BackSpiceJet shrinks to grow in profit quest
SpiceJet seeks to lower costs by flying fewer and newer aircraft to improve fleet efficiency and cut fuel cost
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New Delhi: SpiceJet Ltd, the Indian budget airline that’s posted four straight quarterly losses, seeks to lower costs by flying fewer and newer aircraft in a bid to return to profit amid intensifying competition from AirAsia Bhd.
The airline returned two 14-year-old aircraft to lessors three weeks ago, and will consider removing other older planes to improve fleet efficiency and cut fuel cost, chief operating officer Sanjiv Kapoor said in an interview.
SpiceJet, majority owned by billionaire Kalanithi Maran, has this year offered fares as low as ₹ 500 to fill seats that would have otherwise gone empty, boosting its own occupancy and forcing competitors to follow suit. The budget carrier is shrinking the size of its fleet and workforce to lower costs in one of the world’s most expensive markets for airlines.
“It’s better to be one size smaller" with more seats filled in fewer aircraft, Kapoor said in New Delhi on 12 September. SpiceJet has cut capacity by 10% this year, and aims to shrink by up to 14% in the year ending December, he said.
The steps come as SpiceJet looks to raise funds, including from the sale of stake. In March, S.L. Narayanan, the chief financial officer of SpiceJet’s parent Sun Group, had said the weak operating environment in India is unlikely to attract investors immediately.
SpiceJet is “conceptually open" to raise funds through sale of stake to another airline or private equity, or debt, Kapoor said, declining to provide more details.
Shares of the carrier have declined 22% this year, compared with the 26% gain in the BSE Sensex.
Fleet size
“To improve efficiency, SpiceJet will consider returning some more older planes that have higher fuel consumption and are costlier to maintain," said Kapoor. State taxes of as much as 30% on aviation turbine fuel mean carriers in India have to spend 60% more than the ones in other countries, according to Kapoor.
The airline, which has 38 Boeing Co.’s 737 aircraft and 15 of Bombardier Inc.’s Q400 turboprop plans, has stopped services to some cities including Guangzhou, Riyadh and Bangkok.
“Any short-term capacity gaps may be filled by dry lease-ins," he said. “We believe there is overcapacity in the market in the near term."
The carrier has also deferred taking delivery of two Boeing 737 planes to next year, Kapoor said.
The number of employees at SpiceJet will decline to less than 5,000 by the end of this year, from about 5,600 at the start of 2014, Kapoor said. Some positions that fall vacant as part of normal attrition won’t be filled as the carrier seeks to have less than 100 employees per aircraft, he said.
Fare cuts
SpiceJet has offered low fares to those who book early to fill vacant seats and cover its cost of carriage, Kapoor said. That’s helped fill 82.5% of seats in August, the highest among local carriers for a second consecutive month, according to data from the Directorate General of Civil Aviation (DGCA).
Some benefits of its strategy were seen in the first quarter, according to Kapoor. While fuel expenses rose 4% in the three months ended June, total revenue per available seat kilometer, a measure of revenue performance, increased 9.4% even as capacity was cut.
Still, the company’s liabilities exceeded assets by ₹ 1,020 crore as of 31 March.
“Funding the operations, going forward, would remain a very challenging task for the company," Rashesh Shah and Darpan Thakkar, analysts at ICICI Securities Ltd wrote in a note to clients dated 19 August.
Competition intensifies
The strategy to shrink size and offer low fares come as competition in India intensifies, where over the last seven years airlines are estimated to have lost $22 every time a passenger has stepped on board. That’s added up to a $10 billion loss, according to estimates by CAPA Center for Aviation, in a market where the number of domestic travelers is projected to triple in the decade to 159 million by 2021.
A subsidiary of AirAsia, Asia’s biggest budget carrier, started local flights in June and a joint venture between Singapore Airlines Ltd and Tata Sons Ltd aims to start operations this year. Last year Etihad Airways PJSC acquired a stake in Jet Airways (India) Ltd after India changed ownership rules for airlines.
SpiceJet increased its market share to 19.5% last month from 17.8% in March, overtaking state-owned Air India Ltd to become India’s third largest domestic carrier by share.
“Key trends are positive," said Kapoor. “Next quarter through calendar 2015 could mark the period that the turnaround becomes visible." Bloomberg
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