The Sun Network’s airline, SpiceJet, one of the two low-cost Indian
carriers, set the skies sizzling in early January. The airline launched a
72-hour promotional sale offer and over seven lakh flyers were lucky enough to
get tickets for just Rs 2,013 — on an average, over 50 per cent less than what
they would have normally paid to take the same flight.
Besides these fortunate passengers, SpiceJet’s promoters too should be a
happy lot. Within hours of defying the Government’s request to withdraw its
promotional sale offer, the airline reported a profit after tax of Rs 102 crore
for the quarter ended December 31, 2012.
The profit came on the back of a Rs 163-crore loss the preceding
quarter. In fact, the last year saw the airline on a roller coaster — it
recorded a profit of Rs 56 crore in the quarter ended June 2012, for the first
time after five successive quarters of losses, only to suffer losses again the
next quarter, and a handsome profit the subsequent one.
Buoyed by turnaround
The company is optimistic that this is the turnaround it has been
working on under its CEO, Neil Mills, who joined the company in October 2010.
A major focus of this turnaround for SpiceJet is on tier II and tier III
cities. The airline operates over 330 daily flights to over 42 cities in India.
“Our regional growth is coming from the Indores, Jabalpurs and Bhopals —
those sort of routes where there was not much connectivity before. This shows
that the growth of the business is going to be in those areas,” Mills told Business Line soon
after the Q3 results were announced.
During this quarter, the company honed this strategy of connecting tier
II and III cities even further.
Smaller cities were connected to bigger metros and passengers were taken
onwards to international destinations.
The focus for SpiceJet in its international business is largely on
virgin destinations. The airline has now been permitted to launch more
international flights to the Maldives, Guangzhou in China, and Kabul. It also
flies to Dubai, Colombo and Kathmandu.
For Q2 of FY 2012-13 the average number of aircraft used was 47, against
49 in Q3, although towards the end of Q3 it went up to 51. Similarly, the total
flights operated in Q2 were 26,243 and in Q3 this number was 28,433. Of this,
flights on international routes were 927 in Q2, but jumped to 1,328 in Q3.
Hoping that this strategy will work in the international skies, SpiceJet
is optimistic about taking its international business to 20 per cent of its
total business from the current 7 per cent over the next 18 months.
Cheaper aircraft fuel overseas, no doubt, will help. Besides, the
induction of Bombardier Q400 aircraft to operate flights primarily to the
smaller cities also seems to be helping the airline’s turnaround. Mills
attributed the improved financial performance during Q3 to a 25 per cent growth
in the number of departures, a lot of which were with smaller aircraft, the
Q-400.
“Q3 of FY 12-13 saw an interesting trend of airlines maintaining pricing
discipline despite a load factor hovering around the mid-seventies. This was
enabled by the exit of Kingfisher and a realisation that an unhealthy price war
helps neither airlines nor passengers in the long run. In the case of SpiceJet,
these factors coupled with higher yields, better network planning,
international fleet expansion and a high management focus on cost-efficiency
has led to profitable results,” says Amber Dubey, Partner and Head, KPMG.
Kotak Institutional Equities points out that SpiceJet’s numbers during
the latest quarter were significantly ahead of the estimates due to the
higher-than-expected improvement in yields and efficiencies on the cost front.
Recent equity infusions by its promoters too strengthened the airline
and led to an increase in its market share (19.5 per cent in November 2012 from
13.9 per cent in September 2011).
D. Sudhakara Reddy, Founder and National President of the Air Passengers
Association of India says the airline has improved substantially in terms of
on-time departure and in-flight service, excepting food on board, which needs
to be improved. “In the budget segment, IndiGo is the best. But SpiceJet is
catching up,” he emphasises. Helping it along during the lean months of
February, March and April will be the tickets it has managed to sell on
discounted prices.
This discount sale is likely to add to the airline’s passenger load
factor and improve its revenues.
‘Not irrational’
However, these sales are also worrying industry-watchers, who fear that
this irrational pricing may bring back the bad days of the industry selling
tickets below cost and thus trigger a price war yet again in an industry
already weighed down by losses.
Not that this is bothering SpiceJet. As Mills says: “I do not see how
you can call this irrational pricing. We are selling seats which would have
otherwise gone empty. We hope that this promotional, limited-time sale will see
people take up discretionary travel and possibly some people who would have,
otherwise, travelled by train shift to air. We do not benefit or lose.”
Clearly, the airline wants to put some spice back in air travel.
With a relentless focus on costs and operating flights to the smaller,
under-served cities, SpiceJet reported a handsome profit in the last quarter.
Can it sustain the sizzle in a turbulent market?
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