of crude oil has risen to $55 from $35 a barrel. Airlines say at its current rate, the price is still sustainable, but if it goes beyond $70, then they will be forced to increase fares to a level where demand will be affected.

The airline currently has a market share of 13 per cent (it was 19 per cent in the third quarter of 2013-14). Even though high utilisation rates and low jet fuel prices offer scope to reduce fares and increase market share, Singh says that is unlikely to happen. “Our focus will remain on profitability.”