SpiceJet turnaround still a work in progress: Ajay Singh4 min read . Updated: 22 Feb 2016, 02:28 PM IST
Airline expects to clear legacy issues over the next six months and expand its network back to pre-2014 level
Mumbai: SpiceJet Ltd will see a meaningful turnaround by the end of the next financial year as India’s second largest low-fare airline expects to clear legacy issues over the next six months and expand its network back to what it was before it hit a rough patch in December 2014.
Back then, a financial crisis had forced SpiceJet to cut its fleet size and cancel flights to conserve funds. In February 2015, Ajay Singh, a co-founder of SpiceJet who had exited the airline in 2010, bought back majority equity and started work to turn around the airline.
In an interview on Friday, chairman and managing director Singh said the turnaround is “still a work in progress" even though the airline has reported four consecutive profitable quarters. “The turnaround process is not yet complete. We have done with some parts of it. We still have some sticky legacy costs such as old aircraft acquisition costs, aircraft lease cost and cost of heavy maintenance," he said.
Singh said the airline will need to incur some additional costs in the short term to scale up. It plans to augment capacity by 10% each in the summer and winter schedules.
The SpiceJet management is working on three strategies to complete the turnaround.
The first of these will be placing a large aircraft order with either Boeing Co. of the US or Airbus SAS of Europe on better terms. SpiceJet has 25 Boeing 737NG and two Airbus A320 aircraft along with 14 Bombardier Q400s, made by Canadian plane maker Bombardier Inc.
The original plan was to place an order for around 150 planes by the end of this financial year.
“This might be a little delayed by 15-20 days. There is no point in rushing to place order if the airline is not getting good terms and conditions as it is going to impact its long-term plans," said Singh, adding that these planes are going to be with the airline for at least the next 10 years. Hence, it is important to have the right cost structure.
A second part of the plan is to enter into favourable maintenance agreements with vendors after the aircraft order, as the airline would have a large fleet and can dictate better terms.
For instance, IndiGo, run by InterGlobe Aviation Ltd, has kept its maintenance costs low for the past few years as it has a huge order book to support. IndiGo, which got listed recently, is the most profitable airline in India.
“Thirdly, SpiceJet is focusing on ancillary revenues. In December 2014, our ancillary revenues were just 6% of the total revenues. Now, that is 16%. We have plans to increase it further through various products such as cargo, selling vacations, on-board sale and other products," Singh said.
Kapil Kaul, chief executive officer (South Asia) at consultancy firm CAPA India, endorsed the improvement in SpiceJet’s recent financials. He expects to see further improvement in all key areas at the airline, including operational capability, cost and revenue quality.
In January, for the ninth consecutive month in a row, SpiceJet recorded the highest passenger load factor of all airlines at 92.1%. The cancellation rate at SpiceJet was at 0.5%—the lowest of all pan-India operators.
According to Kaul, SpiceJet needs to address issues such as operational capability, costs and productivity, route network model, revenue management and people development to ensure a structural turnaround.
“Post confirmation of the new fleet order, a new long-term business plan with clear goals will emerge. Capitalization and management quality across the organization, especially at the top, or further change in culture and business practices, especially to deliver pay for performance culture, separation of promoter and management roles are some of the measures required to further strengthen and stabilize SpiceJet," Kaul said.
In the meantime, Singh wants to take SpiceJet not just to where it was, but beyond that as well.
“For that, we need to go back to basics. SpiceJet was known for getting basics of a low-fare airline right. We used to fly to large number of destinations with on-time performance and warm services. We are getting most of the things back," Singh said.
Asked about phasing out its Bombardier planes to have a common fleet, Singh said he had inherited 14 Bombardier planes and he needs to utilize them.
In 2011, SpiceJet decided to alter its business model from a single-type fleet and buy the 78-seater Q400 turboprop aircraft to connect regional towns.
Using two aircraft types pushes up engineering and training costs.
“Since last two quarters, both types of fleets have become profitable. We are examining the possibilities. Before taking a call on Bombardier planes, we will focus on the type of narrow-bodied planes, Boeing or Airbus," Singh said.
The turnaround, along with favourable developments like low oil prices, have pushed up the stock price of SpiceJet. Since 16 December 2014, when trouble at SpiceJet was at its peak, the stock has gained 392% till date.
Singh said he is not particularly concerned about the markets. “Stock market will encourage if we do better and punish for doing bad. My mantra is to stay focused without considering share price movement," he said.
However, he clarified that SpiceJet has no plans to dilute equity stake at the moment or bring in a private equity investor.
“We are generating sufficient cash for working capital and to meet the funding requirements to place initial payments towards aircraft acquisition. Also, we have not utilized banks’ credit limits as of now," he said.