Airline Sector: Clearing the Skies for a Dogfight

The dogfight in the Indian airspace is likely to intensify as stronger players raise money to wrest market share.

Is the Worst Over for the Airline Sector?

• SpiceJet has for two straight quarters posted profits after six quarters of losses
• Indigo is expected to come out with its public offering to raise money
• Analysts expect that Jet Airways too will report strong numbers
• The dogfight in the Indian airspace is expected to intensify further as the economy picks up

Airline companies are once again in the limelight. SpiceJet has for two straight quarters posted profits after six quarters of losses, and Indigo is expected to come out with its public offering to raise money. Meanwhile, analysts expect that Jet Airways too will report strong numbers. So is the worst over for the airline sector and can we expect better days ahead for the sector?

The change in SpiceJet’s performance has a lot to do with the new management and the infusion of funds. Ajay Singh, the original promoter of SpiceJet sold a profit-making company to Kalanithi Maran, but when he bought it back in January 2015 it was on the verge of closing down. In fact it did close down for a day in December 2014.

So how did Ajay Singh and his team manage the turnaround after the company posted six straight quarters of losses? And how did they manage record profits for two quarters, never seen before in the history of SpiceJet? And most importantly, does this signal a change in trends for the sector?

How SpiceJet Turned Around

First, luck was on Ajay Singh’s side. Falling oil prices helped the company to recover faster. But that does not take away the hard work the team has put in and for attacking every problem upfront. The team studied the issues that led to the fall of Kingfisher and started addressing them, settling with lenders and suppliers and putting all their efforts in restarting the airline. Money was only one part of the problem.

The other issue was to win back the trust of its customers. Cancellation of flights and a sharp reduction in aircraft had seen competitors taking away SpiceJet’s customers. SpiceJet had to find new aircraft in order to increase the number of flights daily and see to it that these flights were filled to their capacity.

Since money and time were constraints, SpiceJet could not get the aircraft it wanted. It ended up picking up only those available on a wet lease basis. This means, it’s not just the aircraft but also the crew, maintenance and insurance that comes with it. This is a costly way of adding aircraft but SpiceJet’s immediate requirement was to get airborne. The strategy worked.

Its June quarter profit, which was the highest in the history of SpiceJet was despite the fact that it paid a higher cost to keep afloat. Profits were despite the fact that the company announced 10 flash sales in a span of seven months.

In the June quarter SpiceJet increased its load factor, a measure of the capacity to which an airline is filled, by 14 percent as compared to the same quarter last year. The company flew with 89.8 per cent of its seats full. It is reported that SpiceJet flew with 93.2 per cent of its capacity in June 2015 storming ahead of Indigo’s 86.6 per cent.

SpiceJet sweats its assets like no other airlines. It now flies 252 flights every day as compared to 35 in December 2014. Utilisation of its Boeing fleet is over 14 hours every day, the highest anywhere in the world. But SpiceJet still has a long way to go. The company is planning to add 100 new aircraft as compared to its present fleet of 34 which includes those taken on wet lease.

Apart from the benefit of oil prices which is common to all the other players, the credit for SpiceJet turning around has to be given to its management.

Jet Gains From Wind Under Its Wings

Similarly analysts are also expecting Jet Airways to post a profit in the June quarter, but this is only on account of lower oil prices. Analysts do not expect an improvement in Jet Airways on any other parameter.

Taking advantage of the favourable sentiments, the most consistently profitable airline in the country Indigo will be tapping the equity markets to raise funds to expand its operations further. The company will be taking delivery of 180 aircraft adding to its existing base of 96 aircraft. To add to this jump in supply between Indigo and SpiceJet are other airlines which are growing in strength like GoAir and Tata’s Vistara.

AirAsia which launched in India with much fanfare has not been able to have much of an impact. The airline has managed to get a market share of barely over one per cent. The dogfight in the Indian airspace is expected to intensify further as the economy picks up and stronger players raise money to wrest market share.

This would be as good a time as any to add on to your frequent fliers points as the price war is the oldest trick in the book to gain market share.