SpiceJet: Ready to fly higher

SpiceJet was always going to be a fuel price proxy in my mind.

SpiceJet closed business for a day in December 2014, owed Rs 2,100 crore in unsecured liabilities, had 5,000 employees, the oil marketing companies were hounding it for payments, lessees demanded their aircraft and the company needed something more than only an oil price collapse.

No one would have touched this company; Ajay Singh did.

This is what he might have seen:

One, Kingfisher Airlines had possibly Rs 12,000 crore in debt, against Rs 4,500 crore in annual revenues; SpiceJet needed only a bridge debt of Rs 1,300 crore, against Rs 4,000 crore in revenues.

Two, fuel prices were declining virtually every day; a peak price of Rs 77 a litre had declined to Rs 56 by December 2014 and the incoming chief executive officer (CEO) possibly placed his chips on a sustained erosion for his company to return to the black.

Three, he could possibly see that the average aircraft utilisation at 11 hours a day was about 90 minutes below what he considered easily doable.

Four, ancillary revenues were at eight per cent of all revenues, against a potential 13 per cent.

So, his crack team got down to fixing the company.

The first thing it did was establish revenue predictability; revenues would drive cost optimisation (not the other way around). The company asked employees to set sales targets; this was raised 10 per cent every successive month; he announced a sales incentive scheme (higher you achieve, the more you are paid).

The second thing was to fix its load factor network: From a low of 73 per cent in April 2014, the company achieved 90 per cent-plus in the last nine months of 2015-16.

The third was CEO visibility. Ajay Singh's open-door policy (literally) worked; the decision to insource cargo management was decided (reportedly) in 10 brainstorming minutes (trebling revenues in two months). He checked revenues every half an hour, combined the roles of head of sales and head of commercial, got around to getting to know people by their first name, right-sized the operating team (from 120 per aircraft to 100), and issued full-page ads in newspapers to enhance customer trust.

These worked.

By January 2016, flight cancellation had declined from a peak 2.5 per cent to 0.5 per cent; aircraft turnaround had declined to around 20 minutes, profits strengthened to Rs 238 crore in the third quarter of 2015-16 (seven per cent from fuel cost decline and nine per cent due to the company's mehnat) and overall liabilities were down to Rs 700 crore (possibly extinguishable by the first half of 2016-17) with no term loans on the books.

Singh backs the company because the Indian commercial aviation sector is growing 15 per cent a year, comprises only 400 aircraft (against 700 considered adequate), only two per cent of India is flying and even if oil prices rebounded, the company is now in a position to sweat volumes and economies better.

Result: SpiceJet intends to buy around eight aircraft each year.

That's some spice for thought.

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed