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Business News/ Companies / News/  SpiceJet now on road to recovery: COO Sanjiv Kapoor
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SpiceJet now on road to recovery: COO Sanjiv Kapoor

SpiceJet has been hit by a cash crunch, a CBI probe of Marans and flak from the DGCA but Kapoor said things are now coming together for the airline

COO Sanjiv Kapoor says a new business model, focus on costs, an emphasis on better customer service, and some money from its promoters has put SpiceJet on the path of recovery. Photo: ReutersPremium
COO Sanjiv Kapoor says a new business model, focus on costs, an emphasis on better customer service, and some money from its promoters has put SpiceJet on the path of recovery. Photo: Reuters

A new business model, focus on costs, an emphasis on better customer service, and some money from its promoters has put the Gurgaon-headquartered low-cost airline SpiceJet Ltd on the path to recovery, a top executive said.

SpiceJet has been hit by a cash crunch, a Central Bureau of Investigation (CBI) probe of its owners, the Marans, over an issue unrelated to the airline, and regulatory flak from the Directorate General of Civil Aviation (DGCA), but its chief operating officer (COO) Sanjiv Kapoor, who wouldn’t comment on issues related to the Marans, plans to raise money from a strategic investor, or trouble with the tax department (the airline didn’t deposit the amount deducted as tax from employee salaries with the government) and the regulator, said things seem to be coming together for the airline.

Indeed, some of that is evident in the numbers. For the third month running, SpiceJet had the highest load factor (or the proportion of seats filled). The airline has been working on making sure its flights are on time and, more importantly, safe. And the Marans have committed to investing nearly 300 crore more in the company in six equal instalments, with the first in September.

The airline reported a 124 crore loss in the June quarter, following a record 1,000 crore loss in 2013-14, but it hopes to improve its fortunes in the coming months, helped by a new strategy, a stronger rupee and cheaper oil.

“It’s been an eventful year. When we started we were coming out of our worst-ever quarter which culminated into a (worst) year. It’s never easy to turn an airline around; it doesn’t happen in weeks or months, it takes at least 18-24 months, sometimes longer. Now 11 months into it, the foundation is in place and the green shoots are starting to become visible," Kapoor, who completes a year at the airline in October, said in an interview.

“The situation at SpiceJet continues to be very challenging and difficult, but efforts to make the front-end look good seem visible," Kapil Kaul, South Asia CEO of consulting firm Capa Centre for Aviation, said.

Kaul puts his finger on the one thing SpiceJet desperately needs.

“A decisive re-capitalization, long overdue, is critical. Don’t see turnaround without adequate funding realistic."

Kapoor wouldn’t comment on the airline’s efforts to find a strategic investor beyond saying that this was being handled out of Chennai, where the Sun Group of the Marans is based.

“Someone with a long-term view and who wants to crash the time to ‘go to market’ might see the merit of partnering with us. For the record, we remain open to the idea of inducting a strategic partner," S.L. Narayanan, group chief financial officer at Sun Group, said on 25 August.

Meanwhile, SpiceJet is doing all it can operationally.

That includes what Kapoor and chief commercial officer Kaneswaran Avili term “stimulating the market".

Since January, SpiceJet has sold tickets well in advance, and at a significantly low price. That has helped it put more passengers on planes.

It’s a sound strategy, Avili said, because if you don’t do this “you are basically taking a gamble that demand will be there and you are going empty (into that year), hoping that demand would come and with everyone adding capacity you are basically going in blind".

SpiceJet has surpassed market leader IndiGo in occupancy for the three months ended August. Its occupancy stood at 82.5% in August, compared with 79.4% in July. IndiGo’s occupancy was 74.8%, compared with 67% in July.

Globally, a 75-80% occupancy makes profit for airlines but Kapoor is cautious on that figure.

“At 80%, it doesn’t by itself means we are profitable. Eighty percent can be reached in two ways—if demand is very high and we can sell fares high at 80%, or by stimulating demand, but either way you are going to make sure that the revenue for that aircraft is more than it would be if you are not stimulating the market, which is where unit revenue RASK (revenue per available seat-kilometre) comes in, and our RASK is nearly up double digits in the last quarter and in double digit in the ongoing quarter. CASK(cost per available seat-kilometre) had gone up, then it’s started to flatten and it is coming down and we started to see the early signs of it," Kapoor.

The sales have also helped the airline overcome the concept of seasonality, he added.

SpiceJet said that instead of going in blind, it is now entering a month with 45% occupancy (because of the advance sales) from 25% earlier.

Globally, airlines sell tickets at cheaper prices for those booking months in advance; the cost of tickets close to the date of travel are many times steeper.

In India, competition has taken a toll on this. For instance, a Delhi-Mumbai economy ticket booked a day ahead of travel used to sell for around 10,200 last year; this has shrunk to around 5,000-6,000.

SpiceJet moved to this model in January (it is currently selling tickets for next January).

In June, the gap between RASK and CASK turned positive, Kapoor said.

“We are hoping—absent any unforeseen events, shocks—if we were to start measuring next quarter, October-December, and then look back 12 months (after that), you mark that period when the turnaround became visible," added Kapoor.

Part of SpiceJet’s strategy also involves consolidating its fleet size. SpiceJet has a fleet of about 49 aircraft with around 340 daily flights. Kapoor says it will keep its fleet at this size for a year. “We don’t want to grow until next summer. Then, (we will grow at the) secular rate of growth."

It is also consolidating its employee strength at just short of 5,000, a number Kapoor hopes to reach by early next year by “attrition and performance (measures)". “We are not resorting to layoffs," he added. SpiceJet currently employs around 5,250 people.

Meanwhile, SpiceJet has to contend with intense and soon-to-increase competition.

Jet Airways (India) Ltd, India’s second largest airline by domestic marketshare, which so far had abstained from jumping into fare wars, has started matching SpiceJet fares in the past few weeks and offers free meals, in-flight entertainment (on some flights) and the opportunity to earn miles in its new alliance with Etihad Airways PJSC.

SpiceJet has a 19.5% share of the market currently. IndiGo, with 32.6%, was the market leader in August but Jet Airways’ market share, at 20.1%, was not very far from SpiceJet’s. AirAsia India and Tata-Singapore Airlines’ Vistara will also add more competition this fiscal but Kapoor said he isn’t particularly perturbed.

“AirAsia is filling 69-71% of the seats; in the first month they filled 80% when they had 5 fares," he said, “So even an AirAsia is finding that it’s not that easy to make inroads and gain share, etc".

Ultimately, though, SpiceJet’s fortunes depend on its ability to raise money. Capa says the airline requires around 1,200 crore of capital infusion.

“What the promoters have put in is very helpful, but it is not enough. So clearly there is a need for more capital and we are obviously doing something about it," Kapoor said, declining further comment on the issue.

India’s civil aviation ministry has also granted licences to six new airlines, and Narayanan said on 25 August that raising money had indeed become tougher in this context. Still, Kapoor insists there are many things going for SpiceJet, compared with a new entrant.

“We have tremendous reach...we have a brand which is improving in perception, we have talent, we have skilled workforce; more importantly we have slots, parking bays...and we are cheap," he said. “Starting a new airline and getting to where we are is going to cost a lot more money."

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Published: 22 Sep 2014, 11:47 PM IST
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