Does SpiceJet's recovery match the hype?

The airline that was almost written off last December has managed to stay profitable for three consecutive quarters this year

Years ago, Warren Buffett lost money on his investments in US Airways. After the bad experience, he swore off airline investments altogether. But this year, he made a huge investment in Precision Castparts, a company that makes components for airplanes. Buffett may be convinced that airlines cannot make money for him, but he is also certain that sale of airplanes is not slowing anytime soon.

This dichotomy defines India's aviation business too. While Indian skies are littered with disasters, falling crude prices and lower fares are leading to a boom in air traffic. It's possibly this belief that brought Ajay Singh back to SpiceJet, and helped him steer the airline on the path of recovery.

Last December, SpiceJet had almost been written off as a failed company. It was struggling to pay its outstanding dues and consequently had to ground its flights for days. Everything that could go wrong with an airline went wrong with it. A turnaround at that time seemed impossible and bankers were convinced it was going the Kingfisher way.

But 12 months later, co-founder Ajay Singh seems to have brought the company back from the brink. Last year, when he infused Rs 800 crore into the airline, his 58.46 per cent stake was worth Rs 654 crore. In less than 12 months, its value has risen to Rs 2,460 crore. The airline has also clocked profits in three consecutive quarters this financial year.

How did it survive?
While doubts still remain about the turnaround, it is remarkable that Spicejet has managed to survive the turbulence. Singh says he is taking one day at a time. His restructuring plan has focused on improving the airline's performance, regaining customer confidence and boosting the morale of employees.

Operationally, his focus has been on regaining market-share that the airline lost in the wake of the crisis last year that saw 20 of its aircraft being taken back by its lessors. To build capacity quickly, Singh has resorted to taking aircraft on wet lease, something that investors and analysts do not like, but its positive results are there to see.

SpiceJet now operates 300 flights a day, up from 220 flights daily last year, and this has led to its market share rise from 9 per cent in December last year to 13.3 per cent in November this year. The airline's on-time performance has also improved drastically from only 40 per cent of its flights arriving on time last year to 86 per cent now.

Putting any doubts about the airline's turnaround plan to rest, JM Financial in a note to investors says, "Normalcy of flight cancellations, elevated load factors and regaining of lost market share vindicate the strategies adopted by the new management."

Cutting costs
A big part of Singh's turnaround plan rests on improving the airline's productivity. SpiceJet's fleet utilisation has been increased from 11.5 hours to 14 hours per day in case of Boeing and from 10.5 hours to 12 hours for its Bombardier planes.

There is a tighter control on its fuel utilisation as well. SpiceJet has invested in a monitoring system which tracks its fuel efficiency and provides inputs on how to manage payload and fuel burn more efficiently. It has also replaced its old brakes with lighter carbon bakes to save fuel.

Changes are under way on other fronts too. Destinations which have only a single flight or are unprofitable are being removed from its network. SpiceJet, for example, flew a Pune-Sharjah flight but it largely catered to Dubai-bound passengers. The airline, therefore, tweaked its network and now flies to Dubai directly from Pune.

The results are already visible. The airline's passenger occupancy has been consistently above 90 per cent since May. In comparison, IndiGo's occupancy have been between 76 and 91.9 per cent during the six months of this year.

The share of ancillary revenue in SpiceJet's total revenue has also grown. It rose from 9 per cent in the first quarter of this year to over 11 per cent in the second quarter. This is the same as IndiGo's earnings from ancillary sources. Singh plans to raise the share of ancillary business further to 25 per cent of the total revenue.

SpiceJet's cost of flying per passenger has shown improvement over the previous year. Several factors, including the drop in fuel prices, renegotiation of maintenance contracts and sharp decline in aircraft redelivery expenses, have helped the airline achieve this. In the first quarter, SpiceJet reported unit cost of Rs 3.75. (a gain of 13 per cent over the same period last year) and Rs 3.78 in Q2 (a gain of 8 per cent).

The big overhang
Many believe the turnaround looks real. "It would be unfair to brand SpiceJet's revival as hype. They are not totally out of the woods yet in terms of debt, other liabilities and sustainable profits, but appear to be on the right track. To accomplish this turnaround in less than 12 months in a highly competitive and low-margin Indian airline industry is surely praise-worthy," says Amber Dubey, partner and head (aerospace and defence), KPMG.

However, even as things are looking up operationally, SpiceJet is yet to fully clear the dues it owes to airport authorities and lessors. Recovering dues from a bankrupt entity in India is not an easy task and Singh has used this to renegotiate terms with vendors and lessors.

To the Airports Authority of India, SpiceJet is paying on a daily basis. "We pay something extra for past liability. From Rs 275 crore, outstanding to AAI, the dues have come down to Rs 150 crore," says Singh. The total outstanding dues on its books are at Rs 1,000 crore now from Rs 2,200 crore last year.

Singh, however, is looking at SpiceJet's future with optimism. He has revised the number of new Boeing 737 Max planes that SpiceJet plans to induct in its fleet from 42 to 55. In addition, plans are also afoot to induct 100-150 narrow body Airbus or Boeing planes. Singh believes a bigger fleet size will help it lower its leasing and maintenance costs.

"We are in the process of placing a large order. We have floated a request for proposal and have got responses from Boeing and Airbus. We hope to finalise the order before the end of the financial year," says Singh.

However, there are some loose ends still to be tied. “These have been exceptional twelve months for SpiceJet as it  has come from the brink of closure to deliver a stable and profitable operation. Though a lot more is required to create a sustainable and strong airline, the results till date indicate the direction is positive and airline is set up for a step change. Raising funding and management recast at the top is critical for reaching the next level. I want to see SpiceJet as a board-driven and less as a promoter-controlled airline. This to me is necessary and perhaps, likely, ” says Kapil Kaul, CEO, Centre for Asia Pacific Aviation.