How are low-cost airlines doing, particularly in India?

Low-cost airlines are primarily volume driven. They

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are doing well globally and India is no exception. Over the past few years, a number of new low-cost carriers have come into existence and the number is growing. Premium budget operators are seeing low-cost carriers cut into their market share as they are more popular and this has forced many big operators to launch separate low-cost carriers.

In India, low-cost airlines are getting increasingly popular. We compete with premium class train fares and are doing well. Most flights here are of two hours duration or less, and the majority of passengers prefer to catch a reliable low-cost carrier.

How tough is it to operate a low-cost airline in India, especially when fuel costs are high?

There have been major changes at policy level in the recent past. The government is working on many reforms and we are hopeful that these measure would be positive for the sector. Fuel cost is a major concern for low-cost carriers. ATF now accounts for over 30-40 per cent of operating revenue. ATF prices have gone up sharply in the recent past and that gets passed on to passengers. Since, India is dependent on crude oil imports, it adds to the pressure when international oil prices go up. But there is no remedy for it and passengers understand this.

Are low-cost airlines making profit? What’s the case with SpiceJet, which has already seen two bad quarters? What is the outlook for the industry?

If you look at SpiceJet’s results prior to the past two quarters, we have shown healthy growth rate, both in top line as well as bottom line. This is mainly due to low operating cost structure compared with our competitors. The industry as well as SpiceJet are struggling for the past 6-8 months because of high crude prices, a weak rupee and irrational pricing from one of our competitors.

However, the SpiceJet management is very bullish about the sector and its business model. We are doing well and are adding many new and virgin destinations in operations. With the economy estimated to grow at an average of 7.5 per cent over the next five years, we are very positive on the LCC sector in India, especially in tier-II and tier-III cities as we feel they are under-served and have good potential to grow. With our fleet of latest Q400 aircraft from Bombardier, primarily to cater to these towns, we are confident of making inroads in smaller cities. Outload factors on the newly launched routes have been encouraging.

How bullish is the present management of SpiceJet, when others are exiting the low-cost segment?

Except for one airline, no one else has announced exit from the low-cost segment. So there is no panic. On the contrary, globally some airlines that only operate premium flights are now launching low-budget services, which offer about 40 per cent less cost compared with luxury flights.

While there is a fare war among low-cost carriers, the actual low-cost fares are actually equal to that of normal airlines. Why is it so?

This is due to irrational pricing by certain airlines in which their ticket price has no correlation with their cost of operation. So anyone can be now a low-fare airline, but low cost is different.

Where do you see SpiceJet around five years from now? What are the key plans to enable it to become a larger player in the Indian aviation sector?

We have a good market share in India’s air space and we would strive to increase our dominance significantly in coming years. We are in full expansion mode and are hopeful of getting positive yields over a period. By 2013, we will have 75 aircraft, which would be a mix of Boeing and Q400s. We are expanding domestically and adding new destinations every month. We have also applied for 15 destinations internationally and are waiting to get a positive response from the aviation ministry soon.

Will low-cost airline industry eventually die a slow death in India?

We don’t see any major problem for the sector. Every business has phases and no phase is permanent. We see good growth opportunity for the low-cost airline industry. But India is a price conscious market. Everybody wants a good deal. Premium products will always have a market, but that market is not very big here. On an average a flight is for an hour-and-a-half. Nobody wants to pay three times the price for an hour-and-a-half flight. Going forward low-cost products in every industry in India will work well.

In India, private airlines that took off in the first round in the mid-90s have failed, except for one? Do you see a repeat of that scenario in the low cost space ?

We are positive on the sector and do not see any negative outlook for the industry. Of course, survival of the fittest is a universal phenomenon and it happens everywhere.

With falling load factors how are airlines like yours managing the mounting debt load, capital expenditure and working capital?

Yes, load factors are under pressure, but yields are not. We do not have a mounting debt load on SpiceJet. Capital expenditure is all as planned. Our working capital is taken care of by equity infusion from our promoter and short-term loans from financial institutions.

Currency depreciation and ATF costs have been mounting, but passenger yields have not necessarily improved. Have you hedged against potential risks potential increases in ATF and currency depreciation? Do you plan to raise passenger fares progressively?

There is pressure due to currency depreciation and ATF costs and current yields are low. We have not hedged fuel price like any other operator in the country. Going forward, yields need to increase to cover the operational costs and passengers understand that.

Passenger fares tend to be tariff sensitive. How much headroom do you have to raise tariff?

We believe passengers do realise the situation in the market. Irrational pricing behaviour from our competition is actually driving down yields. Some carriers continue to price their tickets below cost and are offering around 15-50 per cent discount on tickets.

How do you plan to fund your mounting current liabilities — fuel suppliers, dues to the Airport Authority of India?

SpiceJet does not have mounting liability issues. This question is more relevant to some of our competition. We have a healthy balance sheet. We have some working capital loans, but we also have cash in bank and fixed deposits.

To what extent will the government proposal to allow foreign airlines to hold equity in Indian airlines help you? This is especially in a situation where valuations are low and future valuations aren’t too bright either.

SpiceJet actively supports liberalisation of the market and we believe that foreign airlines will choose airlines on their value. So, this will give more options to viable solvent airlines. I am not sure how it will help other non-viable airlines.