Today, India, for the size that it is, has only four airlines that fly international: Full service carriers (FSCs) Air India and its subsidiaries, and Jet Airways, and Low cost carriers (LCCs) SpiceJet and IndiGo. This is in contrast to the 10 airlines that operate domestic scheduled services in India, today. While Indian carriers flew 81 million domestic passengers in calendar year 2015 (CY2015), Indian carriers flew only 18 million passengers in the same period.
Only two airlines/airline groups operate short, medium and long haul international services: Air India and Jet Airways. Both airlines have diverse fleets: from short haul domestic ATR 72 turboprops to long haul international Boeing 777s. The LCCs in contrast have narrowbody jets that can cater only to short haul international services.
Due to the limitations of fleet and perhaps the lack of commercially attractive international destinations, LCCs IndiGo and SpiceJet deployed only 4.8% and 9.5% of their total flights on international, in CY2015. In contrast, Jet Airways (Including operations from the Jetlite AOP) deployed 22.1%, while Air India (Including Air India Express and Air India Regional (Alliance)) deployed 32.7% of its total flights on international. Air India and Jet Airways together contribute to 84.5% of all international departures by Indian carriers, while IndiGo and SpiceJet contribute to just 8.8% and 6.8% respectively.
This statistic shows IndiGo and SpiceJet are very small players in the international front, serving destinations at neighbouring countries. IndiGo operates only to five international destinations: Kathmandu (Nepal), Muscat (Oman), Singapore (Singapore), Bangkok (Thailand), and Dubai (U.A.E.), while SpiceJet operates only to six international destinations: Bangkok (Thailand), Colombo (Sri Lanka), Dubai (U.A.E), Kabul (Afghanistan), Male (Maldives), and Muscat (Oman).
Air India and Jet Airways started operations before the 5/20 rule was instated in the year 2005. IndiGo and SpiceJet started operations after the 5/20 rule was introduced. The 5/20 rule requires airlines to operate domestic services for a minimum period of five years, after which it can fly international only if the airline has a fleet size of 20 or greater.
Air India Express was the only airline to start immediate international operations (although on an AOP different from Air India) after the 5/20 rule was introduced. The first flight of the airline was an international flight.
Neither IndiGo nor SpiceJet fought the 5/20 rule at that time as the focus of both airlines then, as it is today, is to tap the potential of the domestic market. SpiceJet started international operations in October 2010, while IndiGo commenced international operations in September 2011. Despite both LCCs having started international operations nearly five years ago, when the scale of domestic operations were smaller, both airlines chose not to focus on international operations. (See IndiGo’s fleet induction, here) Both airlines always had the option of inducting larger aircraft to serve destinations beyond the surrounding Asian and Middle East countries. But such is not their business model.
As a result, the only Indian carriers to majorly serve international are Air India and Jet Airways, both of which were not ‘victims’ of the 5/20 rule, whereas IndiGo and SpiceJet, which chose to focus on domestic even though they started international operations five years ago, are ‘victims’ of the 5/20 rule, strongly opposing the removal of the a rule that means nothing, and does not impact either airline..
Go Air started operations in the year 2005, but chose not to increase its fleet beyond 19 aircraft. It deferred its 20th aircraft, which was readied by Airbus. As a result, the airline does not fly international, and seems to have no issues remaining a domestic player. Yet, the airline opposes the removal of the 5/20 rule, though it chose not to operate international.
In the quarter ending 31st December 2015, a total of 12.6 million international passengers were carried by both Indian and international airlines. Of that number, Indian carriers flew just 4.5 million passengers, or just 36% of the total traffic.
India is underutilising its bilaterals, due to restrictions placed by rules such as the 5/20. For the purpose of this case, and for want of time, we consider only three international destinations: Singapore, Bangkok, and Kuala Lumpur.
As of late February 2016, there are three airlines from Singapore that operate to 13 destinations in India. Singapore Airlines, Tiger Airways and Silk Air together operate 134 flights per week to India, from Singapore, and an equal number of return flights. Together, the airlines deploy 30,517 seats per week between Singapore and India, in each direction, using a variety of aircraft: Airbus A319s, A320s, Boeing 737-800s, Airbus A330s, Boeing 777-200s, 777-300s, and Airbus A380.
In contrast, three Indian airlines (four if you count Air India Express separately) connect Singapore to only four destinations in India. Air India, Air India Express, Jet Airways and IndiGo together operate 63 flights per week between the two countries. Together, the airlines deploy just 13,244 seats per week between Singapore and India, in each direction, using Airbus A320s, Boeing 737-800s, Airbus A330-300s, and Boeing 787-8s.
Thai Airways, Thai AirAsia, and Bangkok Airways operate from Bangkok to eight destinations in India, flying 73 flights and deploying 19,497 seats per week, Using Airbus A320s, Boeing 747s, 777-200s, 777-300s, Airbus A330-300s, and Boeing 787-8s.
In contrast, SpiceJet, IndiGo, Jet Airways and Air India together operate 62 flights, deploying 12,474 seats per week, from four Indian destinations to Bangkok, using Airbus A320s, Boeing 737-800s, 737-900s, and Boeing 787-8s.
From Kuala Lumpur, AirAsia Berhad, AirAsia X, Malindo, and Malaysian Airlines operate 180 flights to 12 Indian destinations, deploying 32,903 seats per week between Malaysia and India, using Airbus A320s, Boeing 737-800s, 737-900s, and Airbus A330-300s.
In contrast, only Air India Express operates to Kuala Lumpur, connecting only Chennai to the Malaysian capital with 4 weekly flights and deploying 744 seats per week.
While not all destinations are commercially viable, there is a huge mismatch between the capacity deployed by foreign carriers, and the capacity deployed by Indian carriers, on the same set of routes. Infact, the superior connectivity offered by foreign carriers is not matched by Indian carriers, leaving a large scope for more Indian carriers to boost the Indian economy while also providing international passengers seamless domestic connectivity.
The 5/20 rule must go if India should see it’s own airlines connect India with the rest of the world.
What the FIA won’t tell you
The Federation of Indian Airlines (FIA), have something against the airlines of the Father of Indian Aviation (FIA), Late JRD Tata. The Tata’s have already done enough to promote connectivity within India: TATA airlines was renamed Air India.
The FIA (Federation) is shaken by the prospects of airlines such as Vistara and AirAsia India. The goal of the FIA is to restrict the operations of such airlines to within India, so that players like the market leader can use its low cost base to lower fares on every route such airlines fly, and bleed the airlines dry. Starting with the smallest and the least capitalised airlines, airlines will knock off the Indian scene, one by one, leaving only a few to operate in India, with the market player enjoying a huge monopoly in setting fares. At that point in time, India will suffer, with neither good international connectivity, nor with strong domestic competition nor worthy alternatives.
While the FIA blames consultancy firm KPMG of auditing Singapore Airlines and consulting for the government, it remains silent on consultancy firm CAPA.
CAPA India, in its Aviation Outlook 2016, stated, “Despite repeated statements by the Minister that there is no logic to the 5/20 rule and that it should be abolished, the discriminatory regulation still remains in place”.
Guess which consultancy firm’s services was sought for IndiGo’s Red Herring Prospectus? CAPA India.
SpiceJet posted its third straight quarter of net profits, with the announcement of its Q2 results. The airline posted a net profit of INR 23.77 crore, but realised an operational loss of INR 27.91 crore. This loss includes the depreciation and amortisation expense of INR 30.36 crore. The airline has immensely benefitted from lower unit fuel costs which have dropped by 35% to INR 1.17/seat-km, compared to the same quarter last year. Higher load factors at the airline have driven up unit revenues by 7% over the same quarter last year.
Below is a detailed comparison of unit revenues between Q2’16 and Q2’15:
In Q2’15, the airline had an average sale (including ancillary revenue, which includes non-passenger revenue such as cargo) of INR 4,019 per passenger. In Q2’16, the airline had an average net sake of INR 3,750 per passenger. Although the airline was able to extract lesser per passenger, it flew more passengers, with the net effect being positive on the revenues.
Cargo performance has however been disappointing, with the airline flying on average 140kg lesser, per flight, in Q2’16 compared to Q2’15. This has resulted in a 7% drop in cargo carried per ASK. This however is partly explained by the shrinkage of the mainline jet fleet at SpiceJet.
Higher passengers, lower per-passenger sales, and lower cargo have resulted in a net 9% higher unit sales.
On the operating expense front, SpiceJet performed worse (on a unit basis) than the same quarter last year. The graph clearly shows that all unit costs have gone up, except for fuel, lease rentals, and aircraft redelivery expenses.
Average fuel prices in Q2’16 was 34% lower than in Q2’15. This has resulted in Spicejet’s unit fuelc osts falling by 35% (The 1% difference is due to the dissimilar fleet mix of Jets and Turboprops). Unit lease rentals have gone down due to a smaller fleet of mainline jets, and a higher utilisation of aircraft. In Q2’15, the airline re-delivered a large number of dry-leased Boeing 737s, which cost the airline much. In Q2’16, there were no re-deliveries of dry-leased aircraft, which has led to lower redelivery expenses.
All other unit costs are much higher, most notably due to the smaller scale of operations which has concentrated certain fixed costs. In Q2’16, the airline deployed 34% lesser capacity than in Q2’15. Yet, all these unit cost increases were offset by the drop in fuel prices.
In Q2’15, SpiceJet lost 69 paisa for every seat flown every kilometre. In Q2’16, SpiceJet lost 10 paisa for every seat flown every kilometre.
However, the unit EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) in Q2’16 was INR 0.01/seat-km, which was an earning of INR 1 paisa for every seat flown every kilometre.
What pushed the quarter to profits?
“Other Income” of INR 72.7 crore, which included 65.4 crore “consequent to finalisation / revision of terms of settlement of earlier lease terminations with an aircraft lessor for three aircraft” tipped the airline into net profits.
Comparison to Q1’16
Q2’15 and Q2’16 are a year apart. In that one year gap, the airline went througha near-death experience and changed hands, making the usefulness of such a comparison limited. A comparison with Q1’16 allows for a better understanding of how things are shaping up at SpiceJet.
Average load factors in Q2’16 were higher than in Q1’16, despite Q1 historically being a season of peak travel demand, while Q2 is historically a lean season.
In Q2’16, compared to Q1’16, SpiceJet flew 5% more flights, carried 5% more passengers, yet carried 10% more cargo, resulting in 5% more cargo per flight. The airline carried on the same number of average passengers per flight : 121, in both quarters. However, the airline operated flight lengths that were 2% lower than in Q1.
Unit revenues were understandably lower in Q2 due to lower pricing power. Net sales per passenger dropped from INR 4,215 to INR 3,750, which resulted in a 8% drop in unit revenues.
On the cost front, fuel prices on average in Q2 had fallen by 9%, but resulted in just 8% unit fuel savings at SpiceJet due to the shorter flights. Lease rentals have perhaps gone up due to the wet leased A319 aircraft contributing to smaller capacity per flight, and the mainline fleet growing in size with no significant change in capacity. This is due to some aircraft going for scheduled maintenance in this period, which has also driven up maintenance costs. The US dollar being higher by 3% in Q2 over Q1 may have also added to the increased expense. However, airport charges have remained almost unchanged. Q2’s higher capacity of 2% brought down employee unit costs by 2%.
Other operating costs and other expenses going up by 27% and 9% respectively cannot be easily explained. Other operating costs were expected to remain the same, while other expenses were expected to fall by around 2%. The increase may be partly explained by increased selling costs (higher agent commissions – which may also explain the higher load factors), increased marketing spend, and training, among others. The airline has done something that has attracted higher expenses in Q2.
By qualification, profession(s) and practice, I am an engineer. My love for airplanes made me study everything technical about aviation, and hence the name, The Flying Engineer. I did get to practice a lot of it, and filed two US patents with a North American aerospace major before starting off on my own.
I never really liked studying airlines. Running an airline was something totally different from airplanes and technology. An airline with one aircraft could be profitable, and another airline with the same aircraft could be loss making. Unlike aircraft, an airline isn’t exact science. It’s a mix of forecasting science, luck, lots of funding, experimentation, government regulations, competition, glamour, God, and what not. It’s not exact, and can never be. I was, and largely still am allergic to things I cannot mathematically or logically explain.
Then came a transformation at SpiceJet. Suddenly, an ailing airline with tonnes of data had a new head. On November 1st, Sanjiv Kapoor boarded SpiceJet as COO. He pushed SpiceJet into an operation theatre and brought in surgeons like Kaneswaran Avili. It gave an opportunity to study an airline turnaround.
Sanjiv and his team spewed data. Now data is interesting, and more dependable than “we will do it”, “we can do it”, and “we did it”. Sanjiv talked of the “how” of things. That was a turning point in my interests.
He released a good amount of data on the airline’s performance. The airline even released fairly detailed reports (with lots of graphs). His western thinking gave food for thought and ‘growth’ to all those who sat, saw, heard, and reflected. His addiction on Twitter had nothing to do with selfies, or what he did. It was never about him. It was all about the airline : what the airline did, and how the airline did. He even took customer issues into his hands and resolved matters through his team. He is a man of “we”, not “I”.
For once, there was an Indian airline head who was active on social media, and spoke numbers. Now numbers for some of us give us kicks. His maturity, experience, and his emphasis on data was sufficient for me to believe that there are some who don’t hip shoot in the industry. Yet, not always was I in agreement with everything that was done, nor everything that was tweeted.
Following the developments at SpiceJet was my education about the industry. I am far from perfect, but I was lucky to have been guided, by circumstances and people. And thankful to SpiceJet for having conducted classes on airline economics for many of us. Lectured by Prof. Sanjiv, ofcourse.
I have consulted, briefly, for a few airlines, and had a chance to interview many airline heads. You’ll be surprised how very few heads are data and research driven, and even fewer process driven. IndiGo is largely data and process driven. They made sure it was in their blood from day one. Sanjiv, to the best of my very limited knowledge, attempted such a culture at SpiceJet.
He also opened up channels of communication at the airline, bringing in more transparency and clarity. His largely full service airline experience made him focus significantly on customer service. Under him, SpiceJet transformed into an airline that was neither machine-cold nor ‘hot and spicy’ – SpiceJet became perhaps the warmest airline in the country.
Towards mid 2014, one of the airplanes was stickered with the faces of six of the airline’s crew, becoming the first airline in India to fly the faces of its employees. The aircraft had SpiceJet’s tagline, “With all our heart”. In the last week of August 2015, the aircraft was stripped off its livery. Spicejet, many months earlier, had been re-branded as ‘Hot and Spicy’.
During his period, scientifically planned flash sales driven by Kaneswaran and Fares Kilpady helped sell seats that would have otherwise flown empty. It is a concept yet to be understood by many. Today, such sales have become an Indian industry norm. I was definitely not the only one who learnt from SpiceJet. The sales served two purposes – driving up unit revenues, and boosting cash flows. SpiceJet survived longer than it otherwise would have, had it not been for those sales. Salaries never stopped.
Not everyone though could appreciate what Sanjiv and his team did. At the end of the day, performance is real, and evaluation subjective.
From April 26th, 2015, Sanjiv’s Twitter handle ceased being “@SKapoorSpiceJet”. That one Twitter handle was revolutionary, educative and proactive. Exactly six months later, today, news broke of him stepping down. Thank you Sanjiv, and thank you, SpiceJet, for the turnaround and the education. It fuelled my hunger for math, numbers, equations, and logical reasoning. Your troubles educated us.
SpiceJet, which is the only low cost/fare airline in India to operate with more than one type of fleet, including Boeing 737-800s, Boeing 737-900s, Bombardier Q400 turboprops, today brought in more fleet diversity through the induction of a wet-leased Airbus A320.
The airline had wet-leased two Airbus A319s in the recent past, one of which (LZ-AOA) is still flying with SpiceJet. The A319 that is still flying for SpiceJet is from BHair (Balkan Holidays), and the Airbus A320 inducted today is also from the same operator. This is perhaps a symbol of confidence in operators in wet-leasing airplanes to SpiceJet, perhaps indicative of a more stable financial situation that allows for on-time payments. Boeing 737 wet leased aircraft that earlier flew for SpiceJet in the summer peak season have also returned for another peak-season term.
The Airbus A320 MSN 2863, registered LZ-BHH, previously flew for IndiGo as VT-INB. VT-INB was the second Airbus A320 to be inducted into IndiGo, and exited the fleet in 2012. Sale-Leaseback contracts at IndiGo were earlier for a period of 6 years, which has since been extended after 16 airplanes, following a sooner-than-needed capacity expansion after the collapse of Kingfisher in 2012.
With two Boeing 737-800s dry leased by SpiceJet in scheduled maintenance, the airline today has an active fleet of 23 mainline jets (Boeing 737-800s, Boeing 737-900s, Airbus A319, Airbus A320) and 13 Bombardier Q400s.
Besides all the visible innovations that SpiceJet is grabbing the headlines for, the airline is doing certain other things quite differently.
Any airline will like to make the most of a peak season by increasing flights, and providing increased connectivity and flight options. There are two ways to do this : by growing the fleet or by flying the airplanes harder. SpiceJet is doing both.
The airline does not yet seem to be ready to lease more airplanes the conventional way. It instead is wet leasing airplanes from eastern European airlines, which have capacity to spare. In the month of October, the airline will be inducting 6 Boeing 737s on a wet lease (ACMI lease) basis – which means the airline will not have to bother about flight crew, cabin crew, maintenance and insurance. Wet leases can turn out to be more expensive than a dry lease with in house crew, maintenance and insurance, but it offers SpiceJet one big advantage – to modulate its capacity to suit seasonal demand.
SpiceJet today is the only airline in India to be actively wet-leasing airplanes to bridge capacity shortfalls.
The airline presently has one Airbus A319 wet leased, and 2 of the 6 wet leased Boeing 737 NGs to be inducted this month have arrived – OK-TVX and OK-TSF. OK-TVX flew for SpiceJet during the summer peak season, along with two other Boeing 737-800s. The two 737s arrived on 8th October, 2015.
The airline’s remaining Boeing fleet is all dry leased, and the Q400s are owned. Of the 20 Boeing 737s, 16 are Boeing 737-800s and 4 are Boeing 737-900s. Before the 2 wet leased airplanes arrived, one Boeing 737-900 was undergoing heavy scheduled maintenance, ‘C’ checks. After the two leased airplanes arrived, a Boeing 737-800 went into scheduled maintenance. In total, the active narrow body mainline jet fleet as of today is comprised of 15 dry-leased Boeing 737-800s, 3 dry-leased Boeing 737-900s, 2 wet leased Boeing 737-800s and 1 wet leased Airbus A319, in addition to 14 Bombardier Q400 turboprops of which 13 are active. The total active fleet is 34 airplanes strong, which is expected to rise to around 40 during November-December. The peak season starts in a week’s time.
To aggressively take on the domestic and international markets despite a small fleet of airplanes, SpiceJet has been pushing its Boeing 737s to fly much harder than usual. Some of the Boeing 737s operate 19:30hrs, 17:50 and 16:35 hrs. These patterns flown by the 737s witness the airplanes flying hard during the day, and operate long international sectors at night/early morning.
Of the LCCs in India, only two fly international – SpiceJet and IndiGo. IndiGo, which also operates late night / early morning international flights, operates its airplanes only upto 17:45hrs of utilisation, on a pattern that involves a late night Chennai-Singapore return flight. One of the airline’s patterns is all-international with just 4 flights, MAA-DXB-TRV-DXB-MAA, which uses the airplane for 17:35hrs. Both these patterns, however, are not as heavy in utilisation as SpiceJet’s.
While SpiceJet pushing its airplanes to fly harder increases revenue potential and dilutes costs, it also results in a higher chance of cascading network delays in case one flight gets significantly delayed. Having significant gaps between patterns reduces the chances of the delays of one day from cascading into the second day.
On the Q400 front, the airline pushes certain Q400s to operate upto 13:15hrs per day, with an average, network-wide utilisation of around 11:30hrs. This is good for a turboprop that operates mostly domestic. SpiceJet’s Q400 turboprops are the only turboprops in India that fly scheduled international services.
In a previous piece, The Flying Engineer had estimated the operational profit of SpiceJet to lie in the INR “around or less than between INR 80 – 110 crore” range. The airline realised an operational profit of INR 70.7 crore. With the results declared exactly a week ago, we shall analyse the actual performance of the airline in Q1 FY 2015-16 (Q1’16).
We first start with costs, as an airline usually has a better grip on costs than revenues. Capacity is measured in seat-kilometres (Available Seat Kilometre – ASK), and costs and revenues, from operations, are referenced to unit capacity. We compare Q1’16 with the same quarter in the last financial year – Q1’15.
Average fuel price in Q1’16 was 28.4% lower than that in Q1’15. The fleet had also shrunk from a Bombardier Q400 : Boeing 737 ratio of around 1:2 to 1:1.3. This impacted fuel costs positively. Due to this ratio, a larger portion of the fuel burn was realised by the Q400s, which enjoy a flat 4% sales tax on fuel, as against as much as 28% sales tax in some airports, applicable to the Boeings. With operations being dominated more by the Q400s, which fly routes much shorter than the Boeings (upto 85% shorter routes on the domestic network), the average stage length had reduced, leading to an increase in the number of departures per unit capacity. More departures and hence landings per unit capacity translates to a higher fuel burn, but this was offset by the Q400’s lower fuel price and perhaps better fuel saving techniques employed at SpiceJet. Unit fuel costs fell by 30.3% despite fuel prices falling only 28.4%.
The changed turboprop : mainline jet fleet ratio also affected lease costs. The Q400s are owned, and hence no lease is paid for such airplanes. As a result, the lease costs of the Boeings (including the wet leased Boeings and Airbuses) were diluted over a capacity that was generated in a larger part by the Q400s. Unit lease rental costs fell by 12%.
Poor on time performance and increased cycles per unit capacity may have led to increased airport charges, though the Q400s do enjoy landing and navigation charges benefits. It is also possible that there may have been an increase in landing, navigation, other airport charges, in flight & other passenger amenities by authorities. Unit airport charges rose 14.8%.
Aircraft maintenance costs were dominated in larger part by the Q400s, which were also utilised higher. The US Dollar strengthened 6.1% against the rupee, which would have led to increased costs. Maintenance costs for each Boeing are expected to have remained largely unchanged. Unit maintenance costs rose by 14.9%.
The quarter witnessed no significant aircraft re-delivery activity, which dropped unit re-delivery expenses by 90.4%.
Other operating costs rose by 45.7% per unit.
Unit employee expenses were impacted by both having a smaller capacity, and the hike in salaries to crew to stop pilots from leaving the airline. This resulted in unit employee expenses rising by 25.5%.
Depreciation and Amortisation expenses are largely dominated by the Q400s. With lower capacity, this expense was rose on a unit basis. Unit Depreciation and Amortisation costs rose 36.2%.
Other expenses, which include a wide variety of costs including hotel and accommodation expenses for crew, dropped by 16.3% on a unit basis.
Overall, unit costs dropped by 12.8%, aided largely by the absence of significant re-delivery expenses and the steep fall in fuel prices. The airline has scope to further streamline costs in at least three areas, with the other areas being out of the airline’s control. When streamlined, either through practices or scale, unit total operational expenses may further fall by 4.3%. With the present scale of operations and in the present environment, this translates to INR 45 crore.
The cost structure at SpiceJet, Q1’16 v/s Q1’15 is shown below:
SpiceJet’s revenues were adversely impacted by lower airline capacity, poor on-time performance, and increased competition leading to lower prices. The first two factors may have made the airline lost high paying, time-sensitive and last minute (D0-D7) passengers. In the 13 month period June’14 to June’15, SpiceJet had the lowest OTP amongst private airlines for 9 months. Further, the cargo carried by the airline on a unit basis dropped by 4.9%, perhaps on account of Q400s dominating a larger part of the capacity. Unit sales fell by 1.1%.
Other operating income rose by 56%.
In total, operating revenues fell by 1% on a unit basis.
(If the Q1’15 P&L statement was not re-classified, unit revenue would have fallen by 2% during the comparison)
Per passenger Revenues
In Q1’15, the sales per passenger (includes ancillary revenue) was a good INR 5,006 per passenger (at re-classified P&L figures). In Q1’16, the the sales was INR 4,215 per passenger. This represents a drop of 15.8% in the sales per passenger.
Usually, a drop in the sales per passenger should not be a concern if the airline flies more passengers. However, a drop in net sales per passenger per ASK (the first number in the unit revenues and cost graph above) is a cause for worry. The drop was INR 0.05/seat-km). This shows that sales per passenger has dropped to a level that overall leads to lesser revenue despite very high load factors.
To put things in perspective, the below graph shows the per passenger sales required to achieve the same net sales from operations, with varying load factors. For example, flying with load factors of 55% at INR 6,939 sales per passenger will generate the same sales as flying 90% load factor at INR 4,240.
In Q1’16, SpiceJet had load factors of 90.5% (Domestic + International). In Q1’15, SpiceJet had load factors of 79% (Domestic + International). If SpiceJet was to have realised the same revenue in Q1’16 with only 79% load factors,the airline would have needed a per passenger sales of INR 4,833. However, the airline in Q1’15 (same quarter, last year) had a per passenger sale of INR 5,006.
This means that had SpiceJet flown with Q1’15 load factors and per-passenger sales, would have realised an increase in sales of 3.6% or INR 39.53 crore in Q1’16. This shows that increase in load factors does not always imply an increase in either Revenue per seat kilometer (RASK) or total revenues.
To have realised this additional INR 39.53 crore, SpiceJet should have generated sales of INR 4,366 per passenger (+INR 151) in Q1’16 at 90.5% load factors.
Of course, unit revenues (RASK) is the most reliable method of gauging performance. But, in the case where RASK falls, the argument above is used to show that the load factor game must be played carefully.
The above argument does not consider the fact that per passenger sales and/or RASK (RASK and per-passenger sales are not directly comparable) can be safely reduced when per passenger costs and/or CASK also reduce. Ultimately, profit is driven by the difference of revenues and costs, and not determined by either revenues or costs alone.
Unit operating profit rose by 201%, despite a fall in unit revenues, largely due to a fall in costs. Fuel today accounts for 35% of the SpiceJet’s operating expenses. Last year, for the same quarter, fuel accounted for 43% of SpiceJet’s operating expenses. If aircraft fuel prices were at the 2014 April-June levels, the airline would have flown into the red.
Had the airline maintained the unit revenues (RASK) of Q1’15, the airline would have generated an additional INR 11.4 crore over the Q1’16 operating revenue of INR 1,106 crore.
Other income at the airline was INR 26.7 crore, against INR 28.9 crore in Q1’15 (re-classified).
Finance Costs in the airline was INR 25.5 crore, against INR 48.7 crore in Q1’15
Profit before tax
In Q1’16, other income (not from operations) and finance costs are almost equal, cancelling out each other. This makes profit in Q1’16 solely due to operating profits, unlike the Q4’15 quarter (ending March 31st 2015) where the airline stepped into profits due to the insurance payoff. Operating loss in Q4’15 was INR 102 crore. Operating loss before depreciation and amortisation expenses was INR 72 crore.
Hot and Spicy or Red?
The Hot and Spicy part is the reduction in finance costs. The Red part in in the operational costs and revenues. Overall, the airline has the potential to perform much better, and hence we’d consider the performance Red, despite the profit. The turnaround has started, but the airline is not yet ‘there’. Costs have to lean and revenues must grow. Good on time performance (OTP) is key. As seen above, sale per passenger and RASK have taken a hit, perhaps largely due to the poor OTP of SpiceJet, and in part due to competition.
Comparison to Estimate
In the estimate of SpiceJet’s Q1’16 performance (click here to read), our estimate of total operating expenses was lesser by 0.26%, while our estimate of revenue from operations was higher by 1.67%. Changes in accounting practices (re-classification, as declared in the Q1’16 financial results) have also impacted the estimate errors. The lower or our estimate of the airline’s operating profit was higher than the actual by 13%. Below is the comparison:
SpiceJet had a great opportunity to report profits in Q3’15 (the quarter ending December 31st, 2014). It didn’t. Before the quarter could conclude, the airline had stalled.
Then there was a stall-recovery. The Marans got out and Ajay Singh got in. The very next quarter, Q4’15, saw the airline posting a net profit thanks to an insurance claim from a Q400 that was written off at Hubli.
Legacy issues, one time costs, redelivery expenses, economic slowdown, high dollar rates, and high fuel prices were some of the reasons given in the past. This time around, the situation is much better. Ajay is doing a good job renegotiating contracts in manners that benefit the airline.
SpiceJet introduced the Q400s in 2011 as a game changer. The move was not in line with what low cost carriers world over had practiced. After Air Deccan, SpiceJet became the second low cost carrier (which we prefer to call low fare carrier) in India to adopt a dual fleet strategy.
The reasoning was simple enough. First, India is a country where certain routes are saturated while many routes with potential are unexplored. This is largely due to the misconception of a ‘one aircraft fits all’ strategy. Having an oversized airplane (in terms of seats) fly on routes that have insufficient demand only leads to poor control on pricing and revenue management. The hope that some routes will eventually grow to cater to the large jet is unwise. The right sized airplane matters. Second, blindly copying and pasting to India a low cost model that worked wonders overseas is again unwise. Every market is unique, and requires its own study.
But perhaps, SpiceJet wasn’t ready to handle the Q400. Perhaps, SpiceJet did not pull off a good deal with Bombardier. Perhaps, SpiceJet’s study was half baked. Perhaps, SpiceJet was short sighted and the turboprop may have performed better in the hands of a smarter, shrewder operator. But most importantly, perhaps the Q400 fleet and staff were meted with a step-motherly treatment.
Optimisations in the Q400 fleet are only now becoming visible. Ajay Singh is using pressure tactics to squeeze Bombardier to give the airline more. A few Q400s are expected to join the fleet, with the insurance payoff from the Q400 that was written off in a runway excursion at Hubli. The Q400 fleet size reduced to 14 Q400s from 15, and one Q400 that was cannibalised has now been restored and is apparently due for a maintenance test flight. The airline has also started to optimally fly its airplanes, to realise fuel savings and time savings. Time saved can accumulate to fly an additional sector. The airline is also working to better integrate the Q400 network with its Boeing network. After all, the Q400s are intended to primarily serve as feeders. Salaries of the Q400 flight crew have been brought on par with those on the Boeings.
The airline, four years late, has realised that the Q400 cannot play the ATR game. The Q400 must play the Q400 game. The turboprop has been designed to cater to routes that are as thin as the ATR’s, but longer than what the ATR s suited to fly. And that the USP of the Q400 is its speed.
The difference between the games of the Q400s and ATR72s? The Q400 focuses on maximising revenuepotential, while the ATR72 focuses on minimising costs. Those aren’t the same variety of apples to compare.
Simply put, the management wasn’t ready for the Q400.
The Q400s, today
As of today, 13 of the 14 Q400s in the airline’s fleet are active, with the 14th expected to join soon. Effective 16th July, these 13 Q400s will operate 116 flights a day, operating for a total of 149:20 hours each day, and deploying a capacity of 9048 seats on the network, daily.
Each Q400 flies on average almost 9 flights a day, and is utilised to just a minute short of 11:30 hrs per day, per aircraft. A year ago, the utilisation was at 10:20 hrs.
Of the 116 departures, the airline flies 76 routes (where the onward and the return are treated separately) between 38 city pairs. This is on average a frequency of 1.5 on each route. The Q400s serve 28 destinations, resulting in an average of 1.3 city pairs from each destination.
Of the 38 city pairs, 10 are monopoly sectors. Of the 38 city pairs, 34 are exclusively operated by the Q400s by SpiceJet. Of the 28 destinations, 15 are exclusively Q400 destinations. Refer the diagram below.
The Q400 flies the longest turboprop sector in India, between Jabalpur and Mumbai. Sectors like this are what the Q400 are better suited for: longer than those of an ATR, shorter than those suited for a jet. Monopoly sectors are in yellow. Nearly 90% of the city pairs are exclusively operated by the Q400 at SpiceJet.
Block times for the sectors do not necessarily match the distances. The sector block times, for the same sectors in the same order, are graphed below:
The most important stations for SpiceJet’s Q400s are, in order of departures, Hyderabad, Chennai, Delhi and Bangalore. Bangalore, despite being a hub, is not a base for the Q400s.
Jabalpur is important to the airline. Q400s from Delhi are swapped with the Q400s from Hyderabad at Jabalpur, necessary for maintenance which is at Hyderabad. Q400s from Chennai swap with the Q400s at Hyderabad through the Goa flights.
53% of the stations served by the Q400 are exclusive Q400 stations for SpiceJet.
Of the above stations, Belgaum and Tuticorin are exclusively served by SpiceJet, and operated to by the Q400s. Belgaum and Tuticorin are examples of airports that are either operationally unfeasible or commercially unviable to operate using a 180 seat jet aircraft. Most of the Q400 sectors listed here are commercially unviable for a 180 seat jet (the market isn’t yet sufficiently big), and atleast 40% of the sectors are not advisable to deploy a jet on, due to short sector lengths.
Typically, a regional jet with similar seats offers better operating economics and greater productivity when sector distances exceed 250 – 300NM. Average sector length for SpiceJet’s Q400s is 260NM, which speaks well about the way in which the asset is being used. 53% of the 38 sectors are below the average of 260NM, and 74% of the 38 sectors are below 300NM.
Flying the Q400 faster to save fuel?
The Q400 can be flown in one of four speed schedules – Long Range Cruise (LRC), High Speed Cruise (HSC), Intermediate Cruise Speed (ISC – between HSC & LRC), and Maximum Cruise rating (MCR). When arranged in order of increasing speeds, this is LRC-ISC-HSC-MCR.
Among 16 techniques in which an operator may realise fuel savings, optimisation of cruise speeds realises the largest potential gain. The Specific Air Range (SAR) curve below shows the distance travelled per pound of fuel. Higher the SAR, the longer the distance that the Q400 can cover for the same quantity of fuel.
While LRC (red line) would be the choice of speed for any operator who considers only fuel costs, SpiceJet used to operate its aircraft at ISC (purple line). This burnt more fuel, but saved time, which results in reduced time-related costs, and higher productivity.
Of late, SpiceJet has been flying its Q400s at HSC, for flights of around 1 hr in flight time (not block time). This translates to flights of sector distances of 300NM and below, which are 74% of all sectors flown by the Q400s at SpiceJet. Flying at HSC should, according to tables, burn more fuel, but pilots do report savings of around 150Kgs of fuel per sector. 150Kgs of fuel saved is around 14% of the trip fuel for a one hour flight time sector, which is a significant amount.
Such high fuel saving percentages with an increase in speed is not possible. The only explanation could be a host of other procedures that have been implemented that impact the overall fuel consumption. Better routing to take advantage of winds can have significant impact on fuel burns. Optimisation of weights, climb and descent profiles, improvised taxi procedures and approaches, use of detailed performance tables, and better APU management are some of the ways which fuel burn can be reduced.
The Q400 is an aircraft that must be used as a high speed aircraft that serves as a compromise between jet-like speeds and turboprop economy. Pushing the airplane to perform to either extreme is a significant deviation from the intended purpose of the aircraft, which leads to inappropriate and poor asset utilization.
Asset utilization seems to be on the increase. The Q400 is deployed on those routes on which a 180 seat jet cannot operate, thereby allowing SpiceJet to grow its roots into untapped markets to feed traffic to the mainline network. It is a gap filler. With more flights a day, the aircraft is being flown to its revenue generating potential. The networks of the two fleets – jet and turboprop are being aligned to cater to a hub and spoke model. However, a good narrow-body jet fleet size is required to allow the airline to make the most of the connectivity offered by its turboprop fleet.
10 year old SpiceJet’s performance in Q4 FY’15 has been promising. SpiceJet as an airline has been promising in certain quarters, profitable in some others, and disappointing in many. One problem that has plagued the airline is impatience. The constant change of top management results in one, big problem: insufficient time for any strategy to bear fruits, no matter how brilliant.
That is because any strategy has a trial and error phase – essential to coarse and fine tune the strategy to the environment – both internal and external to the airline.
In Q4’FY15, SpiceJet changed hands, yet again. The Marans are out, and Ajay Singh is back in. In the quarter, the aircraft lost a Q400 to an accident at Hubli. Active fleet size was down to 17 Boeing 737s and 13 Q400s – a total of 30 airplanes, down 50% from the days of 57.
Things got so complicated at the airline that the one element required to run an airline was missing – Simplicity.
The circumstances surrounding the airline, and the situation it was in Q4’FY15 was very different from what was in Q4’FY14. Yet, comparison is worthy to put things in perspective.
Q4’FY15 saw SpiceJet as a shrunk airline – lesser routes, smaller fleet, lesser departures. The number of flights were lower by 43%, to an average 179 a day from 312 in Q4’FY14. Load factor difference was a positive by 13% – which meant the airline carried more passengers per flight, on average. This had two effects – the number of passengers carried was down only 37% despite 43% lesser flights. This also affected the cargo uplift, which was down 8% due to lesser free cargo space available. The average flight length was 752 km – down 9% from 826km. Capacity was down 52%.
SpiceJet is yet to stabilise its operations. An airline has two aims: safe and convenient flights for passengers, and value for shareholders. Part of convenience are frequency and on time performance, with the latter more important.
SpiceJet’s on time performance isn’t one of the best, and that is something that the airline needs to, and perhaps is, working on. SpiceJet has had the highest number of cancellations among all airlines in the month of January and March, and the second highest among established airlines in the month fo February. Stabilisation of such operational parameters is key to SpiceJet becoming a preferred airline.
Down to the rupee
Unit revenues speak volumes about an airline’s efficiency.
We look only into Income from operations (Net sales), and ignore all other incomes, as this is the real measure of the airline’s core activity’s performance.
Q4’15 had a revenue of INR 4.15/seat-km (or per ASK= RASK), which is 3% higher than what was realised last year. This shows that the increase in load factors had a positive impact on unit revenues, thanks to the strategies employed by the former CCO Kaneswaran Avili and the VP Revenue Management Fares Kilpady. This also reflects network rationalisation.
When an airline shrinks, costs get complicated. There are certain costs that are hard to shrink, such as employee costs, as layoffs are subject to an airline’s culture. Employee costs per ASK shot up 63% to INR 0.57/seat-km. Further, staff salaries were upward revised after Q4’14.
Although the airline shrunk its fleet, it were the leased Boeing 737s that moved out, not the owned Q400s. Capacity dropped, but the depreciation and amortisation costs associated with the aircraft didn’t. This resulted in the associated costs rising by 48% to INR 0.16/seat-km.
Airport charges went up by 18%, in part due to the reduced flight lengths, which means the airline had more take off and landings for the same capacity. This may have also negatively impacted aircraft maintenance. Spares pool policy may have also had an impact. If an aircraft went for a C-check in this period, costs may have been impacted too. Maintenance costs per ASK went up 3%.
Other operating costs went up 17% to INR 0.16/seat-km.
Other expenses, which includes administrative expenses went down by 5%.
Lease rentals per unit went down 18% to INR 0.61/seat-km, owing to higher utilisation of aircraft which diluted this fixed cost.
Aircraft fuel costs went down 31% to INR 1.52/seat-km largely due to the fall of ATF prices.
Fuel, Maintenance, Staff, Lease and amortisation (as Q400s are owned, and is the equivalent of lease costs) and other operating expenses form a chunk of the expenses, and these 5 together account for 92% of expenses. These costs together went down by 12% to INR 3.62/seat-km in Q4’15 against INR 4.13/seat-km in Q4’14.
Redelivery expenses are one-off expenses and went up 626% to INR 0.35/seat-km. Other expenses are arguably not part of the operating expense consideration set.
With this, the operational cost per available seat kilometre (which excludes one-off redelivery costs and administrative ‘other expenses’) is INR 3.98/seat-km, which is 10% lower than the INR 4.44/seat-km in Q4’14.
With an operational RASK of INR 4.15/seat-km, and an arguable operational CASK of INR 3.98/seat-km, the airline was arguably operationally profitable by INR 0.16/seat-km.
Core operating costs and revenues are stressed upon as this is a reflection of the performance and efficiency of an airline’s core activity. However, an airline will need to be efficient throughout the structure. SpiceJet realised a loss of INR 102 Cr due to the total operating RASK and total operating CASK amounting to INR 4.15/seat-km and INR 4.71/seat-km, respectively.
Extraordinary Income and bottom line
Insurance companies paid INR 161 Cr for the Q400 that was written off after an accident at Hubli, Karnataka. SpiceJet received INR 61 Cr. This, along with other income of 91 Cr added INR 153 Cr to the books. Finance costs drained INR 28 Cr. Overall operating loss drained INR 102 Cr.
The airline realised a net profit of INR 22 Cr, and the insurance pay off was responsible for the tip over into the black.
Comparison with AirAsia India
While a comparison between a small start-up airline and a larger, older airline is fair to neither airline, a comparison will help show what’s possible.
Unit costs (per seat-km) of staff is leaner at SpiceJet as it is a larger airline, however, this can fall further. SpiceJet cannot escape amortisation & depreciation costs as Q400s are owned, while AirAsia only leases airplanes. Fuel expenses per ASK are higher at SpiceJet due to the higher fuel burn per ASK of the Q400, the possibility of higher burns due to ATC congestion at metros, and higher load factors.
All of AirAsia’s airplanes in Q4 were new, and almost fresh out of maintenance when delivered, needing hardly any maintenance. Such may not have been the case at SpiceJet, which could have taken up the maintenance cost up.
User charges are higher at SpiceJet as AirAsia India does enjoy certain benefits from Bangalore airport – the only airport it used to fly into in Q4. SpiceJet flew into all metros.
Aircraft operating lease expenses appear lower at SpiceJet as of the 30 aircraft in the fleet, only 17 were leased. Q400’s lease costs do not figure in the lease expenses.
Other operating expenses are lower at SpiceJet due to a larger fleet diluting costs. However, ‘other operating costs’ for SpiceJet may not be the same as AirAsia India’s.
Where SpiceJet can trim its cost are in the ‘other expenses’. However, AirAsia India has lower administrative costs as many resources are shared with the AirAsia Group.
The cost structure (see pie charts) of both airlines show the cost structure for both airlines. Generally, a cost structure which has a larger share of fuel cost indicates a leaner structure.
A chance to renew
What the management did in FY 2014-2015 to SpiceJet has been impressive – revenue management and market stimulation has resulted in a positive impact on unit revenues even with higher load factors and promotional fares. Such practice, if continued, may benefit the airline in the current fiscal.
The airline scaled up its fleet in Q1’16 temporarily through the wet-lease of 3 Boeing 737s. Unverified information point to 2 additional Q400s joining the fleet, and an active evaluation of wet-leasing Airbus A320 aircraft. Whatever the aircraft type, and however questionable it may be, the airline is going to, and needs to increase its fleet size.
SpiceJet has another opportunity to keep the system lean as it regrows. Good contracts, scaling up and high asset utilisation will reduce fixed costs. Good market study, prudent and well researched network growth, leveraging the benefits of the Q400 to do what the market leader cannot, and differentiation of in-flight services can allow SpiceJet to realise good unit revenues even in the light of competition.
Revenues aren’t much of a problem at SpiceJet, but can be bettered through better core service – frequency and on time performance. Costs are the biggest problem in the airline, and will need to be trimmed down significantly.
SpiceJet has what it takes to grow to an extent that allows it to compete non-head-on and healthily with the market leader. Focus on basics and differentiation are key.
SpiceJet goes loud on some developments, and silent on the rest. What SpiceJet has done in the last few weeks is to unbundle as much of its services as possible, to find multiple ways in which the airline can make money.
Tony Fernandes (Group CEO, AirAsia) and Mittu Chandilya (CEO, AirAsia India), have been fighting for unbundling of services for long. In fact, when AirAsia launched a year ago, it charged passengers for check in baggage. DGCA interference, reportedly driven by pressure from other airlines, ensured that the airline provided a minimum free check in baggage service: 15kgs per passenger. Tony Fernandes regarded this move undemocratic. He had a point: The 15kgs of baggage did not come free, but was included in the airfare, unknown to the passenger. This only meant that every passenger was forced to pay for a baggage service that he or she may not opt for. Business travellers usually have no check-in baggage.
Air Transport Circular 1 of 2015, dated 24th March, 2015, seems to be an outcome of the constant requests AirAsia India has made to the ministry. The DGCA now allows airlines to charge for all seats that are pre-booked. Previously, this was limited to just 25% of the seats and excluded the middle row seats. The new circular also talks about “Check-in baggage charges” being unbundled. Although this was present in the previous circular, upon which AirAsia India acted, DGCA had the final say. Things seem to have now changed.
SpiceJet is the first airline to have stealthily implemented the circular to the fullest. All the seats on SpiceJet’s aircraft – Bombardier Q400 & Boeing 737, are chargeable when pre-booked, which wasn’t the case earlier.
Every Seat Pays
On the Boeing 737-800s (The airline flies 16 B737-800s and 1 737-900, besides three wet-leased Boeing 737-800s which have no SpiceMax extra legroom rows), the middle seats on rows 6 to 13 are charges at INR 100. The window and aisle seats are charges INR 300. Seats on the first five rows are charged INR 1,000. Emergency exit rows are charged INR 600. From rows 16 to 31, middle seats are charges INR 50, while the aisle and window seats are charged INR 100.
This allows SpiceJet to potentially generate an additional INR 56,400 per Boeing flight. Assuming a flight with 80% load factor has 25% of its passengers pre-booking their seats, this is INR 11,300 per flight. With this assumption, and a maximum of 129 Boeing flights in a day, SpiceJet may realise around INR 14,50,000 revenue per day from selling seats on Boeings alone.
On the Q400s, (The airline flies 12 -13), there are no middle seats. Row 1 (two seats) and Row 2 (right two seats) are SpiceMax seats, charged at INR 500. All other seats upto and including row 6 are charged INR 200. The rest of the seats in the cabin are charged INR 100.
This allows SpiceJet to potentially generate an additional INR 11,200 per Q400 flight. Assuming a flight with 90% load factor has 25% of its passengers pre-booking their seats, this is INR 2,520 per flight. With this assumption, and a maximum of 162 Q400 flights in a day, SpiceJet may realise around INR 4,10,000 revenue per day from selling seats on Q400s alone.
Together, the airline may, on average, generate 18,66,000 per day from selling seats. Over a month, this will be sufficient to pay almost two Boeing 737s’ dry lease.
No free check-in baggage
With SpiceJet’s “#Travel Light, Save More” offer, announced on April 27th, SpiceJet offered 1,50,000 seats on sale. The tickets for these seats were on the condition that a passenger did not travel with a check-in baggage. The offer was extended, adding an additional 100,000 seats. In total, SpiceJet offered 250,000 seats for sale with high confidence that these passengers would not have check in baggage.
With 15Kg per passenger not occupying the cargo hold, the airline has saved 3,750 tonnes of cargo hold weight. At an assumed average cargo rate of INR 20,000 per tonne (we’ve earlier determined this average to be slightly higher), this allows the airline to ‘sell’ INR 7.5 Crore worth cargo space/weight to its cargo handler, Sovika.
If however any passenger chooses to check in their baggage on these tickets, the airline’s T&C requires a flat fee of INR 750 to be paid for upto 15kg. This is the first example in India where a passenger is not granted complimentary 15kg check in service, but has to pay for “any” check in baggage.
This may be SpiceJet’s move in evaluating demand for such tickets. Perhaps, if proved successful, the airline may implement a policy of paying for every check-in baggage.
Other unbundled services
SpiceJet also charges for priority check in, Meal (hot meals – 737s and cold sandwiches – Q400s), excess baggage slabs, a ‘Meet and Assist’ service, and “SpiceAssurance”.
Priority Check-in charges a passenger INR 200. Hot Meals on Boeings are charged at INR 315 when pre-booked and INR 350 when bought on board. On Q400s, pre-booked Sandwiches are available for INR 200, and INR 220 when bought on board (the illustration for the Q400 meal is misleading as it shows steam coming from the plate that has the sandwich, which is not true. The sandwiches are cold). The SpiceAssist service comes at INR 500 per passenger (assistance from the SpiceJet staff at the airport).
All these services are ‘opt-in’ services, as mandated in the DGCA circular (a passenger needs to check the box associated with the service. By default, there must be no service pre-selected). However one service, the SpiceAssurance which charges INR 35 per passenger is pre-checked, which may not be the right thing to do. By paying INR 35, SpiceJet offers passengers a voucher of INR 500 is the flight is delayed by 1 to 2 hours, and INR 1000 if beyond 2 hours. This also offers limited baggage loss reimbursement.
This, in our personal opinion, is a poor move. Firstly, this is an opt out service. Secondly, a passenger has to pay for his own compensation for a delayed or cancelled flight. Previously, the airline offered this compensation for free, more. Third, the compensation is in the form of a voucher, which forces the passenger to book on SpiceJet to avail the compensation as a deductible from the next travel fare. Fourth – the voucher is valid for 90 days only.
Passengers who miss this INR 35 on the SpiceJet website (not offered through OTAs) will together contribute INR 19,30,000 to the airline, per month (assuming 10% bookings are through the website, and all these passengers miss or choose to ignore the INR 35 charge).
For a limited period, opting for a SpiceMax seats entitles a passenger to a complimentary meal. However, the airline allows for a meal to be chosen as well. This means that a passenger pays for a meal that he is entitled to. This seems to be a glitch in the system.
These small little things add up to big money! SpiceJet, we hope, corrects the ‘hot sandwich’ and SpiceAssurance.
Moving towards absolute no-frills
SpiceJet is the first to act like a ‘true LCC’ in India. IndiGo, Go Air, and surprisingly – AirAsia India, are yet to follow with seat selection and no-free check in baggage. On one hand, these moves pitch SpiceJet as a LCC (we now don’t believe in the term, we prefer no frills carrier), and on the other hand, the SpiceMax seats with good legroom and complimentary meals lend it a different image: of good premium economy luxury. Same brand, two images. Does it lead to brand confusion? We think so.
SpiceJet’s Boeing 737-800 MSN 37366 earlier registered as VT-SGU had entered storage in the July of 2014. The aircraft, leased from BBAM, was recently painted in the colors of Pegasus Airlines, and will soon be flown off from Hyderabad Shamshabad to operate for the Turkish airline.
A very significant number of SpiceJet’s Boeing 737s were leased from BBAM, most of which have been returned to the lessor. BBAM, which began as Babcock & Brown Aircraft Management remains the largest lessor for SpiceJet, with five aircraft – VT SGG/SGH/SGV & SGQ – all four Boeing 737-800s, and VT-SPU – a Boeing 737-900.
Recent media reports pointed to BBAM taking SpiceJet to court for the de-registration of the five 737s. The airline issued a statement on 25th March ststing, “Discussions have been ongoing with the lessors for an amicable settlement.SpiceJetfully expects the matter will be resolved shortly and positively with the lessors, and there will be no grounding of aircraft or disruption of operations.”
All five BBAM aircraft are still operating flights for the airline.
SpiceJet today flies an active fleet of 17 Boeing 737s, which includes only one 737-900 leased from BBAM. The other lessors are Air Lease Corporation (ALC), Ansett Worldwide Aviation Services (AWAS), Bank of China Aviation (BOC), Industrial and Commercial Bank of China (ICBC), and Mitsubishi Corporation Aviation Partners (MCAP).
SpiceJet owns all its fifteen Bombardier Q400s.
GE Capital Aviation Services (GECAS), another prominent lessor, had towards the end 2014 pulled out its five Boeing 737s, four of which are parked at Seletar Airport, Singapore- VT-SZE/F/G/H, all of which have been de-registered.
As per the airline’s statement on the 20th of March, 2015, “SpiceJet is also in the process of adding more aircraft to the fleet and expects to add 8-9 Boeings starting in April to take the active Boeing fleet to 25-26 aircraft in the summer, in addition to the 15 Bombardier Q400 aircraft that are owned by SpiceJet. SpiceJet will continue to add more aircraft in the second half of the year to take the Boeing fleet up to 34-35 aircraft by the end of the year.”
It is believed that some of the 737s to come will be wet leased.
There are few airlines in India which talk about their employees on social media. IndiGo has been featuring some of its staff and crew in its in-flight magazine, but these are more individual stories – either of struggle or achievement than a general feature. AirAsia India hasn’t officially talked of its staff – most photos of staff in a joyful mood are clicked and posted by its poster CEO Mittu. Air India only recently got active on social media. Go Air remains silent and Jet Airways uses certain employee photos to focus on matters other than the employees.
SpiceJet stands out. It became the only airline in India to sticker photos of its crew on the sides of its poster aircraft – VT-SZK. It did away with models, and featured employees for all promotional advertisements and banners. SpiceJet uses its employees as faces of the airline. Women’s day had to be special
Of all airlines in India, SpiceJet and Air Costa were the only ones to issue press releases with photos of their all women crew. While SpiceJet talked of 16 all women flights operated on Women’s day, Air Costa operated four flights with an all women crew. Air India operated four such flights, but spoke nothing of it on its social media sites. Air Costa issued a press release, but it was only the chief financial officer (CFO) Vivek who posted photos of the all women crew. The only airline that well coordinated the effort was SpiceJet.
Sanjiv Kapoor, the COO, was active on Twitter, and posted a photo of him posing with the all women crew who flew him from Goa to Delhi. The airline allowed all its fans and followers on Twitter to ask four of its women crew – a captain, a first officer, a cabin crew in charge, and a cabin crew, questions about pretty much anything. It also posted photos of the all women crew that operate the first Q400 and Boeing 737 flights today. SpiceJet pulled all plugs to engage with its audience, and the crew interaction was perhaps the most meaningful activity hitherto undertaken by any airline in India, on Women’s day. The message was clear – don’t just admire, ask and learn. SpiceJet may have been successful in not just inspiring, but guiding men and women seeking a career in the airline industry. Efforts of the management head and the airline social media team seem to have been energetic, and well co-ordinated. Sunday wasn’t an excuse.
While SpiceJet conducted a great, out-of-the-box and meaningful exercise on social media , one aspect where it perhaps fumbled was in blindly (though unofficially) promoting a poorly researched story about a SpiceJet woman pilot from a particular religious community that was carried in the mainstream media – Hindustan Times.
Social media take away – Do what SpiceJet did (not necessarily follow, but get inspired!). It was brilliant and out of the box. Also make social media mental checklists a habit, so that certain stories, when promoted, don’t damage the image of an individual or an airline.
Kudos to SpiceJet, for what it did. We’ll next have to convince them to form an ‘Aviation Day’ that we can observe and celebrate.
Yesterday, SpiceJet announced 5,00,000 seats for sale, bringing back the airline’s ‘Sale’ after a gap of three months. This does send across a message that the airline has set its focus on staying afloat. We discuss SpiceJet under its re-crowned king: Ajay Singh.
Ajay Singh is believed to return to SpiceJet because of two reasons: Him being approached by Maran to revive SpiceJet, who was mulling over closing the airline; and the lower oil prices, and an economy that’s poised to grow. Being a BJP man, he was also approached by the government to salvage the airline, as an airline that bites the dust will imperil the investment climate in the country, posing strategic imperatives for many including the government. And the people, for whom airfares will increase.
The 2015 summer schedule, which comes into effective March 28th onwards, has been planned for 280 daily flights, to be operated with a fleet of 26 Boeing 737s and 15 Q400s – a 41 aircraft fleet, of which 39 will be active at any given time, up from today’s 16 Boeing 737s and 14 Q400s. The commercial team swung back into action, opening bookings till October 2015, and offering 5,00,000 seats for sale, boosting cash flows at the airline. Ajay’s idea is to bounce to a 35 aircraft Boeing fleet as soon as possible- which would be a challenge given that the airline today doesn’t have enough Boeing pilots to fly a fleet of that size. Reportedly, the airline by end of March will have enough pilots to fly only 15 Boeing 737s, as a significant number are serving their notice period. Ajay has appealed to these pilots to reconsider their decision to leave.
Ajay’s priority, as far as the Q400s are concerned, is to pressurize and renegotiate with the manufacturer – Bombardier, to make the turboprop fleet a profitable one, allowing the Q400s to stay for a longer period, and perhaps growing the fleet. Ajay was never in support of the Q400, but as in previous analysis on this site, the turboprops are good money makers, and are needed by SpiceJet to differentiate itself from a big player like IndiGo, by offering routes that are both commercially and technically unfeasible for narrow bodies to operate on. The only problems that SpiceJet may be facing are maintenance and support issues. Ajay looks to making the Q400 fleet ‘a profitable fleet’. SpiceJet has received immense support from Boeing, but has been disappointed with Bombardier who has apparently not behaved as fairly with the airline as they should have.
With money flowing in, Ajay aims to renegotiate all those bad contracts that have been signed.
Ajay wishes to treat the pilots who’ve recently left as furloughed, and looks to getting them back on board on priority. However, this would be a challenge from a technical, emotional and legal perspective, especially for those who have already started flying on another type.
Ajay Singh is looking to introduce a cultural change, or rather, bringing back a culture of transparency between the employees and the higher management. Ajay will look towards better employee and customer engagement, with his aim of achieving perfection in human interaction.
For example, although the present COO Sanjiv had made it clear to all employees that he was accessible anytime via email, there were others lower in the chain of command who had broken this link of direct communications. The Flying Engineer, who had interacted with certain operational staff, had vented out their frustration in not being able to reach the COO directly. Ajay Singh has been made aware of unwanted forces in the airline, and has initiated a task to indentify the negative, and the passionate, and separate these forces for the benefit of the airline, to bring back a cleaner culture they started with, in 2005.
Uplifting hot meals for the crew was recently resumed.
To bring in a greater sense of belonging and loyalty, Ajay Singh is looking to introduce an employee stock ownership plan (ESOP). He reportedly told a section of employees, “I want to see all of you owning a piece of SpiceJet”.
To help reset the airline to a comfortable position, Ajay Singh will put money into the airline, in three installments – February, March, and April. He’s already pumped in some money into the airline, but that may have been an emergency infusion to help with aircraft that lessors look to repossessing.
Ajay seems to know what he’s getting into. Sources quote him as saying, “Plenty of sh*t I get on my plate with this acquisition. It needs cleaning up, and it will take time to clean up. I’m still discovering the problems at SpiceJet.“
Who sh*t on the plate?
Perhaps there is nothing quite as frustrating as working for someone who doesn’t grasp the basics of the business. Kaneswaran Avili, CCO at SpiceJet had tweeted on 14th November 2014, the day of a board meeting, “Aaaaiiyoo why no one understand RASK……”, very obviously referring to the board.
SpiceJet today is riddled with multiple problems, most of which are related to the airline being cash strapped for a fair period of time. Ajay being a director with SpiceJet since he sold his stake to the Marans in 2010, has kept a watch on the airline, and reportedly believes that the cash strapped situation arose because of some strategic decisions that went wrong in the early years of transfer to the Marans, and also because of certain commercial decisions which were taken primarily in the year 2013, which led to a significant cash burn for the airline, which the airline couldn’t recover from.
Having said that, Ajay reportedly doesn’t seem to throw the entire blame on Maran, as the latter’s background didn’t prepare him to take on airline – a business which is extremely competitive, and consumer centric, contrasting the other businesses he runs. Maran’s lack of involvement in the airline cost him.
Ajay feels he can make a difference, as his involvement in the airline he founded gives him a better understanding of the space. Ajay seems to be passionate about SpiceJet as a brand, and works hard to defend, just like Sanjiv Kapoor, that the present situation at SpiceJet is far different from that at Kingfisher in 2012.
While Ajay believes that the airline has a lot of positives to re-build on, including a strong team led by performers: Sanjiv and Kanesh, the external environment is fast changing – competition is stiffening. SpiceJet will have to play to its strength, to hopefully find itself in a healthier and comfortable state by May 2015 – a month when domestic travel demand is very high, and also the month the airline started operations in its present form, 10 years ago.
In the light of Ajay Singh taking over SpiceJet, media reports and general speculation had pointed that the revival plan of Ajay’s ‘include culling the 15 Bombardier Q400 regional aircraft from the airline’s fleet’. On the contrary, The Flying Engineer has learnt that SpiceJet’s Q400s are here to stay.
While the industry in general is led to believe that a single fleet strategy is best suited for a low cost carrier, based on the success of Southwest, Ryanair, AirAsia, and IndiGo, The Flying Engineer has firmly believed in a dual fleet strategy to effectively penetrate the Indian market. This is based on the Indian market which falls into three broad categories:
Thick, long and short routes – markets which are mature and overcrowded, such as Bangalore- Delhi (long), and Bangalore -Goa (short).
Thin, long and short routes – markets which are evolving (underserved, and unserved), such as Bangalore – Chandigarh, Bangalore- Vishakapatnam.
Thinner, short routes – markets which will not mature easily – such as Vijayawada- Hyderabad, Bangalore-Belgaum.
The reason for the last market to not mature easily is the fairly good rail and road connectivity that is present between such city pairs. Yet, there is a segment (albeit small) of travellers who will pay for the time and convenience of air travel, which reduces an overnight journey to around an hour or so. Further, at many such destinations, the runways haven’t been upgraded to allow bigger jets to land, making them fit almost exclusively for turboprop operations with ATR72 (typ. 72 seats) and Q400 (typ. 78 seats). Since most travellers on this segment are those who value time and convenience, and because there is insufficient competition, an airline like SpiceJet enjoys good pricing power.
To support this, SpiceJet, in Q2 FY’15, realised a passenger-only RASK (excludes ancillary revenues) of INR 2.74/ASK, while the Q400s delivered INR 4.99/ASK. This passenger only RASK of the Q400 was higher than the average RASK (including ancillary revenues) of INR 3.26/ASK.
In Q2, the Q400 flew only 8.13% of the airline’s total deployed capacity, yet contributed to nearly 14% of the airline’s total passenger revenue. Interestingly however, the Q400 made up 30% of the airline’s fleet in Q2, but had only 14% of the airline’s total aircraft seats.
What worked the most against the Q400 was the maintenance costs, which The Flying Engineer has been led to believe is a problem of the past, when maintenance facilities were not available in the sub-continent. Perhaps the selection of the aircraft wasn’t right, but the dual fleet concept wasn’t wrong.
Should SpiceJet bounce back with the infusion of funds, the airline may have to redo the Q400 network a bit and play the aircraft to its strength, better feeding into the mainline network with traffic from Tier III routes. This is one of the ways a smaller player in the market can hope to survive through differentiation, and monopoly / duopoly, especially when established routes are crowded with very low margins.
The days of a dual fleet jet – a mainline narrow body complimented by a regional jet, are not far off, either.
SpiceJet has automated the process of applying for a refund or modifying the flight booking should the flight be delayed by more than 90 minutes. Rescheduling the flight under these circumstances, as reported by the airline, comes at no charges. The steps are self explanatory and on the airline’s website.
This seems to have been a move taken by the airline in response to unbearably long queues in congested call centre lines. With heavy disruptions in the airline’s flight schedule over the past few days and weeks, prompting action from the DGCA, the airline came under flak from passengers, resulting in a brand image that was spiraling down in the light of poor service (On time performance and flight realization are very large contributors to service quality).
Reportedly, “This is the first time ever an airline has automated disruption management to enable passengers find alternatives”.
The airline has reportedly been flying additional flights to cater to affected passengers. The efforts taken by the management team over calendar year 2014 seem to have been negated by the effects of a lack of funding at the airline which led it to the crisis it is in today.
The management seems confident of a future for the airline with new investors coming on board to fly it out of difficult times. With such hopes, it is necessary to cater to the flyer of today for a loyal base for tomorrow.
In an interesting observation, IndiGo’s load factors for Q2 FY2014-15 were found to be consistently below the average domestic load factors for the first time in its entire operational history.
The chart above (click to expand) captures IndiGo’s domestic load factors as reported to the DGCA. Plotting this against the average domestic load factors reveals 13 months out of 98 when the load factors of IndiGo have dipped below the average. Most of these below-average loads were in the first seven months of operations at IndiGo. In the last six financial years – the same years when the airline has been reporting profits – this has occurred just thrice. However, in this financial year alone, it has occurred thrice – in Q2 FY’15.
It what appears a challenge of supremacy, SpiceJet’s market stimulation was able to distort usual market dynamics in the lean season. For instance, September, which is historically – from the last three years – the weakest month for domestic travel as indicated through the lowest load factors – has this year matched the load factors as seen in May 2014. While demand still remained low, the market stimulation drive created demand, at the expense of yields but to the benefit of RASK – revenue per available seat kilometer.
While SpiceJet brainchilded and executed this, not every airline could follow its footsteps. IndiGo was unable to match SpiceJet’s market stimulation effects, which positively impacted SpiceJet in Q2, and positively impacted other airlines as well. IndiGo’s load factors also rose in sync with the average domestic load factors, but however, underperformed with below average loads.
Indigo, by following what SpiceJet did, salvaged its September. However, its loads in July and August this year were lower than its loads in the same months the previous year. This performance explains in part the Q2 loss of 100Cr incurred at IndiGo.
In short, market stimulation both surprised and helped the blue airline.
India didn’t seem ready for a taste of South East Asian proven low cost strategy. At the same time, IndiGo is ready to make a killing in the months of November and December, lapping up the excess demand due to SpiceJet’s cancellations and planned temporary capacity reduction.
SpiceJet stimulated the market with great effort, only to hand it on a platter to IndiGo in the peak season.