High fuel prices are not only taking a toll on airline companies’ balance sheets, but also forcing them to innovate to cut costs. SpiceJet Chief Executive Officer Neil Mills explains why there is always scope to bring down costs not by taking from anyone’s pocket but by doing things efficiently. Excerpts from an interview with Mihir Mishra:
What explains the poor performance in the last two quarters?
High fuel prices during the period have been one of the reasons. Another major reason has been that two big carriers have kept their prices incredibly low, making it impossible for us to pass on the increase in fuel prices to consumers. The average fare for the industry, which is a bit over Rs 3,200, should be about 15 per cent higher to improve our finances. Fuel prices have gone up by about 40 per cent over the last year and now constitute over 50 per cent of our total operational costs, which is huge.
Rising fuel prices cannot be controlled. Are there ways to offset the impact of fuel prices when you cannot raise fares either?
We have done everything possible to control the non-fuel cost and have been able to bring down our cost available per seat kilometre [CASK — an indicator of the operating cost of an airline] by five per cent during the first quarter of the current fiscal compared to the same quarter last year. We have been able to achieve this by doing little things efficiently. All we can do about the fuel cost is to make payments to oil marketing companies in time and get some discount in return.
What are these little things that you have been able to manage?
We started to look at ways to make our staff more efficient. From April, we introduced a new rotating menu that helped increase our on-board sales by around 30 per cent. Among other things, we are reviewing various contracts to make them more efficient and all this has helped reduce our cost.
I am also trying to avoid costs by signing cheques for around 50 per cent of the payment that goes out of the company. I spend time signing cheques everyday to know about our costs and ask for details if the cost is not logical. Even if we do not save it today, we can save it in the future. There are little adjustments that need to be made to save costs and there is always scope for that. For the four years I was at EasyJet, we were able to reduce cost every year. So, there is always scope.
What are you doing to make your staff more efficient?
Employee cost in India is the cheapest and we should not compromise on efficiency to offset the benefit of cheap cost. There are various ways of ground handling being followed at airports across the world that are more efficient than the current system we follow. We are looking at ways to maximise the utilisation of our people.
And what is your outlook for the coming quarters?
It will continue to be a challenging environment for the coming six months at least, particularly with two carriers pricing at an incredibly low level. Even people start behaving illogically, how can I as a logical businessman compete?
We will not be able to offset the fuel price in the coming quarters. The maximum increase in average fares we may see in this quarter would be of Rs 500.
You are making losses for the last two quarter but IndiGo, which follows the same model, is making profits. What is it that they do better than you?
I do acknowledge that they have a good business and are efficiently run. Also, they got a good aircraft acquisition deal from Airbus. The profit they announced recently would make them more profitable than RyanAir, which is the most profitable airline in the world. But I am not convinced that their costs are less than RyanAir.
How are your international operations doing?
Our international operation is fairly a small part of the total network with only six flights a day. We are getting fine volumes and decent yields on the international sector but we are looking at ways to reduce cost, particularly on ground handling. For ground-handling charges we are paying at Colombo and Kathmandu, the service is not up to the mark. We are re-negotiating all those contracts.
You recently received permission to launch more international flights. Are there any plans to increase your international network?
We do not have any immediate plan to expand our international network. We have permissions to start some flights to Colombo and will take a call at a later stage.
You have plans to launch regional operations with Bombardier aircraft. Will you have enough volumes in these smaller cities?
The smaller cities in the country are growing faster than the bigger cities. Passenger volumes in these sectors will not be a problem. In fact, operating these smaller aircraft is cheaper because the sales tax on fuel for smaller aircraft is only four per cent and also we do not have to pay parking and landing charges. Currently, the average sales tax on fuel in India is 24 per cent, which is cheaper only from Bangladesh that charges 27 per cent.
When will this regional venture start paying?
We are getting our first aircraft next week. Our expectation is that the regional venture will start paying from the second year. According to our plans now, we will receive all our 15 aircraft by July next year and regional operations will constitute around 30 per cent of our total operations but the contribution will not be the same in terms of revenue.
Do you think growth for Indian aviation will come from smaller cities?
Smaller cities in India have one and a half million people and this is not a small number by any standards. A city of the same population in the US will have two airports and five or six airlines.
But how many people from these cities actually fly?
India is not on another planet; it is just a bit behind in development. Even if I get 10 per cent of this population on the airplanes, it will be more than enough.