Could SpiceJet have been profitable in FY2013-14?

Edit: SpiceJet issued a statement in response to this article. Its comments and our corrections appear at the end.

Q1 of FY2014-15 had just closed, the first quarter with an almost all new team at SpiceJet. We looked back at FY2013-14, with five year trends where needed, to see what went wrong and what the airline was changing.

Key points

• FY2013-14 saw SpiceJet's lowest load factors, and load factors tracked operating profit closely.
• Loads suffered from a damaged brand and from too few direct flights, frequencies and good timings. SpiceJet lost traffic on key routes to IndiGo's point to point network.
• Cargo was on par with IndiGo but well below GoAir.
• 40 minute turnarounds and the lowest utilisation among LCCs hurt revenue and costs. Dirty aircraft added fuel burn.
• Maintenance costs rose steeply, probably from heavy checks; the dollar was not the main cause. Agent commissions added cost. Q400 loan interest tracked the dollar.
• Newer 737NGs could save real money. The Q400 was a white elephant. Employees were both asset and liability.
• Verdict: SpiceJet could have been profitable or at worst reported a modest loss. A purely academic sum showed about INR 550 crore of profit.

Background

As of 30 June 2014 only three independent low cost pan India airlines remained: IndiGo, SpiceJet and GoAir, in order of fleet size. IndiGo had been profitable six years running, GoAir dipped in and out, and SpiceJet had just reported its largest ever loss, INR 1,003 crore. Kingfisher stopped flying in October 2012 without a single profitable year. Jet Airways and JetLite were too old and too big to change quickly.

SpiceJet's roots went back to ModiLuft, a 1994 tie up between the SK Modi group and Lufthansa that stopped flying two years later. The valuable AOP changed hands and the airline became SpiceJet. In June 2010 Kalanithi Maran of the Sun Group became promoter; the airline reported a profit only in the year he took over. FY2013-14 was the first full year with all 15 Bombardier Q400s, and the year CEO Neil Mills left. Management churn and family control cost the airline. That changed when Sanjiv Kapoor joined as COO in November 2013 with a free hand, and the slogan moved from "Flying for everyone" to "With all our heart".

The highs and the lows

Over five years SpiceJet made a profit twice: INR 61 crore the year before the Sun Group arrived, and INR 101 crore in FY2010-11. In 2010-11 it started international flights and ordered 15 Q400s with 15 options, with a fleet of 20 at the end of FY2009-10. Losses followed: INR 606 crore in FY2011-12, INR 191 crore in FY2012-13, then INR 1,003 crore. Three of the five years showed an operating profit; finance costs, selling expenses and other expenses dragged them into net loss. In FY2013-14 the net loss was 440% of the operating loss.

1. Revenue from operations

Load factors. In the LCC market fares on a route converge, so volume is everything. FY2013-14 brought SpiceJet's lowest domestic and international load factors in five years. Passengers cared about timing and connections, fare, on time performance and the in flight experience, in that order.

A damaged brand. In Q1 and Q2 of FY2013-14 the airline hit bottom on cleanliness, service and food. Older 737s had dirty seats in dull grey, off white and red, against IndiGo's clean blue and white. The India head of a global computer brand told us he would never fly SpiceJet again. Hot meals were hot versions of stale food. DGCA data showed the worst on time performance and the most cancellations in May 2013.

Too few flights and connections. In March and April 2014 SpiceJet averaged 6 flights per destination against IndiGo's 14. Bangalore to Lucknow showed the gap: IndiGo had a 2h25m direct flight and 15 one stop options as short as 4h35m; SpiceJet had one option taking 10h35m with a 6h40m layover at Delhi, often at a higher fare. SpiceJet had 20 fewer aircraft than IndiGo but about 20 more destinations, and leaned on hubs where IndiGo flew point to point. SpiceJet became a tourist airline.

If loads were higher. Average yield was INR 4,999. At a 75% load factor, 2.8 points higher, revenue would have risen INR 244 crore on the INR 6,304 crore earned, with only about INR 33 crore more fuel: a gain of INR 211 crore. The fleet mixed 189 seat 737-800s, 212 seat 737-900ERs and 78 seat Q400s, a weighted 163 seats. With Q400s at 80% loads, the Boeings were below 72%. IndiGo's loads were 76.7% domestic and 81.6% international.

Cargo. In FY2012-13 SpiceJet carried 65,690 tonnes for INR 150 crore, about INR 22,850 a tonne. In FY2013-14 it averaged 685 kg a flight, near IndiGo's 643 kg but half GoAir's one tonne plus. Another 115 kg a flight could have added INR 30 crore.

2. Costs of operations

Utilisation and turnaround. SpiceJet flew its aircraft about 8.5 hours a day (see the airline's response below) against IndiGo's 11.5 and GoAir's nearly 12.5, March 2014 figures. IndiGo targeted 30 minute turnarounds; SpiceJet targeted 40. Over six flights a day that was an hour lost, enough for another Bangalore to Delhi or Mumbai to Delhi flight. On 18,494 million ASKs and INR 6,304.23 crore, lifting utilisation to 11.5 hours could have pushed ASKs to about 25,000 million and revenue to about INR 8,600 crore, a net gain of about INR 495 crore after extra costs.

Dirty aircraft. Dirt and poor airframe condition can add up to 1% fuel burn. Even a 0.1% penalty cost about INR 8 crore.

Maintenance. The dollar averaged 34% stronger in FY2013-14, but maintenance per aircraft tripled. Dollar adjusted, it had averaged about INR 5 crore per aircraft a year for four years; in FY2013-14 it was INR 17 crore, where INR 7 crore was expected. Almost 30% of the 737s were seven years or older and six had reached the age of the expensive heavy check; seven more would turn seven the following year. IndiGo avoided this with six year leases on new aircraft. Without the Q400s and with leases held to six years, the bill could have been INR 406 crore instead of INR 993.25 crore, a saving of INR 580 crore.

3. Other expenses

SpiceJet paid agents about 3.5% commission, an estimated INR 200 crore, which could have cut fares by about INR 175 a ticket. Finance costs, mostly Q400 loan interest, rose from INR 116 crore to INR 136 crore, in step with the rupee's fall. Eight Q400s arrived in FY2011-12 and seven in FY2012-13.

4. Aircraft

Single type fleets suited Ryanair, AirAsia and Southwest, but JetBlue, WestJet and Nok Air showed a mix could work. 737s delivered from late 2010 had the Sky Interior; SpiceJet had 11. From July 2011 737NGs came with CFM56-7BE engines and the performance improvement package, worth 2% in fuel, about INR 1.3 crore per aircraft a year. Had the 23 older 737s been new, savings would have been INR 20 to 30 crore.

The Q400 was not suited to Indian heat: early windshield cracks, APU problems in summer and engine driven hydraulic pump failures hurt dispatch reliability, and Bombardier spares support was slow. Sanjiv Kapoor told us the aircraft needed a "cooling period" between flights and could not be pushed. The ATR 72 flew slower but burned 20 to 30% less fuel, and the Q400's speed advantage was never turned into extra sectors. The Q400 cost more to buy and run, lessors shunned it, and since SpiceJet had bought the 15 aircraft it could not simply hand them back. Kapoor said they made sense when fuel was cheaper, preferred a single fleet, and said the Q400 "isn't as relevant today". ATRs would also have let the airline hire Indian crews instead of expats costing as much as two and a half Indian captains.

5. People

The airline had 5,200 employees. Captains earned a reported INR 1,15,000 a month less than at IndiGo. One captain told us crews sometimes extended flaps and gear early or used reversers needlessly to make the airline pay. 100 kg of extra fuel a day per captain cost about INR 9,000; put another way, unmotivated crews not saving 50 kg a flight could have cost more than INR 55 crore a year. Some captains skipped ramp jackets while everyone else wore them.

The verdict

Yes. The airline could have reported a profit of about INR 550 crore, or a small loss. Many assumptions were just that, and leases could not be rewritten overnight, but every area listed was one IndiGo had already mastered. SpiceJet now sat between AirAsia India and TATA-SIA: part full service with extra legroom seats, yet unwilling to go as low on fares as AirAsia.

The all new SpiceJet

Image makeover. From December 2013 to February 2014 SpiceJet topped the on time charts. Kapoor said in March that every delay, even of a minute, was tracked to its root cause. On 5 May 2014 Chief Commercial Officer Kaneswaran Avili launched the On Time Guarantee, built on "SOCCH": safe, on time, clean, courteous and hassle free. Boarding music, cleaner cabins, hot meals with Cafe Coffee Day and TAJ-SATS, and five front rows with 35 to 36 inch legroom (a seat removed from the right side) followed, giving 30 seats of unmatched legroom. Twelve of 37 operational 737s had the Sky Interior.

People focus. Captains' pay rose by INR 95,000, trailing IndiGo by INR 20,000. Staff replaced models in adverts and their photos went on the fuselage, a first in India, with a one year commitment in return. Kapoor defended crew against abusive passengers and wrote to staff often.

Turnaround. The 737 fleet fell from 43 to 37 as six older aircraft went back, two scheduled and four early. International destinations dropped from 10 to seven. 42 Boeing 737 MAX were ordered at India Aviation 2014 in Hyderabad in March, due in four years. Avili, ex AirAsia and Tiger Airways, pushed lower agent commissions and more ancillaries, which were 8% of revenue in India against 26% overseas because 80 to 85% of bookings came through portals and agents.

Stimulating demand. The Rupee 1 sale in April drew a DGCA rebuke before AirAsia and IndiGo were allowed Re 5 and Re 1 fares. Promo fares of INR 1,899 netted about INR 1,500 a seat; on Bangalore to Delhi 10 extra passengers burned about 120 kg of fuel costing INR 11,300, still leaving INR 370 a passenger, close to INR 50 crore a year across 360 daily flights. First time flyers were becoming repeat customers.

The last word

If IndiGo could do it, so could SpiceJet, but time was short. 17% of its Boeing capacity would compete with TATA-SIA and 83% with IndiGo and AirAsia India. We suggested tighter fuel discipline, 30 minute turnarounds, a rear section for families, and Scimitar winglets that could cut the Boeing fuel bill by over 1.5%, about INR 40 crore, for a little over INR 3.3 crore a set. SpiceJet needed a good bath and a hot shower, because it was getting classier than ever.

Airline response

Sanjiv Kapoor, COO: 57 aircraft were on the register but six were at MROs being redelivered to lessors, two scheduled and four early, leaving 51; "Red Chilli" arrived in May, making 52. Our note: we had used 57 from the airline's own press releases. Six aircraft on the ground for so long only strengthened the utilisation argument.

Anurag Jain, Senior VP Network Planning and Strategy: Comparisons should be within the same family, 737 against A320 and Q400 against ATR, since smaller aircraft fly shorter sectors by design. Actual utilisation was about 12 hours on the Boeings and 10.3 on the Q400s. Our note: with 51 aircraft our figure became 9.6 hours a day, only an hour higher, and still short of even the 10.3 quoted for the Q400.