SpiceJet Setting an Example

SpiceJet added a feather in its cap when in August last year, it became the first airline in India to operate a flight using a blend of ATF and Bio-fuel.

Issue: 2 / 2019By Air Marshal B.K. Pandey (Retd)Photo(s): By Boeing

SpiceJet, one of the better known low-cost carriers in the Indian airline industry today, has been through a major crisis in the recent past that threatened its very existence. However, the airline has successfully negotiated its way through the potentially disastrous development and is back on the Indian aviation scene as one of the leading players. In the event that the management of SpiceJet had not dealt successfully with the financial crisis, the airline could well have joined the already long list of failed carriers in India that had aspired to consolidate their position and standing as budget airlines.

BRIEF HISTORY OF SPICEJET

The origin of SpiceJet which today operates a fleet of Boeing 737 airliners and Bombardier Q400 regional twin-engine turboprop aircraft, can be traced back to 1984 when it was set up by S.K. Modi an industrialist in India, as a private aviation company to provide air taxi services. On February 17, 1993, the company that was named as MG Express, entered into technical partnership with the German flag carrier Lufthansa. The company was renamed as ModiLuft which thereafter began to provide passenger and cargo services and it did so until it ceased operations in 1996. In 2004, this company was acquired by Ajay Singh, a well known entrepreneur in the domain of civil aviation who renamed it as SpiceJet and it commenced regular commercial flight operations in May 2005, adopting the lowcost model newly introduced by Air Deccan. In January 2010, Kalanidhi Maran, a media baron from Tamil Nadu and head of Sun Group, a media house based in Chennai, acquired a controlling stake in the airline to the extent of 58.4 per cent. However, in January 2015, following financial distress that afflicted the Indian carrier the previous year, this controlling stake was sold back to Ajay Singh.

SPICEJET ENCOUNTERS FINANCIAL TURBULENCE

All had appeared to be going well for the airline till 2012 when a couple of flawed decisions by the management created some problems that escalated into a full blown financial crisis. The first was the decision by Neil Mills, the Chief Executive Officer (CEO) at that time, to make a radical change in the business model of the airline. With the aim of exploiting the market potential of extending aerial connectivity between the metro airports and the smaller cities that were as yet un-served, as well as of providing air connectivity among the smaller cites, the CEO decided to add to the existing fleet of Boeing 737 airliners, a fleet of Bombardier regional aircraft. After around three months of taking charge of the airline in 2010, SpiceJet CEO Neil Mills placed orders for 15 Bombardier Q400 aircraft. No other Indian carrier following the low cost model had made any move in this direction till that point in time. While the second type of airliner added to the existing fleet of SpiceJet, the airline could and did expand its operating network. However, the cost burden involved in inducting, operating and maintaining two types of aircraft in its fleet necessitating duplication of manpower, maintenance and logistic support facilities, were enormous and heavy enough to completely neutralise the gains to the airline from the expanded network of air connectivity.

In a typical low cost model, to achieve financial viability, it would be necessary that every destination airport should have a minimum number of flights per day in order that the fixed costs get amortised. For SpiceJet, this did not prove easy to achieve. Other low cost carriers such as IndiGo Airlines, AirAsia India and EasyJet preferred to operate only a single type of aircraft. The second step that the CEO took was to adopt an aggressive turnaround strategy based on heavily discounted fares. The CEO expected that this would boost sales and more than make up for loss of revenue on account of lower air fares by the significant increase in the passenger traffic this step was expected to generate. Unfortunately this did not prove to be a reality and thus severely dented the finances of the airline.

For financial viability, a low-cost model requires every destination airport to have a minimum number of flights per day in order to amortise fixed costs

Both the decisions by the CEO served to aggravate the financial woes of the airline to a point where its very existence was in question. In fact, on December 16, 2014, the management of the airline communicated to its employees their intention to down shutters and that the airline was not going to operate the following day. The employees were advised not to report for work and were asked to stay at home. There was no doubt that de facto, the airline was in a death spiral and had virtually collapsed.

AJAY SINGH BACK IN ACTION

It was at this point in time that, fortunately for the airline, its founder Ajay Singh who had relinquished controlling stake to Kalanidhi Maran, came back and bought off enough shares to become the majority stakeholder. He thereafter assumed charge as the Chairman of the airline that was already on the brink of disaster. At the helm of affairs of the airline, Ajay Singh began to make earnest effort to turn the airline around and retrieve it from the deep financial crisis it was afflicted with. Fortunately, the Ministry of Civil Aviation was favourably inclined towards the airline and was prepared to assist in any way it could to help the airline recover from the financial crisis. As per P. Gajapathy Raju, the Minister of Civil Aviation at that point in time, “The airline has a good safety record and they are taking a number of measures to keep going. Our two big interests are safety and consumers and keeping those in mind, we want the airline to continue to fly.” This statement by the Minister of Civil Aviation clearly reflected the inner strength of the airline and the level of confidence the Ministry of Civil Aviation had in its potential and capability to tide over the financial crisis. After a meeting with Ajay Singh, P. Gajapathy Raju, the then Minister of Civil Aviation said that the Directorate General of Civil Aviation would be asked to allow SpiceJet to sell tickets in advance up to March 31, 2015. It also said that airport operators would be asked to give SpiceJet 15 days time to clear dues, while state oil companies would be asked to provide Aviation Turbine Fuel (ATF) and other products on credit for up to 15 days. Banks and other financial institutions had been asked to provide credit up to 600 crore. However, this would have to be backed by the personal guarantee by Kalanidhi Maran.

FINANCIAL RECOVERY

Since the beginning of 2015, the time that Ajay Singh took charge as the Chairman, SpiceJet recorded profits in three consecutive quarters that financial year. This impressive turnaround was attributable to measures initiated the Ajay Singh. These included restructuring of its operations which included cutting down operations on non-profitable flying routes. The airline was also able to renegotiate in its favour, some of its engineering and maintenance contracts. Essentially, the airline adopted a two-pronged strategy which was based on reduction in expenditure and enhancement of revenue. The efforts by the management of the airline to come out of the red, was, to some extent, helped by a drop in price of ATF at that time. However, recovery of the airline from a state of severe financial distress to a reasonably healthy state is an example that SpiceJet has set for other airlines to follow in an economic environment of inordinate financial pressures and highly competitive environment.

SpiceJet added a feather in its cap when in August last year, it became the first airline in India to operate a flight using a blend of ATF and Bio-fuel. In all probability, Bio-fuel is likely to be the only option for fuelling flying machines in the future.