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India’s second largest no-frills airline, SpiceJet, requires $200 million (approximately Rs 1,200 crore) to turn operations around, according to the Centre for Asia Pacific Aviation (CAPA), an aviation advisory firm.
The need for more funds comes at a time when the airline is expected to post losses of around Rs 1,000 crore in 2013-14. The estimated net loss for the previous financial year almost equals the Rs 1,186 crore combined losses over seven years from 2006-07.
SpiceJet has launched a series of discount offers — seven flash sales in the last three months — to improve cash flows and clear vendors’ dues. The Airports Authority of India had last November threatened to put the airline on cash-and-carry for not clearing dues. However, a senior airports authority official said SpiceJet did not have any dues pending with it.
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Unlike full-service airlines that give credit to agents, budget carriers collect deposits in advance from them. Discount offers induce agents to sell more tickets, thereby increasing the deposit amount and helping airlines meet immediate cash requirements. “The airline is also asking (ticket-booking) portals to increase the deposit amount,” an industry source said. SpiceJet is understood to be paying the portals Rs 150 above the commission on the ticket price.
The airline denied the industry insights available about the frequent flash sales in response to an emailed query from Business Standard.
“Our fare sales are simply an example of market stimulation practised by successful low-cost carriers all over the world. This kind of stimulation has a positive impact on the broader travel sector. The only ones who object to such revenue management tactics are those that do not wish to see any changes to historic practices,” the airline countered in a statement.
Industry experts point out that the revenue and expense mismatch in SpiceJet cannot be bridged by fare discounts. Air travel in India is seasonal and there is no brand loyalty among customers, who opt for whichever airline offers cheap tickets.
SpiceJet had posted a net profit of Rs 50.56 crore in the first quarter of 2013-14 but accumulated losses of Rs 732.29 crore in the second and third quarters. “Without adequate capitalisation to fund the turnaround (of SpiceJet), no serious improvement can be expected. Investor interest will remain low unless the new government initiates quick stability measures,” CAPA has pointed out.
While all Indian airlines have been hit by rising fuel prices and an appreciating dollar, SpiceJet is specially affected because of its high cost base. It operates two types of aircraft, the Boeing 737 and the Bombardier Q400, unlike typical budget airlines that stick to a uniform fleet.
Ajay Singh, founder-director of the SpiceJet who quit after Kalanidhi Maran’s Sun group took over the airline, said, “The dual fleet strategy has forced the airline to open up more destinations to make its operations viable.”
The airline has 15 Bombardier Q400s, which it flies to smaller cities. “The cost of maintaining the Q-400s is very high,” said a source who did not want to be named. Some of its spare parts were costlier than those of Boeing 737s, he added. With no few service centre in India or in the neighbourhood, SpiceJet has been sending its planes to Europe or the US for overhaul.
To save costs, the airline decided on a maintenance check in Hyderabad, but it took three months to complete.
“The Q-400 was on the ground for three months in Hyderabad and engineers were flown in from a service centre in the Netherlands. Typically, the check is completed in 20 days,'' the source pointed out. SpiceJet did not respond to a query on maintenance costs and whether it was is facing any difficulty in maintaining its Bombardier fleet.
SpiceJet’s maintenance expenses have jumped 125 per cent to Rs 673 crore in 2012-13 from Rs 298 crore in 2010-11. Neil Mills, who quit as the airline’s CEO last year, had admitted costs were higher than his expectations. In the first nine months of 2013-14, maintenance costs rose 79 per cent to Rs 761 crore from Rs 424 crore in the same period a year ago.
“We have been working closely with SpiceJet senior management and are supporting them to meet their goals. We are committed to their success and the success of the Q400 aircraft in the region. Bombardier and SpiceJet signed a SmartParts agreement, which helps the airline manage the cost of major components. We continue to seek ways to improve operating costs for SpiceJet and our entire fleet. We can’t speak to a difference between Q400 and B737 and A320 – the airliners have a distinctly different value proposition and the Q400 is a proven platform for its market segment,” a Bombardier spokesperson said.
Also, another source who did not want to be identified said the lease rent for the majority of SpiceJet’s 42 Boeing 737s was higher than the average lease charges for them. Sources also said SpiceJet had returned four Boeing 737s because of early termination of lease contracts by Nomura Babock & Brown, the leasing division of Nomura. SpiceJet, however, denied that these were premature terminations while Nomura refused comment.
“The early retirement of four aircraft is at our request simply to help us rationalise our network and remove older aircraft from our fleet as we get rid of loss- making routes. To balance the four aircraft being returned early, we have four new Boeing 737-800NGs joining the fleet this year,” SpiceJet said in a statement last week.
Despite the challenges, Singh feels SpiceJet is a fantastic brand and the management can leverage it by focusing on on-time performance, customer service and reliability. The airline has been making efforts to revamp operations, with enhanced in-flight and ground services and changes in domestic and international routes. The company announced in January it would remove Pondicherry, Trichy and Allahabad from its network, as part of scheduling its destinations.
