Mumbai: In July 2008, oil prices were at $145 (Rs6,800 today) a barrel. Indian airlines, like their global counterparts, were reeling under losses, given that jet fuel accounts for 45% of their operating costs.
It was in this environment that Wilbur L. Ross Jr, chairman and chief executive officer of the eponymous New York-based private equity fund WL Ross and Co. Llc, decided to invest $80 million in Gurgaon-based low-fare carrier SpiceJet Ltd; his bet was that crude would fall to $90 a barrel.
Ross, known for his skill in turning around distressed firms, also persuaded the investment banking arm of Goldman Sachs to invest $20 million in the airline.
In the fiscal that ended 31 March, SpiceJet posted a net profit of Rs61.4 crore, and was the only Indian airline to return profits that year.
In June, Ross, who entered SpiceJet at Rs25 a share, sold his stake to Chennai-based media baron Kalanithi Maran of Sun TV Network Ltd, at Rs47.25 a share, a profit of 89%. Overall, Maran bought a 37.75% stake in SpiceJet from Ross and Bhupendra (Bhulo) Kansagra, the airline’s promoter.
In an email interview, Ross told Mint he will not invest in any Indian carrier in the near future, having signed a non-compete agreement with Maran.
As for the industry, he said it must consolidate to be able to cut costs. Edited excerpts:
How was the SpiceJet experience? What were the strategies that you adopted to turn around a loss-making airline?
It was a great thrill to see our two original strategies work. We entered SpiceJet when oil prices were peaking, on the theory that they would decline sharply, relieving the pressure on low-cost carrier costs. Our second theory was that (chief executive) Sanjay Aggarwal would be able to reduce the airline’s controllable costs and to increase market share.
Could you please share some interesting attempts you made in this process?
It was really lots of little steps rather than one gigantic one, but in general it was improving the experience passengers had when flying SpiceJet.
Are you happy with the current status of SpiceJet? Where do you want it to grow?
The addition of international routes will be a major step, involving more aircraft and even more sophisticated operational and marketing management.
Did you face any challenges in doing this?
The most complex parts were dealing simultaneously with the airline regulators and competitive challenges.
How profitable was your investment?
The conversion price was Rs25 and the selling price was at Rs47.25.
Any regrets in this deal?
My only regret is that we will no longer be involved, except that I will naturally fly SpiceJet when I travel to India.
Given a chance, would you invest in any other airline in India?
The buyer required us to sign a non-compete agreement.
Any key lessons from an airline investment in India?
There are too many airlines. Consolidation would save a lot of costs and would benefit both the flying public and the airline industry.
What is your outlook for Indian aviation?
As the economy continues to grow and as per capita income grows, air travel will continue to expand rapidly because the distances among cities are large and the airports are being improved.
Any lessons from the Indian aviation market?
We have learned a lot since we entered the Indian market and continue to be optimistic about the long-term outlook for the country and for its stock markets.