The last five years has been nothing short of tumultuous for SpiceJet. Having undergone a back-from-the-dead fairytale after surviving a near collapse in 2014, the airline has completed its turnaround, with a clear focus to keep growing.
In an unforgiving domestic sector crowded with around 10 established players, SpiceJet is one of four low-cost carriers that also compete with full-service stalwarts such as Air India and Jet Airways, as well as start-ups like Vistara. Data from India’s Directorate General of Civil Aviation shows that SpiceJet has, over the past three years, consistently been ranked among India’s top five airlines in terms of domestic market share.
With two consecutive years of profits under its belt, scars from the carrier's near-death experience are starting to fade. Its rise-from-the-ashes story has one man to thank – founder Ajay Singh.
Bryan van der Beek
At SpiceJet's headquarters in Gurgaon, New Delhi, the 52-year-old tells FlightGlobal he started SpiceJet in 2004 because he saw "a great need for maturity" in Indian aviation. Then, about 16 million people commuted daily by train in India – about the same as the number of air passengers in an entire year.
In the telecommunications industry at that time, the entrepreneur saw "a golden opportunity" – and seized it.
"We had seen the impact of reducing tariffs to generate demand [in the telecommunications sector]. Therefore, it seemed to me that if you had a model where cost in aviation was kept low and tickets were sold at a reasonable price, there would be immense demand in this country," he recalls.
"That model seemed to exist in Europe with Ryanair and EasyJet and at Southwest Airlines in the United States. I thought there was a possibility of replicating those models [in India]."
DARKEST DAYS
Although SpiceJet was loss-making in its initial years of operations, the carrier was profitable before its ownership change in 2010. The next four years, however, saw its performance go downhill.
Indian media tycoon Kalanithi Maran, through KAL Airways, which was part of his Sun Group conglomerate, initially held a 38.7% stake in the carrier in 2010. Maran and KAL's stake, however, ballooned to 86.2% by 2014 after aggressive share acquisitions.
By 2010, Singh held only a 4.13% stake in the carrier he founded. He eventually exited SpiceJet after selling that stake in the open market.
By 2014, SpiceJet had amassed losses totalling over $360 million. To compound the situation, the carrier had at its peak in the same year, carried a debt of around Rs20.2 billion ($310 million). The airline was eventually grounded on 16 December 2014 after it had to cancel 230 flights, largely due to companies refusing to refuel its aircraft on account of payment defaults.
The carrier did not stay on the ground for long. Partial operations resumed three days later when Singh returned as SpiceJet's white knight, backed by private equity. Had SpiceJet been permanently grounded, it would have become the second major Indian carrier to collapse in three years, following the demise of Kingfisher Airlines in 2012.
Bryan van der Beek
Singh says that when SpiceJet was sold to Maran, it was profitable and also had "significant reserves". He also reveals that he was approached by Maran to buy back the airline as there were plans for it to shut down.
"I felt there was still a great potential that still existed in the aviation sector. Even at that time, there was still less than 3% of people flying in the country. There was an opportunity and the market could still grow. SpiceJet was a brand that most people in the country already knew, and therefore, it would be relatively easy for me to take that brand forward [rather] than to start something else," he says.
"A little bit of it was also emotional – it was a brand that I helped start and it was painful to see the brand fall into such disarray. I wanted to make sure the brand survived."
When Singh started his second stint with SpiceJet in fiscal 2015, the carrier had a total debt of around Rs17.1 billion. By fiscal 2017, that figure was reduced to Rs9.5 billion.
FROM THE ASHES
Upon his return, Singh’s top priority was to restore the airline's credibility. There was an urgent need to instill confidence in passengers that the airline was there to stay, and to clearly communicate the steps being taken to remain airborne.
"Nobody wanted to book seats or do business with us, be it partners or suppliers… We had to explain to people our plan [to restart full operations]. Why would they book tickets in advance if they felt the airline was not going to be there?"
The airline chief also made the decision to wet-lease several aircraft in the initial phase of the restart, which though an "expensive option", was necessary to "maintain the sanity" of its schedules.
The next step was to lower the cost of operations that had soared in the preceding years, and to increase its revenue and load factors. To that end, it had to renegotiate engineering and fuel contracts; consolidate its network by quickly axing unprofitable routes; and implement measures to boost ancillary revenues.
For fiscal 2017, SpiceJet's CASK ex-fuel stood at Rs2.43 ($0.04), down 20% from a year ago. Its RASK, meanwhile, came in at Rs3.76. Ancillary revenues made up 15% of its total income, up from a mere 5% when the carrier was first launched.
Aircraft utilisation has also risen, with its Boeing 737 fleet operating more than 13h daily and its Bombardier Q400 turboprops logging more than 11h. The carrier adds that its load factors have been over 90% for the past 33 months, and that its on-time performance is also among the best in India.
Bryan van der Beek
Singh says SpiceJet’s "resounding" financials are proof that it has learnt from past experiences. While the carrier has not released its full 2018 financials, the first nine months ended 31 December 2017 saw it post an operating profit of Rs5.2 billion, up 48.5% year-on-year. Net profit was Rs5.2 billion, up 34%.
Since taking over from Maran, Singh has led SpiceJet to record full-year net profits of $69 million and $64 million in fiscal 2016 and 2017, respectively.
"It is about the basics – you need to get your operations right; continuously work to reduce CASK; continuously work on increasing the RASK. But ultimately, it's about credibility and confidence. You need to make sure that you live up to the commitments made to the public, and at the same time infuse confidence in your own team and partners that there is a bright future ahead."
NEW AIRCRAFT
Singh believes that India's aviation market still has a long way to go to reach its full potential – particularly on the international sectors, since there is growing affluence among the middle class. As such, SpiceJet is "seriously looking" at soaring its wings beyond the 7h mark.
He shares that there is a dedicated team within its revenue department studying further international expansion, and that the carrier is keen to reach more points within Southeast Asia, as well as make its first foray into Europe.
FlightGlobal schedules data shows that SpiceJet predominately operates domestic services, although its network also reaches Bangkok, Dubai, Muscat, Kabul, Colombo and Male.
"We will only [have more international services] if we can bring cost down to a level [middle-class passengers] can afford and we can be profitable. India is a strategic location between ASEAN and African countries where economies are growing, and Europe where there are traditional holiday destinations."
Singh has pointed out the Boeing 787 and Airbus A350 as suitable types with which to start intercontinental services, but says their price tags have thus far prevented such a move. Now, the broad plan is to start long-haul international services only after the airline receives most of its outstanding aircraft orders.
Flight Fleets Analyzer shows the carrier has 60 aircraft in service, comprising 38 737NGs and 22 Q400s. It is set to grow exponentially with its backlog of 167 aircraft (122 737 Max 8s, 20 737 Max 10s and 25 Q400s) on order.
Delivery of the Max will start from August and the carrier plans to add up to 15 of the narrowbody type, as well as six to nine Q400s by the end of 2018. For the next two years, it will take about 25 737s and 15 Q400s through sale-and-leasebacks. Financing options for deliveries from 2020 are still being looked at.
The carrier is also sitting on a letter of intent for 20 additional Max 10s, with options for 50 units of an unspecified type (widely reported to be widebodies) and 25 Q400s. Should its LOIs be fully exercised, SpiceJet would have a total orderbook of around 260 aircraft.
However, it still needs to catch up to match the scale of its largest low-cost rival, IndiGo. Flight Fleets Analzyer shows IndiGo operates a fleet of 156 A320s and ATR 72s and has a staggering 398 more aircraft on order. On the full-service front, dominant players Air India and Jet Airways operate a fleet of 129 and 119 aircraft, respectively.
HAMPERED BY AIRPORTS
Despite the optimism in SpiceJet's own ambitions, Singh laments India's failure to keep its airport infrastructure competitive against the likes of Dubai and Singapore – particularly in the area of transforming its gateways into major air hubs.
For years, India has seen hub leakage to Dubai International airport (on to Europe and the USA) and Singapore’s Changi airport (on to Southeast Asia and Australia), and Singh firmly believes "the time is right" for India to build its own international hubs.
Bryan van der Beek
"There was no real plan from private and government-owned players to compete with the international hubs. No other base carriers took advantage of Air India's growing weaknesses as a hub carrier. But with Air India's privatisation, other full-service and low-cost airlines looking at long-haul low-cost operations need to ensure enough domestic capacity to hub out of India."
He points to India's metro airports such as those in Delhi, Bengaluru and Hyderabad, as well as the upcoming Navi-Mumbai International, not only as international hub options, but also as growth opportunities for SpiceJet.
In the near term, the majority of India's airports are expected to have greater domestic links, especially to tier-two and tier-three destinations that have seen an economic boom. Connections will also be boosted by the country’s Regional Connectivity Scheme (RCS) – launched in October 2016 with the objective of facilitating and stimulating regional air connectivity by making air travel more affordable.
To date, the airline has launched four routes under the scheme, and Singh says he is "very happy" with their performance and yields that have done “very well”.
"We had expected that the routes would pick up over several months, but they have picked up much faster than that," he continues. "Our RCS routes have been operating at around 90%-plus load factor. The three-year exclusivity [for each RCS route] has been useful for us. We also wanted first-mover advantage given the amount of growth in such areas. Should there be a third round of RCS bidding, we will definitely do it."
SpiceJet's network strategy is to focus on profitability and to launch services on potentially high-yield routes that can feed into its hubs.
LONG-TERM VISION
In the meantime, Singh says he has been trying to instill a culture of freedom and independence within the company, while preserving “the mentality of a start-up”.
"We have key people in revenue, finance and airports [departments] who run it like it is their own business. They do not refer to me other than for broad directions. But we should not get too complacent and need to consistently work at reducing cost and increasing revenue. There must always be a little sense of desperation in the company."
With a staff-strength of around 8,000, the carrier is also planning for its future manpower needs. It is building its own training campus, which will be completed by the end of the next financial year. The facility is expected to reduce training costs by half.
While Singh is open to potential foreign investments into the carrier, he says there is no rush on account of the carrier's healthy profits over the past years.
Looking ahead, he also rules out any form of early exit: "I am here for the long term. This is a great business to be in, there are many opportunities still around. I would like to be here for the foreseeable future."
Source: Cirium Dashboard
