What took SpiceJet close to the exit

NEW DELHI, 24/12/2014: A Spicejet aircraft at the IGI airport, SpiceJet yet again sparked off a fare war. For the third time this year and in quick succession, it has opened up a window for providing discounts on the base fare. As part of the Super Summer Sale launched on February 24, the airline is offering 75% discounts on base fare for tickets booked between April 1 to June 30. The bookings have to be made by February 26. Photo: V.V.Krishnan

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A golden rule of business is to never to let your firm’s troubles reach the customer. But it was one that SpiceJet broke repeatedly, starting from the fag end of October when things began unravelling at the Chennai-based airline.

Flights were delayed and rescheduled at short notice, leaving disgruntled flyers. In fact, at the Kempegowda International Airport in Bengaluru on October 30, passengers trying to board the early-morning Chennai flight found no staff at the SpiceJet counters. They had gone on a flash strike for non-payment of dues. It was only hours later that an airline official came to inform irate passengers that their flight would take off in the afternoon.

By December, when the airline announced that it was cancelling over 1,800 domestic flights — on average around 80 a day — during the month, SpiceJet was all but tottering.

But why did an airline once considered the best alternative to Delhi-based IndiGo and voted the top low-cost carrier in 2012 by the Travel Agents Association of India fumble so badly? What went wrong?

WRONG TURNS

In hindsight, it is clear that the airline made a few wrong turns. In 2010, SpiceJet decided to place orders for Bombardier Q400 aircraft, when most airlines in the country had Airbuses or Boeings.

The price of the 15 Bombardier Q400s was $450 million, the first of which joined the fleet in 2011. SpiceJet’s rationale to opt for the 70-seater Bombardier Q400s was that it would widen its network in smaller towns and cities. Its owner, Kalanithi Maran, said at the time that they were “expected to totally change the lives of the people in tier 2 and 3 cities by making flying more affordable.”

But what it did was bloat the airlines’ debt and expenses. SpiceJet’s total debt soared from Rs 55 crore in fiscal 2011 to Rs 855 crore in fiscal 2012, when the Bombardiers were inducted. This doubled to Rs 1,678 crore in fiscal 2013. The company’s net worth which was Rs 321 crore in fiscal 2011 turned negative in fiscal 2012, to minus Rs 147 crore.

Two years after these aircraft were inducted, SpiceJet’s maintenance costs ballooned to over 50 per cent. While the maintenance cost per flight hour for a 70-seater Q400 is about $1,300, a low-cost airline need it to ideally be at about $800.

The lack of support centres in India meant that the aircraft had to be flown to the Netherlands for maintenance checks.

An analyst with a consulting firm, who did not want to be identified, said it was extremely important to deploy the right aircraft for the right route. “These things become important because some of the costs are not in your control,” the analyst said.

Also, between the time SpiceJet placed the order for the Bombardiers and receiving them, the price of aviation turbine fuel went up by almost a half.

The next questionable decision was the deals the airline entered into with vendors and service providers, according to insiders in the company. They have over a period of time bogged down the finances of the company. When asked about them, a SpiceJet spokesperson said: “We will be looking to improve contracts wherever necessary.”

DEEP DISCOUNTS HURT

The airline's practice of giving deep discounts repeatedly to shore up volumes also hurt. Since January, according to one analyst, there have been 30-35 such offers.

Shabori Das, senior research analyst with Euromonitor International, said the company’s strategy to ensure every seat was booked worked brilliantly only in theory. “The airline did not want even a single seat to go empty. But when you are looking at a debt of Rs 1,400 crore, you need constant infusion of funds. Therefore, increased volumes sales does not always work,” Das said.

But the airline disagrees. “Our pricing and revenue management strategy has been exactly the right thing to do. It helped us reduce our year-on-year losses by 50 per cent in Q2 and fly record loads in the low season,” a spokesperson said.

SpiceJet also did not have an investor who stuck with the company for long. Even current promoter Kalanithi Maran’s investments into the airline have not helped much. The Rs 750 crore that the Sun TV boss paid to buy a 37.75 per cent in the airline in 2010 went to Wilbur Ross and Kansagra family, from whom the stakes were bought. Only when, Maran increased his stake by another 5 per cent for about Rs 130 crore in 2011, did the money go to the airline.

DGCA ACTION

But the irony is that Directorate General of Civil Aviation has pushed the airline to the brink just when it looked like it was getting its act together. Yes, it needs a cash infusion of over Rs 1,400 crore urgently, but the new management team under Chief Operating Officer Sanjiv Kapoor had begun to set things right.

During the second quarter, the airline had managed to cut its losses nearly 45 per cent to Rs 310.45 crore as revenues rose 15 per cent. Its market share increased 1 per cent to 20.9 per cent, second only to IndiGo.

Even the RASK (revenue per available seat km), an indicator of an airline’s financial health, has grown significantly. It stands at about Rs 4.2 per km, higher than some of the other airlines by as much as 60 paise.

Some of the initiatives taken by the new management include extensive retraining of customer-facing employees, keeping aircraft clean and tying up with TajSATS and Café Coffee Day to offer a completely new menu to passengers.

But with the DGCA imposing stringent curbs—including a ban on taking advance booking beyond a month—things have gone from bad to worse.

Such measures, according to analysts, may have kept investors away. “They are being more than proactive and should allow some breathing space,” said an analyst who did not want to be identified. “You can’t expect an airline to perform well if you clip its wings.”

Additional reporting by Anand Kalyanaraman

Published on December 16, 2014
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