Home >Companies >People >SpiceJet promoters open to diluting stake for strategic investors: Neil Mills

SpiceJet Ltd promoter Kalanithi Maran, who has a 52% stake in the airline, may divest a part of his holding by selling equity to long-term investors and not just foreign airlines, chief executive Neil Mills said in an interview, days after India’s second largest low-cost airline announced an unexpectedly huge loss for the year ended March. Edited excerpts:

You joined SpiceJet in October 2010, taking over from Sanjay Aggarwal. In fiscal years 2010 and 2011, the airline posted its first profits. By fiscal 2012 and 2013, the losses were 606 crore and 191 crore, respectively. What are your views on this?

From a loss point of view, there are significant macro-economic factors that have driven the loss position for the last two years. So, the one big thing that has changed is the fuel price, because the artificial pricing mechanism that is here artificially inflates the prices by 15%. What also changed was the rupee, it significantly weakened... what also happened in India is Kingfisher (Airlines Ltd) took far too long to die.

The conditions under the former CEO were much tougher because oil had peaked at $140 a barrel.

Well, there was no one single thing that turned the entire thing from bad to worse. But if you look, for instance, at our competitor like Jet (Airways India Ltd), which is the only other publicly listed company during this period, their results have been much worse than ours in each year.

You had said in 2010 that SpiceJet will have high utilization of assets and “we will make money". The utilization of SpiceJet aircraft in 2010 was 12.10 hours a day. Now it is 10.5 hours a day.

That is the mixture of utilization between Q400s and Boeing. The Boeing utilization is down marginally year-on-year but the Q400s is never gonna be the same as Boeing because if you are flying seven flights a day it will never be 12 hours, which will reduce your average.

With 20 aircraft, your maintenance cost in 2009-10 was 240.91 crore, which has gone up with 54 aircraft to 613.75 crore in 2012-13, when your fleet is fairly new. What explains this disproportionate increase?

The intense environment that we have in India is certainly having some impact on the engines, so I know certainly other carriers have seen exactly the same in India. Engines don’t last that long. And there is a big debate as to why that is. But it’s a fact. So the engine costs more than what one would have expected. That’s on the Boeing CFM engine. It gets overhauled probably about 20% earlier than expected. We will try and recover some of the cost from the manufacturer.

You had said you fought Ryanair for 12 years on cost (when Mills was with easyJet). Yet, SpiceJet’s cost per available seat kilometre (cask) in 2009-10 was 2.46; now it has gone up to 3.53.

You got a mix there of Qs and (Boeing’s) B737s, so cask on Q400s is always going to be higher as the aircraft is smaller. On a pure cask basis, you will see a difference between the two for sure. The cask cost, that’s actually sitting with Q400 fleet, will be higher but so will be rask (revenue per seat kilometre).

You had also said “the Q400 is a very good machine and if you put it against the ATRs, especially the very tired machines that you have in India". I understand Q400s have constant hydraulic failures, landing gear problems and control issues? These keep repeating. What do you have to say about the aircraft now?

There are some snags, sure. But it was a new aircraft type for us in the country; some of the snags will be to do with how experienced our guys are on the machine, but they have got a lot better. There were some known issues with the aircraft, and there are known issues with almost every aircraft type whether it has to do with bleed or with hydraulic pressure or leaks, etc. There are couple of issues that do keep reoccurring with the Qs. We are actively working on trying to get them fixed and trying to make sure that our guys have the right experience to deal with it.

Who is picking up these additional costs?

Majority of them is not us. Bombardier will pickup these costs for sure (as per their contracts).

You said Bombardier issues were known. If they were known, why would you buy this aircraft?

Because every aircraft has known issues. There is no perfect machine in the world.

Do you regret not buying tested ATRs used by most Indian airlines?

Not really. I think it’s just a challenge (with Q400s). But from a customer point of view, it’s a better product to fly. I don’t fly planes to make engineers happy. I fly aeroplanes to make customers happy.

Kalanithi Maran, the promoter, has pumped in 350 crore in SpiceJet in the last three fiscal years, and in two 796 crore have been lost. In a 2011 interview you had said, “It is not a bottomless pit. I’m not going to keep asking him for money because we are inefficient." What are your views on this now?

Interesting question. I don’t think at that point in time I envisaged the macro-economics factors to have gone against (the airline) to the degree that they did. It can be an interesting business and it’s a challenging environment. It is what it is. Do I still stick with that to say I don’t want to make it a bottomless pit? Yes, for sure. Do I think we can do something about it in the short term? Yes.

Does it worry you that you are still asking for promoter equity for the third year running?

But we have access to debt anyways. We don’t have to keep getting pure equity money all the time. At the moment we are okay, we have still have fixed deposits, but over the next couple of months we have to assess how much more we require.

Like other airlines, are you looking at a stake sale after FDI (foreign direct investment) was allowed in the sector?

We keep having discussions. We are not in any serious discussions with anyone but that can change very quickly.

That would be a foreign airline or a strategic investor?

What we have said all the way is that a strategic investor need not be exactly that. He needs to be someone who has a long-term alignment as well not someone who wants to just flip out the investment in a couple of years. Strategic investor on a pure financial basis will also be fine but as long as it is strategic. Strategic is more important than whether it is an airline or not. It’s more important that you have a long-term perspective rather than just a getting into and flip and get out again.

I understand you are talking with a strategic investor and not a foreign airline right now?

We are not going to get into that.

Has any foreign airline approached you?

Of course, the airlines will approach. But then a lot of airlines are just fishing anyways.

So something is likely this fiscal year?

It’s not a fiscal-driven issue, it’s a long-term partner alliance. It’s like getting married. You don’t do it in a hurry unless you are forced to. They (promoters) are open to talking about long-term strategic partner, whether they will be diluted, etc., but they are still supportive of the company long-term. That hasn’t changed.

How much will they be willing to be diluted?

That would depend on what the deal is. That’s up to the promoters.

Do you regret your decision of going for a discount sale in the last quarter, which was your idea? You posted 182 crore in losses in 90 days.

What we did was a very tactical sale to increase the load factors by a couple of percentage points. It was about 4 lakh (400,000) seats sold. Considering we fly 45,000 people a day it’s not a huge proportion of a quarter’s volume.

You made forward bookings cheaper, but rivals reacted by making immediate bookings cheaper and so the overall revenue per flight fell. Do you regret it now?

No, I don’t (laughs). The way they reacted I don’t understand how that is logical.

Some analysts say you would have lost a lot less without the sale? What was the motivation?

Maybe. As you can’t redo history. How do you know? You have to make the decisions based on the facts at that point in time. My concern was the loads. The demand going into that quarter was particularly weak. The fares were higher than historically but loads were very weak because discretionary travel had almost stopped. Airlines don’t have the right to keep bashing the customer on the head.

Two chief commercial officers have quit the company in the past 18 months.

The first one left for his own reasons. I am sure you will get more views from him than me.

You fly 54 aircraft to 55 destinations but most low-cost carriers (LCCs) prefer beating frequencies on one station before opening a new one.

Your research must have included Ryanair. It’s not unsuccessful. There are very different elements of LCC models across the world. Just because you have 12 frequencies one way (like rival IndiGo and Air India Ltd have) doesn’t mean you are full always. I remember a time in easyJet when we had 6-8 flights between London and Edinburgh; we dropped that to three because the cost base changed so people’s propensity to do that as often reduced.

Passenger feedback anecdotally points out that your airport and inflight services are deteriorating. Late last year you yourself landed in SpiceJet head office with some 200 pictures of torn carpets, aircraft seats and spot marks from your entire fleet network.

We have a progressive campaign to fix all of that. But the aircraft is in high utilization, so there will be issues from time to time. If you think about the sheer volumes of flights that we do with 45,000 people a day... I understand this is anecdotal feedback. I am not saying it’s perfect. We do have issues but we do have a clear campaign to fix that, but they won’t all be fixed everyday.

Except airports, salaries, lessors, most vendors like hotels, etc., are not being paid on time and the airline keeps changing its hotels because of this.

We use them to manage cash flow. It is as simple as that.

Which means there is a cash flow problem?

We make sure that the critical payments are made.

You have a finance background but some say it has left the operations and engineering sides of the airline weakened. Do you think the firm needs a chief operating office?

I think the fact that we have inducted as many aircraft that we have, and since I have been here we have grown from 140 flights to 370, shows that operations isn’t exactly not happening. We have enough pilots to fly all our flights now. Our on-time performance has been better than it’s ever been. So there are some engineering issues that have come up from time to time. I don’t think that’s because of lack of focus or anything. We do (need a COO) and we have been actively recruiting for, but issue there is in India is a challenging environment to get expats to come in.

You have been here as well.

It’s not been the easiest drive.

Did you meet all the KRAs (Key Result Areas) in your contract set out by Maran last year?

Well, obviously a big one of those was profitability and that was a bit of a challenge.

You plan to complete the term of your contract?

Who knows what will happen. Mine is a five-year contract till 2015.

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