Focus is on yields, not market share: SpiceJet's CEO

SpiceJet has secured high load factors in February and the trend may continue this month too, says airline CEO Neil Mills.

The airline managed to record 75 percent load factors, as it has already sold 10 lakh seats at flat Rs 2013 for travel between Feb-April.

In an interview to CNBC-TV18, Mills says he aims to improve load factors to 80 percent, as the airline is seeing decent growth in not only metro routes, but also in tier II cities.

For a no frills carrier like SpiceJet, 75 percent loads is a break-even point, say analysts.

When the airline announced mega sale in January this year,  it initially received flak for giving away10 lakh seats at throwaway price. But later, when other airlines followed suit, it was clear that SpiceJet was aggressive to fill up seats in lean period, which anyways go empty.

"We announced a discounted fare scheme in a more structured way than what our competitors did. They cannot sustain such low levels of fares in long term," he said. The airline earned Rs 160 crore in January through advance bookings. He further said that if any other carrier cuts fares in future, his airline will certainly react to it.

Despite, offering seats at low rates, the airline has managed to improve its yields by around 29 percent to Rs 4412 in January. "We want our yields to stabilise at current levels," he said. Also, Mills seem satisfied with current 20 percent market share.

Meanwhile,SpiceJet's sudden discount scheme announcement did upset rival carriers which said it cannot be sustained in an industry loaded with heavy losses. However, later, Jet Airways too sold 20 lakh seats at heavy discount.

Below is the edited transcript of Neil Mills' interview with CNBC-TV18

Q: First I want to ask about the trajectory for yields that you are expecting to see because last quarter was very strong, up about 30 percent year on year. Do you think you can repeat that performance or given the kind of fare cuts that we have seen and the increasing competition, it might be tough to see higher yields in the next couple of quarters?

A: I don’t think we need the yields to continue to keep growing at the rate that they have. What we have hit in the last quarter was being able to recover the full excessive cost base that we have in this country against actual yields. We don’t need to see yields continue to grow. We would like to see them stabilise at where they are now rather than trying to push them upwards.

Q: Why did airlines like yours feel the need to introduce those special offers in terms of aggressive fare cuts and have you seen an immediate impact in terms of passenger traffic because of it?

A: The promotion that we ran in January was a tactical promotion and it helped us through the weaker quarter, which is March end. We have seen an uptick in the expected load factors that we would have carried through January and February and we hope to see that through the end of March as well.

However what other players have done about discounting is more a slightly less structured approach, but we don’t see this as being a long term continuation. Certainly, the balance sheets of most of our competitors cannot sustain long-term competition of these levels.

Q: Is passenger growth and maintaining the levels you have had becoming a challenge and if you could just break it up in terms of which sectors or which parts you are facing more pressure on?

A: I don’t think so. At this point in time we deliver value for money product at a very good price. We are still seeing continued growth both in the regional markets, tier II, tier III cities plus in the metro connectivity that is continuing to be very stable.

In the international market there is huge pent-up demand in India. I don’t see this as being a huge challenge going forward. Keeping the current volume should be reasonably simple and growing from here would be slightly more difficult, but not impossible at all.

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Q: Going forward in the next quarter are you expecting to see more fare cuts within the industry itself and will SpiceJet go ahead and cut fares further?

A: We have always been competitive if our competitors decide that they want to cut fares we will always react. We don’t have any choice, but to do so and as a low fare carrier that’s exactly what we should be doing. Ours is the lowest cost base in India, so we can afford fares at lower levels if our competitors can.

Q: What kind of load factors do you think you can hold on to because in the last quarter it was very strong at 75 percent? Do you think you can repeat that?

A: 75 percent should be easily achievable and that is the sort of load factor numbers we should be looking at as a minimum. Pushing it closer towards 80 percent over time is certainly our intention.  We would rather carry slightly more people then try to get more yields out of each individual. 75-80 percent is certainly our target range for load factors.

Q: It is a capital intensive business and there are a few deep pockets that are going to be hitting the aviation sector. Any concerns on whether that much more capital that could be employed and some of your competitors would make the turf a bit more difficult for SpiceJet?

A: The two deals that are eminent at the moment are very different. One is to try to fix a historically bad balance sheet so that is only taking deep pockets to fix the problem from before. How much that is going to improve the future I don’t know, we will have to see how deep their pockets are and how willing they are to get everything out of those pockets.

Then new competitor coming in Air Asia, Air Asia is a very credible competitor but they have always been very rational and logical. I don’t believe they will undercut and not make any money. If one sees their growth in some of the other markets they have tempered growth when they haven’t been able to make money.

India is not an easy environment for aviation for sure. A lot of the policies are not necessarily airline friendly, so it is going to be a fairly big challenge for a new competitor coming into this market.

Q: In order to maintain better market share because bigger players are coming in, do you think you will have to start looking at tapping some kind of capital source?

A: Capital sources and market share are not really related. At this point in time we are hovering around 20 percent market share, which for us is more than enough. We don’t need it to be bigger than that.

I cannot do anything about the market share other than have it reported in the newspapers on a monthly basis. For us around 20 percent is fine, if it is just above or just below that is okay. Capital has to do more with growth rather than market share.

Q: A word on how the operational trends will pan out because domestic fuel prices continue to remain quite high. What kind of margin trajectory do you think SpiceJet can hold on to in the ensuing quarters because of the cumulative effect of competition, of pressure on yields as well as higher fuel prices?

A: SpiceJet is very well placed to do well going forward because the strategic initiatives that we have put in place in the last two years have certainly started to deliver. In fact two of the last three quarters for us have been positive despite what the rest of the industry has reported.

Going forward we continue to be successful. Our growth in international sectors will continue to be margin additive and it will improve our margins going forward because the base on the current business is very strong.

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Q: The Indian aviation market is set to get more competitive. How are you seeing the possibility of AirAsia coming in, impacting your business and the business of the current competitors?

A: With AirAsia coming in I don’t see that as being a real problem. I think competition when it is logical and rational is always welcome and it always helps to keep all of us on our toes. I think the ones that it will certainly affect are those airlines that have much higher cost bases or much weaker balance sheets.

For us we welcome competition. We have no particular problem with it. However, that particular competitor will learn that India is not a particularly easy place to do business, particularly for aviation.

Q: The Directorate General of Civil Aviation (DGCA) has issued a notification with regards to foreign direct investment (FDI) for scheduled carriers yesterday. You are looking at bringing in either a strategic investor or private equity money in. Do those clarifications satisfy your potential investors? What are you hearing?

A: Foreign investors are always going to have concerns and everybody wants an ironclad guarantee. However, in most places of business it is about manage risks. So it would really be for the strategic investor to take a decision as to whether the risks are managed enough or whether it is just too risky for them.

Ultimately, the policies that are being put in place now, although there are a lot of steps to be followed, are actually adequate and will work for FDI.

Q: In our last conversation you had said that you would prefer to bring in a strategic investor. You were also I understand in talks with private equity investors and you have said then that you are not in a hurry to bring in capital, where do these things currently stand, would you still prefer private equity over a strategic investor or a strategic investor over private equity?

A: Spicejet is in no hurry to do an investment like that. Initial discussions have already taken place as we have confirmed before but we have not taken that forward until somebody really gets serious, and the deal actually will make sense to the shareholders and to the company.

Once we have a deal like that we will do it. How long it will take? Sometimes you have to wait little longer for the right deal.

Q: Do you still prefer a strategic investor over a private equity investor?

A: Yes we are open to strategic investor for sure. As I said before it depends on what deal is actually put on the table. We are in no hurry to do it. For now we are focusing on running a good business and investors will come to good businesses anyway.

Q: Do you anticipate a price war now? You guys started it off in January but if the Jet-Etihad deal finally does go through, if AirAsia gets up and running by about the middle of the year or a little after that, do you anticipate a price war in the Indian market?

A: I don’t anticipate a big price war. Some of the balance sheets in the country certainly can’t support a price war anyway. Some of the new competitors coming in certainly in other markets, AirAsia has shown themselves to be very rationale and have moderated their growth considerably in the last 12 months when they haven’t been able to make money. So, a price war can only be driven by excess capacity, as long as the competitor is going to be rationale by putting capacity into the market. Then I don’t believe a price war will ensue.

Competitive pricing will continue and certainly the tactical promotion we did in January, has certainly helped us in the current quarter on load factors but we don’t see that being a particularly large problem.