‘We are playing the game of last man standing'

He spent 12 years at EasyJet when it was growing at a scorching pace and later helped start up low-cost Middle-east carrier, flydubai; yet for 40-year old Neil Raymond Mills, this could be his toughest assignment yet. He moved in as CEO of SpiceJet in October last, just as the airline was flying into difficult times. Challenged now by high fuel costs, mounting losses and competition that is bent on taking fares to unsustainably low levels, Mr Mills has to leverage all his financial training and skills to help SpiceJet fly out of turbulence. Business Line caught up with him at Toronto soon after SpiceJet took delivery of its first Bombardier Q400 NextGen aircraft. Excerpts from the chat on a tour bus headed towards Niagara Falls:

Q: You said in your speech today that SpiceJet is not a regional carrier. Can you elaborate?

A; Regional carriers have certain characteristics if you look at them worldwide. They usually have poor volumes, the utilisation of the aircraft tends to be quite low and they don't tend to make any money. On all three aspects we don't fit at all. We will want high volumes, we will have high utilisation of assets and we will make money. So we are a low-cost carrier that happens to be flying into regional markets. That's the difference. Regionals are usually feeders of big flight carriers and unfortunately they tend to be the poor relative in the relationship and therefore don't make money. We are not like that. If I could have flown into some of these smaller markets with a Boeing and kept the business simple, that's exactly what I would have done. I can't because of the infrastructure constraints and I needed a different machine. And it's not a different business it's just an extension of what we do today with a different machine. If I could have flown Hyderabad-Vijayawada with a Boeing, I probably would have taken the cost penalty but kept the complexity out of the business. You get a lower seat cost on a Boeing than you would ever get on any other aircraft.

Q: With oil prices projected to remain strong, what are the options for airline companies to manage the situation?

A: The option we have is obviously to manage the asset as best as we can. So even a one or two per cent reduction in fuel burn is important and we are doing everything we can to fly the aircraft as smartly as we can to keep the fuel burn as low as possible. We monitor the fuel burn very closely and we track the fuel burn per aircraft per hour every month. So we monitor to literally that level and we have four aircraft at the moment that are on the watch list whose fuel burn is higher than the rest. We are looking at what is specifically wrong with these aircraft. We are looking at revising our tankering policies, single engine taxis…. None of these will make you rich, but every bit will help just that little bit. There is no silver bullet in the low-cost business; there is no one thing that will help. But each little thing you do adds up and over time the solution is found. The one thing about cost in a low-cost carrier is it never ends. It is a continuing exercise and should be a part of the DNA. If you have a carrier that says we are going to cut costs now, it is an exercise doomed to failure by design, because it means as business it is not part of your DNA to save costs. It will be a short-term fix, that's all.

Q: Is oil price hedging a part of your strategy?

A: I believe in hedging in principle, but in India since the market is artificial in pricing, it is not really something that you can do. You will be actually hedging against Singapore crude and with the margin above Singapore crude that you are getting now, I would actually be locking in at a price of $120-125 a barrel. It is not a practical option in India.

Q: You have been quoted as saying that competition is dropping prices to unsustainable levels. How do you cope with this kind of competition?

A: We are trying to keep our cost base as low as possible. We are the operator with the lowest cost in India today and as you would see in our last published results, we have brought our cost per seat down by five per cent. We are doing everything we can. We manage the fuel cost as much as we can. Pricing will be dictated by the market and we can survive in the short-term to medium-term with a few bad quarters. But really, the game we are playing is ‘last man standing' and we are okay with it. And our promoters are okay with it as well as you can see from the announcement today that they are picking up another 5 per cent in the company at a price of somewhere around Rs 36 a share when the market price is Rs 22, a premium to get a preferential allotment. That's because of the confidence in the business and the confidence that bringing money into the business is good investment.

Q: So what you are essentially saying is that you will keep bringing in capital to sustain the business?

A: Yes, and it is not a bottomless pit. I'm not going to keep asking him for money because we are inefficient or that we don't make money. But this is really a time when the promoter is showing his confidence in the business model. May be some of the other promoters should be looking to do the same thing. We were looking at a rights issue, but this is not the time in the market. Who will participate now? It is for the promoters to step up and say: “I have confidence in the business, I will support it through the tough times.”

Q: Given the bad balance- sheets of some of your competitors, do you see a shake-out in the offing?

A: Whether there will be consolidation post the collapse, I'm not sure about that. Should there be a collapse? Well, some of the balance sheets are horrible, absolutely horrible. I'm a finance guy and having any part of that balance sheet would scare me. Some of them are at the point where even servicing the interest bills is difficult. One of them has an interest bill that needs a 12-per-cent margin to service and in the airline business, during the best of times you get a four-six per cent margin. How are you going to service that load?

Q: So are you saying that there is no way that these guys can keep standing?

A: I'm not saying that, but I don't know how I can keep them standing if I were in that role. That's all I will say.

Q: Is the government making your job more difficult with some of its regulations such as no extra charge for preferred seats?

A: It is not appropriate for me to comment when the government is going through tough times of its own at the moment.

Q: Okay, what would you look for as help from the government at this juncture?

A: I would prefer to see them step out of the industry; just leave it alone. Let the free market economy do its job. Don't overtax the industry, don't over-regulate it. Let us get on with it. If we kick the hell out of each other, that's fine. That is what free market is all about. The consumer does well because the pricing would become lower particularly in the short-to medium- term and we would all become better businesses by having to deal with competition. That is what it should be ideally and is not going to happen tomorrow. But that is where we should be heading for — total deregulation. The government should be involved as regulator to make sure we remain honest, to make sure that we stay safe.

Q: Some of your competitors have placed big orders for jet aircraft. Do you think the entry of more capacity will aggravate the situation?

A: The majority of the aircraft don't come into the market for several years; at least three-four years. And they have to survive to introduce these aircraft. Their balance sheet commitment for the orders is enormous. To take a fixed commitment for seven times your current operating fleet is rare. The signature money you pay is not much, just a per cent or so. Where it starts getting significant is two years before the delivery. Then the numbers start getting interesting. You will have to pay probably 6 per cent two years before delivery, another 6 per cent 21 months to delivery, another 6 per cent at 18 months… remember, you will probably be taking delivery at monthly intervals. So huge sums become payable on a monthly basis.

Q: Is there a market at all for so many seats even if between the metros?

A: The market is definitely there as long as pricing is sensible. The free market will sort it out anyway. So don't overburden the market with high taxes on fuel of 23-24 per cent and let the volumes grow. If the government drops taxes on fuel to 10-12 per cent, I predict that in three years the market will double; so you are back to the same level of revenues and have a much better, sustainable economy.

Q: When do you think the new Q400s will start paying back? Are the margins on the regional routes better than on the trunk routes?

A: I'll go back to my earlier point that these are not regional routes. These are just different routes for us. Competition dynamics will be different here, so we may be able to achieve better pricing just because the level of head-to-head competition will be different. Even if we have head-to-head competition, the product is not comparable. The Q400 is a very good machine and if you put it against the ATRs, especially the very tired machines that you have in India today, it is very superior. So we should have better margins and I think it will start paying back from the middle of the second year of operations. That any way depends on the pricing we are able to get in the market.

Q: What's been your experience in flying international routes till now?

A: We are fine. Volume is not a problem. On both routes we are running just under 80 per cent capacity. Pricing is an issue not because of the revenue, but because of the costs on these routes. The local ground handling agencies are charging ridiculously high sums and we have to go back to tell them that the pricing has to be more sensible.

Q: Any thoughts on new routes?

We are looking at options. We have applied for another ten new routes to the government and depending on what comes back, we can then decide whether it's something we want to operate or not.

Q: What is the outlook for the next couple of quarters?

A: It's a tough environment and the only comfort, hollow comfort, is that our losses in the last two quarters are relatively less than that of competitors. Even on a proportional basis, we seem to be doing okay and that's all we will try to do. As I said, it comes back to last man standing. It's a game I don't particularly want to play, but am quite happy to play considering the relative position that we have. If I have to play this game, then I rather have the balance-sheet that I do rather than that of my competitors.

Q: SpiceJet seems to have vacated the space of being a sought-after low-cost carrier to Indigo. What is your take?

A: Indigo is a good competitor. That SpiceJet is now smaller than Indigo is SpiceJet's fault, not Indigo's. SpiceJet went through too many management and shareholder changes in too short a time. It lost focus in delivering as a business. But the focus is back now, in the last four months we have grown 42 per cent. Are we trying to play catch up? No. We'll make sure that we are competitive.

Q: What do you think of some of the proposals that have come from Ryanair to further cut costs?

A: I competed against Ryanair for 12 years. Very good competitor, but ruthless on costs. For them, passengers are self-loading freight! As long as you know that and agree with that you will get a really good deal time after time. Don't ask for anything and you won't be disappointed, but they will take you to your destination safely and on time, 98 per cent of the time. But that model will not work in India.

Q: What about the idea of standing passengers in flights?

A: That's nonsense. Most of what Ryanair says is meant to attract press coverage. The fact that you are talking about this in a bus to Niagara Falls in Canada shows how successful they are!

COMMENT NOW