Adding Sun and Spice to air travel

The Sun Network’s airline, SpiceJet, one of the two low-cost Indian carriers, set the skies sizzling in early January. The airline launched a 72-hour promotional sale offer and over seven lakh flyers were lucky enough to get tickets for just Rs 2,013 — on an average, over 50 per cent less than what they would have normally paid to take the same flight.

Besides these fortunate passengers, SpiceJet’s promoters too should be a happy lot. Within hours of defying the Government’s request to withdraw its promotional sale offer, the airline reported a profit after tax of Rs 102 crore for the quarter ended December 31, 2012.

The profit came on the back of a Rs 163-crore loss the preceding quarter. In fact, the last year saw the airline on a roller coaster — it recorded a profit of Rs 56 crore in the quarter ended June 2012, for the first time after five successive quarters of losses only to again suffer losses in the next quarter, and a handsome profit the subsequent quarter.

The company is optimistic that this is the turnaround that it has been working on under its CEO Neil Mills who joined the company in October 2010.

A major focus of this turnaround for SpiceJet is on tier II and tier III cities. The airline operates over 330 daily flights to over 42 cities in India.

“Our regional growth is coming from the Indores, Jabalpurs and Bhopals — those sort of routes where there was not much connectivity before. This shows that the growth of the business is going to be in those areas,” Mills told Business Line soon after the Q3 results were announced.

During this quarter, the company honed this strategy of connecting tier II and tier III cities even further. Smaller cities were connected to bigger metros and passengers were taken onwards to international destinations. The focus for SpiceJet when it comes to its international business is largely on virgin destinations. The airline has now been given permission to launch more international flights to Maldives, Guangzhou in China, and Kabul. It also flies to Dubai, Colombo and Kathmandu.

For Q2 of FY 2012-13 the average number of aircraft used was 47 against 49 in Q3 although towards the end of Q3 it went up to 51. Similarly, the total flights operated in Q2 were 26,243 and in Q3 it was 28,433. Of this, flights on international routes were 927 in Q2 and 1,328 in Q3, a sharp jump.

Hoping that this strategy will work in the international skies, SpiceJet is optimistic about taking its international business to 20 per cent of its total business from the current 7 per cent over the next 18 months. Cheaper aircraft fuel overseas, no doubt, will help.

Besides, the induction of Bombardier Q400 aircraft to operate flights primarily to smaller cities also seems to be helping the airline’s turnaround. Mills attributed the improved financial performance during Q3 to a 25 per cent growth in the number of departures, a lot of which were with smaller aircraft, the Q-400.

“Q3 of FY 12-13 saw an interesting trend of airlines maintaining pricing discipline despite a load factor hovering around the mid-seventies. This was enabled by the exit of Kingfisher and a realisation that an unhealthy price war helps neither airlines nor passengers in the long run. In the case of Spicejet, these factors coupled with higher yields, better network planning, international fleet expansion and a high management focus on cost-efficiency has led to profitable results,” says Amber Dubey, Partner and Head, KPMG.

Others like Kotak Institutional Equities point out that SpiceJet’s numbers during the latest quarter were significantly ahead of estimates due to higher-than-expected improvement in yields and efficiencies on the cost front. Recent equity infusions by its promoters too strengthened the airline and led to an increase in its market share (19.5 per cent in November 2012 from 13.9 per cent in September 2011).

D. Sudhakara Reddy, Founder and National President of the Air Passengers Association of India says that the airline has improved substantially in terms of on-time departure and in-flight service, excepting food on board, which needs to be improved. “In the budget segment, IndiGo is the best. But, SpiceJet is catching up,” he emphasises.

Helping it along during the lean months of February, March and April will be the tickets that it has managed to sell on discounted prices. This discount sale is likely to add to the passenger load factor of the airline and improve its revenues.

However, this discount sale is what is worrying industry watchers as they fear that this irrational pricing may bring back the bad days of the industry selling tickets below cost and thus trigger a price war yet again in an industry which is already weighed down by losses.

Not that this is bothering SpiceJet. As Mills says, “I do not see how you can call this irrational pricing. We are selling seats which would have otherwise gone empty. We hope that this promotional limited time sale will see people take up discretionary travel and possibly some people who would have, otherwise, travelled by train shift to air. We do not benefit or lose.” Clearly, the airline wants to put some spice back in air travel.

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