Jan 13, 2017 07:30 PM IST | Source: CNBC-TV18

New aircraft to trim costs by 15-17% in long run: SpiceJet Chief

With fuel burn at 20 percent less than the existing fleet, the new airplane range will help reduce costs, said Ajay Singh, CMD of SpiceJet. The low-cost carrier, on January 13, announced a mammoth deal worth Rs 1,50,000 crore to purchase 205 aircraft from the US-based aircraft maker Boeing.

With better fuel efficiency and lower maintenance costs, the new aircraft fleet will bring in at least 15-17 percent saving in overall costs in the longer run, said Ajay Singh, CMD of SpiceJet in an interview to CNBC-TV18 detailing the benefits of the mammoth deal worth Rs 1.5 lakh crore that SpiceJet signed with US-based Boeing for purchase of 205 aircraft. Dinesh Keskar, President of Boeing India also shared his views on the deal and the aviation industry in general with CNBC-TV18.  

The deal, hisorically the largest for the company that was close to being shut down in December 2014, will help it pursue its domestic and international expansion plans for the next few years. Ray Conner, Vice-Chairman of Boeing said the order is likely to be completed by 2024. 

Stressing on the importance of bringing down the unit cost, Singh said, "The significant elements of unit costs are fuel price, the cost of the plane itself, the financing cost of the plane and the maintenance cost. These are the big ticket items as far as cost is concerned. This order enables us to improve on each one of those four items."
 
Currently, SpiceJet has a fleet size of 47 aircraft. The company, under the leadership of previous owners, the Marans, had purchased 42 planes from Boeing.

Keskar believes China and India are the two big economies that are going to drive world aviation. Boeing has forecast demand for 1,850 airplanes for India worth USD 265 billion over the next 20 years 

Below is the transcript of Ajay Singh and Dinesh Keskar’s interview to Shereen Bhan on CNBC-TV18.

Q: If I could start by asking you about what this means now for SpiceJet? If you could also help us understand because 2018 is actually when we see he addition to your fleet capacity. What is this going to mean now eventually as far as market share is concerned and your game plan for India?

Singh: What this signals, is in essence a culmination of the revival process that we undertook in December, 2014. As you know, the airline had nearly shutdown in December, 2014 and we have come a long way since then. We have performed consistently well. Our load factor has been high for 21 months. We have exceeded 90 percent. We have been profitable in all the seven quarters in this last two years. We have had the best on-time performance, we have had the lowest cancellations. So, we have consolidated what gains we had achieved in the last two years and now, we feel that this is the time for growth and we have spent the last one year trying to decide which plane to grow with and we have decided that the Boeing and the MAX plane is the right plane for us.

Basically, this is the largest deal for SpiceJet in its history. It is also the largest deal for Boeing in India. And we feel this gives us a terrific platform to grow both domestically and internationally for several years to come. What this deal also does is, it helps us reduce our cost and that was incredibly important for us. This deal means that we get lower cost aircraft, we get a lower cost maintenance, we get a more reliable aircraft, we get a much more fuel efficient aircraft, an aircraft which is 20 percent more fuel efficient than the existing plane. We get an aircraft which has a larger range and therefore, enables us to get to more destinations. So, we think it is a fantastic fit for SpiceJet and we are delighted to be able to do this.

Q: There are several things that you have talked about there. Let me pick up on each of those and let me start by asking you about the cost advantage that you just spoke of. And of course, the cost benefit on account of this being a very fuel efficient aircraft is going to be a significant one given the fact that we are now seeing commodity prices on the uptick. But can you quantify for us what this could eventually mean as far as cost reduction is concerned and then the implications for your margins which have been on an upswing over the last seven quarters.

Singh: Like you said, commodity prices have been on an upswing and we do not think they are going very far, but still, we need a hedge against those commodity prices rising. And for that, it is incredibly important for us to bring down our unit cost. Now, the significant elements of unit costs are fuel price, the cost of the plane itself, the financing cost of the plane and the maintenance cost. These are the big ticket items as far as cost is concerned. This order enables us to improve on each one of those four items.

In terms of fuel, the aircraft is 20 percent more efficient than our existing fleet. On a per seat basis, this is more efficient, we believe, than planes which were offered to us by Boeing’s competition. In terms of maintenance cost, what we have done is that along with negotiating the price of the plane, we have also negotiated maintenance contracts on a long-term basis that will help us reduce maintenance cost. Of course, Boeing has made an aggressive offer and therefore, we have been able to bring down the cost of the plane itself. And we think we are in a great financing market. This is an eminently financeable plane and interest rates are low across the globe and this is a great time to go into the market to finance the plane. So, if we can bring down that cost as well, on a sustainable basis, we have brought down significantly the unit cost of operations at SpiceJet and this is incredibly important.

Q: So, if we were to assume that fuel prices would remain where they are currently and not move significantly higher, maybe between the USD 55 and USD 60 per barrel band, I just want to understand what the margins trajectory could be because it is currently at about 7.9 percent, what would it imply as far as your margins are concerned?

Singh: What this does is over a longer period of time, because remember that there is going to be a mix of fleet. There will be some new planes, but there will also be old planes. And then as new planes build up, we are looking at anything like a 15-17 percent reduction in cost.

Q: Has Ajay Singh been able to drive a very hard bargain?

Keskar: Absolutely. I think I am going to use him as my next salesman. He told you all the right things about why he bought the plane, but that is indeed true. We are delighted, at Boeing, because SpiceJet is an important customer, we go back. The inception of SpiceJet, we have been with them and the fact that they showed the confidence in Boeing, we are quite pleased. And of course, it enhances our footprint in India which is a huge market. One of the fastest growing markets in the world today.

Q: You were talking about the India market and this deal enhancing your footprint in India and I know, you have always been very confident and optimistic about the future of Indian aviation. But given where we stand today, give me a sense of what the outlook for growth is.

Keskar: We think in the near-term, the outlook for growth is about 15 percent. We just did our annual forecast, as you know, and our current forecast is for the next 20 years, 1,850 airplanes for India worth USD 265 billion. So, we continue to stay bullish on India and we think if the infrastructure keeps in pace, we will probably outpace these numbers. So, we are pretty firm that India is going to be the future and China and India are the two big economies that are going to grow the world aviation.

Q: But still no comparison between Chinese aviation and Indian aviation, just in terms of size and numbers?

Keskar: True, but if we were talking this five years ago, I would have readily agreed with you. But now, we are coming close. The gap is closing.

Q: What is the current gap?

Keskar: Current gap is about 3:1 which is not too bad. At one time, it was 10:1. So, India is today, where China was seven years ago. That is what the paradigm is.

Q: You talked about how you are restoring several options in order for you to be able to finance this megadeal. What seems to be the preferred route at this point in time and what will the implications be as far as your debt is concerned? You have a debt of a little over Rs 1,000 crore today. What could this imply for debt?

Singh: As you know, SpiceJet today is a near-zero debt company. The Rs 1,000 crore that you talk about is the debt which is backed by assets. These are the Q400s which are on our balance sheet. In terms of financing, of course, one of the avenues we will look at is a sale and lease back of planes. Going forward, we will also look at financing some of these planes and putting them on our books, backed by exim guarantees and other such mechanisms. For us, it is important at this time, while there is no paucity of funding available, we need to see what works the best for us in terms of lowering the cost of finance.

Q: I would imagine, sale and lease back would be the most preferred.

Singh: That is, at this time, appears to be the more preferred option because obviously, one of the advantages of that is that it ensures that there is no dilution of equity, there is no increase in debt of the company. And this is a great market to be doing this and we are hoping that even in those situations, we bring down the effective cost of lease because right from where we started this journey in 2014, our attempt has been to bring down the average cost of lease of planes. And I am confident that this deal will enable us to get that cost down even further.

Q: How much could you expect further reduction?

Singh: I do not want to put numbers on it, but it is looking very good. We have already started to get offers on this and it is looking a lot better than it was even a year ago.

Q: You talked about what this will mean as far as your international aspirations and your international expansion plans are concerned. How soon can we realistically expect those to fructify?

Singh: As you know, SpiceJet already has 25 percent of its capacity on international. We continue to look at international and how to expand international. We are looking at routes in a holistic sense and saying look, is this route going to make more money for us or is this other route going to make more money for us? We are not so fussy whether that is a domestic route or an international route. What this aircraft does for us however is that it increases the range that we can fly. If a next-generation could fly up to four hours, this aircraft can fly five hours. So, that expands the footprint and therefore, enables us to go to some international destinations that we could not have gone with our existing fleet. So, we will evaluate those opportunities as the aircraft start to come in.

Q: Over the next 3-5 years what kind of mix do you expect between domestic and international operations in terms of revenue?

Singh: It depends on what turns out to be more profitable. My expectation is that several of the domestic routes will do incredibly well, especially tier II, III, the smaller towns connected to larger towns or even the small towns connected to other small towns. Some of the international sectors which are doing well today will continue to do well and we will discover yet undiscovered markets which will be extremely relevant.

Q: Would it be fair to say that maybe over the next few years the focus will continue to be largely on India, given the fact that this is in that sense the high growth market?

Singh: India is a high growth markets but India is also an extremely competitive market. Our focus has really been largely into tier II and tier III. Tier I to tier I is really saturated at this point of time, there are also infrastructure constraints. So, we will see but our intention is to increase our international share over time.

Q: You talked about the catch-up that we are seeing between and China. You talked about the infrastructure deficit which has always come in the way of India playing catch up. However as we look at the regulatory environment in India, we have got a new civil aviation policy, Ajay Singh was talking about regional connectivity. How do read the landscape and its evolution?

Keskar: I think India is trying to grow faster than they are doing it right now. One of the way to do that is, how you open new airports, how do you connect more people, how do you find more cities. As Ajay Singh just said tier I to tier I is saturated, so you have got to go to the smaller towns. We have many airports in India that can be developed which Airport Authority of India is looking at. The way we look at it at Boeing is, once you build this connection to smaller cities they are going to feed the bigger airplane like these. That is how India is going to grow further and if that infrastructure can be kept up in pace, I think all our projections that I gave you are going to be thrown out of the window because we will be much faster than that.

Q: Speaking of importance of India, from a make in India perspective and given the kind of aspirations that you have to do business in India, what can we realistically now expect going forward?

Keskar: We have been doing this since 1991. So, Make in India has a new impetus. It has a new champion and it has now a focus which wasn’t there before. In the past you did the deal, you have so much offset to do and you would follow that. Now there is enhancement on top it. There are skill development and other things that India is trying to do, I think we are talking part in that and that is what you are going to see, plus our military business has opened up and that is going to help us to do even more. So, overall we are going to contribute significantly to Make in India.

Q: Speaking of Make in India and part of the new defence procurement norms, one of course is the business of design, develop and Make in India. There have been tweaks to the offset obligations as well. So, do you believe that the regulatory environment is something that you can benefit from more than you could perhaps earlier?

Keskar: We are poised to explore that. Like I said I am mostly focused on commercial side of the market but I know what is going on in my other side of the company. I think we will see some enhancement excise also.

Q: We have the Budget coming up now on February 1, what would your expectations be?

Singh: We have made similar points that we made before but the larger point is that aviation helps growth both for the states and the country. We have been saying that you must bring down the cost of aviation if you want people to fly more.

It is not right that India should be the fastest growing aviation market in the world — that we should have the highest cost aviation turbine fuel in the world, we should have the highest cost airports in the world. If we are ever to develop our own hub airports like Dubai and Abu Dhabi and if we are ever to create global airlines in India then we need to bring down the cost of aviation. That can be done in a variety of ways. GST is coming up soon, we would love for them to say that ATF just as credits, taxes paid on ATF are allowed by way of setoffs in tax and this is a global practise. So, we should be allowed to do the same thing.

In terms of airports we need to rethink this whole model of Operation Management Development Agreement (OMDA) that we have. We need to bring down the cost of those airports. We need to bring down the cost of the turnarounds so that more and more people can fly into India and out of India. So, we need to be globally competitive if we are to compete globally.

Q: Speaking of this dream that the government has put forward by way of regional connectivity and you have been fairly confident of being able to capitalise on that, what will it really mean over the next few years, how realistic is this dream of regional air connectivity?

Singh: It is absolutely imperative that we connect airports and small towns. Today we have 400 airports in the country, 80 of which are operational and are connected. There are another 30 airports which are completely operational and ready and have not a single flight. So, we need to look at all these airports and get them into the mainstream. A lot of the traffic from these small airports will go and feed large planes like the ones that we have ordered now. So, it is absolutely imperative that we connect small towns.

The regional connectivity scheme is something that we have welcomed. It needs some tweaks, we are talking to the government on how to make it even more efficient but this is something that the country must do.

Q: You talked about on time performance and there is currently a fairly public spat that is on, on the issue of on time performance. How do you see that playing out for you?

Singh: We don\\'t understand why there is a spat. This is the same set of data that has been used for more than 10 years. It is the same set of data that has been used by some airlines to talk about their great on time performance. Now by the same set of data if some other airline in this case Spicejet has the best performance and this is all government data, I don\\'t see why there should be an objection. If DGCA wants to take a look at how this is done, we are very happy for them to do it.

From our perspective what is happening is great for the consumers. Let everybody fight to improve on time performance, let everybody fight for that number one spot, absolutely fantastic for the consumers.

As far as Spicejet is concerned we had committed that we will improve operating performance and for six months in a row we have been number one in on time performance. We have had the lowest cancellations of any airline in the country and we are very delighted that we have been able to achieve what we have done.

Q: What do you believe are the risks for this market?

Keskar: I don\\'t think over capacity as a problem right now. The two things I watch carefully is the fare price which we have already talked about.

Q: What is your own assessment on where you see fuel prices?

Keskar: I think it is going to be range bound. We think USD 60 per barrel will be the top for the time being. However the other factor which is important that most people forget is the devaluation of rupee. Our fuel price is based on multiplier of the fuel price times the devaluated. So, it is 68 now, it was 58 just a year ago and so if that number keeps going up it is going to have some dent on the demand requirement because people will better to go by train or something like that. However I think the risks are limited and infrastructure will be another key risk to watch for.

Q: Who else are you talking to in the Indian market and can we expect any further announcements from you anytime soon?

Keskar: We have three customers in Indian market, we cherish them. Spicejet is the talk of the day today but we have Air India also and Jet Airways. I think they will continue to build on it because the growth rate in India is over 20 percent. Nobody can sit still, they got to buy.

Q: Do you believe there is room for another Greenfield airline perhaps in India?

Keskar: I don\\'t know about that. To us it is number of aircrafts that matter whether it is one airline running all of those or 10 airlines it is not that important. However the new entrants I haven’t seen them do very well. So, we will wait and watch.

Q: Let me ask you about the environment in the short-term specifically when it comes to pricing, etc. What would the projections really be as far as prices are concerned?

Singh: We always hope that we can bring up yield and that prices will be sane. For the last one year, of course, all the airlines have been making money, SpiceJet has been making a little more money on the operating side than some of the others. But, it is difficult to control. We will see what happens. The solution really is to look at markets which are less saturated and to look at products like ancillary revenue.

Q: What has been the growth in ancillary revenues currently?

Singh: We started at around 5 percent when we started in December, 2014. That number has gone up to 16 percent now and we are hoping that with the initiatives that we are taking, we can take up that number further. So, we will focus on that, we will focus on dynamically re-jigging our network to make sure that we fly the most profitable routes and we will look to see that we do not go into completely saturated markets. So, we have to look at a bunch of those issues as well as keep trying to knock down our unit cost.

Q: What would the aspiration be maybe in the next three years for you in terms of margins, in terms of revenues and in terms of profitability?

Singh: I do not want to give guidance, but I think we have done well. In the last two years, we have nearly doubled our capacity, we have had higher profits than we ever had in our history and we hope that in the next three years, we can grow responsibly and profitably. That is it. That is all I want to do.

Q: What about you Mr Keskar?

Keskar: I hope the fuel price stays below USD 70 per barrel since you are talking about a three year horizon. The exchange rate is balanced and the capacity, the Indian market can absorb. I am not worried about over-capacity anymore. So, let us wish for the best.

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