All Set For Smooth Sailing

There are some dates that become milestones in a company’s history. In the case of SpiceJet, there are two dates: December 16, 2014 and January 13, 2017. Between these two dates, the airline went from rock bottom to becoming India’s second largest low-cost carrier. From a near shut down on 17 December, 2014 to the beginning of a new growth story on 13 January, 2017, when SpiceJet chairman and managing director Ajay Singh announced one of the biggest aircraft deals with Boeing, the world’s leading aircraft manufacturer. The Gurgaon-based carrier, which has nearly 13 per cent market share in the domestic air-travel industry, signed a deal to acquire 205 planes from Boeing, worth $22 billion. It was an emotional day for Singh, who took up the command and control of SpiceJet for a second time 24 months ago when virtually all its flights were grounded — due to large debts and lack of cash — and its erstwhile owners, Kal Airways promoted by the Marans, had decided to shut down operations on 17 December, 2014. “This order is the biggest in SpiceJet’s history. It ends the era of turnaround and marks the beginning of a growth story for the next decade,” he told the whole world as he announced the deal with Boeing. Singh says he is weighing various options for financing the new purchase, including sale and leaseback. However, he rules out raising equity or issuing more debt to pay for the planes.

The new aircraft will increase the range of SpiceJet’s flights by up to one hour. “This will open up more destinations within India and abroad,” says Singh. SpiceJet will take delivery of the first of its new jets in the third quarter of 2018, confirms Dinesh Keskar, senior vice-president of Asia Pacific & India Sales at Boeing.

It is incredible how Singh, the original founder of the airline, returned and rescued the airline from shutting down despite its recent downfall. In June 2010, Kalanithi Maran of Sun TV acquired SpiceJet from Singh, who had co-founded the airline in 2005. But very soon, Maran discovered that the challenges of running an airline were much greater and trickier than other businesses. On 15 January, 2015, the company presented the ‘scheme of reconstruction and revival’ before the Ministry of Civil Aviation which proposed takeover of ownership, management and control by Singh from the previous promoters. This was approved by the Ministry on 22 January, 2015 and was subsequently approved by the Competition Commission of India. Consequently, the entire shareholding of previous promoters constituting 58.46 per cent of the equity share capital of the company was transferred to Singh on 23 February, 2015.

Putting Back In Order
To understand the magnitude of this successful turnaround story in the history of Indian civil aviation, let’s rewind to December 2014. What was it like when you got that call from the previous owners, we asked Singh as we settled down in his spacious second-floor office in Udyog Vihar, Gurgaon (now officially called Gurugram). “The previous owners called me to inform me that they were shutting down. They asked me if I would be interested in buying it back. A day before the handover happened, they had already written to the government that there will be no more flights from 17 December, 2014.It was 16 December. I saw a draft email that was supposed to go out to all employees the next morning. It said, ‘they need not come to office from next day’,” recalls Singh clearly as if it all happened just yesterday. So what did he do? “The first thing to do was to instil confidence in all our stakeholders, partners and employees that the airline will continue flying and will not shut down operations,” says Singh. At the time, SpiceJet owed dues to the tune of Rs 2,200-2,300 crore. Today, it claims it has repaid nearly all its dues.

In December 2014, within weeks of taking charge and re-charting its finances, favourable results started to appear, says Singh. In the fourth quarter of FY15, SpiceJet reported a net profit of Rs 22.5 crore, a turnaround from a net loss of Rs 321.5 crore in the corresponding quarter last year. On an EBITDA basis, SpiceJet reported positive of Rs 80 crore, against a negative of Rs 235 crore the previous year. “These results indicate that a recovery is in progress, and is the first tangible evidence of the ongoing revival,” Singh had said back then while discussing the financial performance of the company. “We are confident that we will build a world-class airline and this is the first step. We still have a lot of work to do,” he had said. “Our results show the resilience of the SpiceJet brand, and the unwavering faith, passion, and commitment of each and every one of our employees. I am delighted to see the airline that I helped create this month 10-years ago starting to get back on its feet in this manner,” he had said back then.

In 2014-15, SpiceJet had posted a net loss of Rs 687 crore. A year ago, the net loss for the low-cost carrier stood at Rs 1,003 crore. But in FY15-16, the company posted a net profit of Rs 407 crore. And this happened with Singh at the helm for all of four months. Under Singh’s stewardship — appointed as Managing Director on 21 May, 2015 — the company has been cutting down on expenditure a great deal. On an overall revenue of Rs 5,088 crore in FY16, the expenditure was reported at Rs 4,656 crore, which was much lower than the previous year’s expenditure figures of Rs 5,798.40 (FY15), Rs 7,155.42 (FY14), and Rs 5,784.09 (FY13).

Experts say SpiceJet took a number of steps which resulted in its successful turnaround. Of course, availability of low-priced fuel (Aircraft Turbine Fuel) also helped the company’s fortunes, as it did to every other airline. There were a number of other steps too such as enhanced customer experience, improved selling and distribution, revenue management, fleet rationalisation, optimised aircraft utilisation, redeployment of capacity in key focus markets, renegotiation of contracts and other cost control measures, among others.

Says Amber Dubey, partner, India head (aerospace and defence) at KPMG: “The turnaround proves that a well-managed airline can provide good returns in the Indian market despite the significant challenges and over-hyped doomsday stories about the Indian aviation industry. It also shows that the government’s benevolent support, without pumping in any public money, can do a lot of good for a beleaguered airline and the industry as a whole.”

Looking Ahead
Now, SpiceJet is cruising at the right altitude and with vigour; it has the best figures in passenger load factor and good on-time performance (OTP) month-on-month. At the time of transition (1-15 December, 2014), the company was operating 234 flights. Today, the average flights are 339. SpiceJet is flying to 45 stations and is seeing an increase in its headcount. In FY15, it had 4,185 employees. Today, its staff strength is over 6,700. According to Dubey, the best from SpiceJet is yet to come. “SpiceJet is reporting market leadership in load factor and OTP. With ATF prices remaining below the Rs 60-per-litre mark, demand for flying growing at 20 plus per cent per annum, improvement in airport capacity, new growth centres emerging in tier-2 and 3 locations, and Singh’s strong, visionary, hands-on leadership, SpiceJet’s best is yet to come,” says Dubey. About the Boeing deal, Dubey feels that a competing offer from an aggressive Airbus would have helped SpiceJet get a good bargain.

So what are the future growth areas for SpiceJet? According to Dubey, Indian carriers have just 30 per cent of the global traffic to and from India. “With Indian government demanding prime slots at certain international hubs for Indian carriers in return for higher bilateral quotas, low-cost long-haul flights to the EU, the US, Australia and far east is a great opportunity,” he says.
Ray Conner, Vice Chairman, The Boeing Company, says, “The economics of the 737 Max will allow SpiceJet to profitability, open new markets, expand connectivity within India and beyond and offer a superior passenger experience.” The company said that the new planes will deliver 20 per cent lower fuel use than the first next-generation B737s and the lowest operating cost in its class, —8 per cent per seat less than its nearest competitor. The agreement with SpiceJet is a much-needed boost for Boeing in India, as its rival Airbus has won record-sized orders with InterGlobe Aviation’s IndiGo, India’s biggest budget airline, as well as a recent deal with GoAir. Let’s hope that in the new era of growth, SpiceJet will give its best to the discerning Indian customers.