Smaller aircraft to ferry SpiceJet’s regional push5 min read . Updated: 24 Feb 2011, 11:41 PM IST
Smaller aircraft to ferry SpiceJet’s regional push
Smaller aircraft to ferry SpiceJet’s regional push
Mumbai: India’s second largest low-fare carrier SpiceJet Ltd is equipping itself to fly to about 100 domestic destinations as it expands regional coverage even as it tries to remain profitable.
SpiceJet, controlled by media baron Kalanithi Maran of Sun TV Network Ltd, is altering its business model with the induction of fifteen 78-seater Bombardier Q400 turboprop aircraft in the 13-month period starting June.
The carrier’s fleet currently comprises 25 Boeing Co. 737 aircraft that have about 200 seats each. While using two aircraft types will push up engineering and training costs, analysts say SpiceJet may be onto something. They expect SpiceJet’s regional operations to be profitable, with each Q400 generating annual revenue of Rs31.64 crore in the next fiscal year.
Metro routes—connecting Delhi, Mumbai, Chennai, Hyderabad, Bangalore and Kolkata—account for 25% of the airline passenger traffic within India, the ninth largest civil aviation market in the world. However, the country’s three full-service carriers—Jet Airways (India) Ltd, Kingfisher Airlines Ltd and Air India Ltd —are increasingly focusing on smaller cities. That’s because of the untapped potential of regional destinations and as the metro routes are crowded with flights.
SpiceJet will buy 15 Bombardier Q400 planes with an option for another 15 at a total cost of $900 million (Rs4,086 crore), it had said on 2 November.
“SpiceJet’s latest strategy to become a regional carrier can incrementally add Rs1 earning per share (EPS) to fiscal 2013 earnings, and also raise operating margins from about 19-20% to 21-22% (from) fiscal 2014 onwards," wrote senior analysts Mahantesh Sabarad and Vijay Nara of domestic brokerage Fortune Equity Brokers (India) Ltd, on 22 February, after meeting the airline’s senior management.
Sabarad and Nara wrote that they expect the Q400s to boost operating profit by 52.2% in fiscal 2013. Once the 15 Q400s are deployed, EPS will rise by Rs1.59 from fiscal 2014, by their estimates.
SpiceJet’s chief executive officer Neil Mills said there was no shift in the business model and that the new strategy was in reaction to Indian infrastructure constraints.
“India has only 36 runways where a Boeing 737 can land. If you want to grow beyond that, you will have to access tier II and III cities and for that you need a different machine," he said. “With Bombardier Q400s, we will be able to land on 97 runways in India."
Mills said Bombardier Q400 operations should be profitable in the next two-three years.
“We will be announcing the schedule and network for Bombardier operations in the next one week to 10 days," he said. “We will fly routes of one to one-and-a-quarter hour" duration, distances that usually take about six hours by road and rail.
According to Airports Authority of India traffic statistics for April-November 2010, there are about 10 towns that see passenger traffic of 300-1,000 travellers per day. These include Ranchi, Madurai, Udaipur, Bhopal, Leh, Aurangabad, Dibrugarh, Rajkot, Tirupati and Silchar.
Nawal Taneja, professor and chairman, Ohio State University’s department of aviation, said connecting such emerging towns can add value to India’s economy. “The key question is about how SpiceJet would be able to implement it more efficiently," he said. “Inducting smaller planes and connecting smaller cities requires careful planning in terms of the integration of network, schedules and pricing,"
Taneja has 40 years of experience in the aviation business and has advised airlines across the world.
SpiceJet should select the right destinations, explore higher frequencies in terms of schedule management and price tickets based on the routes, he said. The optimization of these factors will be critical, he said.
Some rivals are sceptical about SpiceJet’s plans. They cite the two aircraft types and the decision to buy the Bombardier planes, which they said were bigger and more expensive than the ATRs used by others on regional routes.
“These are planes between ATRs and mid-size jets," said a senior Jet Airways official on condition of anonymity. “It appears to be tough to market 78-seater planes from these regional cities." Jet flies ATRs, which have about 62 seats, on regional routes.
Taneja said, however, that “the idea is not to avoid such complexity, but to manage it. If your benefits are higher than costs, and if passengers are willing to pay for that complexity because of higher value provided, then there is nothing wrong with complexity in your network system."
Asked about price of the planes and the twin aircraft types, Mills said the cost of operations would go up only marginally. “Bombardier is a machine in a different league and superior to other machines. The look and feel of these operations would be the same as SpiceJet’s narrow-body planes," Mills added.
Attempting to tap tier II and tier III cities is not a new idea. G.R. Gopinath, who founded India’s first low-fare carrier Air Deccan (since acquired by Kingfisher), had experimented with this.
“SpiceJet’s strategy is almost a rehash of Air Deccan’s strategy of serving the common man. Air Deccan’s initial (2003-06) experience did not go well in terms of profitability. What is different this time is that SpiceJet has a much healthier balance sheet and deeper pockets to sustain any shocks from a downturn," Sabarad and Nara wrote in their report.
Unlike Air Deccan, SpiceJet won’t need to spend heavily on route development as air travel has grown substantially since a decade ago, when Air Deccan started operations.
Ohio University’s Taneja said Air Deccan’s execution of the regional plan had been flawed.
Gopinath said, however, the the ATR operations of Kingfisher Airlines are profitable. Given that only 3% of Indians fly, it’s necessary to expand the network rather than restricting it to the metros.
SpiceJet’s strategy was also akin to that of Jet, said the airline’s official cited above.
“We do believe in this model. Identifying the potential of these smaller cities, we have added six more ATRs to take them to a total 20 since October," the Jet executive said. “We have now started focusing on the regional cities of north-eastern and southern India."
There are also parallels with Europe’s leading regional airline Flybe Group Plc, which connects smaller cities with Bombardier Q400s and Brazilian Embraer aircraft.
A 17 January investor presentation on the UK-based Flybe’s website said the key to its success was avoiding routes with a drive time of less than 3.5 hours and those connected by high-speed trains.
Sabarad and Nara said SpiceJet can break even at 70% seat occupancy; Flybe does so at 62.4%. SpiceJet should follow the Flybe strategy of running high-frequency services—50% of its capacity serves a route four times daily. All told, 80% of its capacity serves a route twice daily, they added.