No cash flow issues; IndiGo IPO to rerate sector: SpiceJet

Below is the verbatim transcript of the interview.Q: Let me start by asking you if you can continue to sustain what we have seen you deliver in Q1? I ask you that because of several reasons, one of course is the load factor which is significantly high, in fact the highest that you have ever seen. Will this be sustainable given the fact that at this point in time capacity continues to be constrained even though you intend to up capacity by about 16 percent in this month. Also seasonally it is a good quarter because that is when the travel season actually happens and you have had the advantage of low oil prices, is this kind of performance sustainable?A: SpiceJet has achieved occupancy factors in excess of 92 percent in the last five months and that has been part of our deliberate strategy. This airline had shutdown in December and from there it was important for us to start to revive consumer confidence and we have done that in a variety of ways. The fact that occupancy factors have been so high reflects the fact that consumer confidence is actually coming back into the airline.Going forward we are very confident that we will be able to sustain high occupancy. It is difficult to say exactly what those numbers would be and the strategies may keep changing from different points of time. However what we have achieved and the reason that we have been successful is that as oil prices have come down and as a consequence of oil prices coming down the tariffs have come down, the airfares have come down. Our occupancy factors have ensured that our total revenues remain the same. We have also focused on ancillary revenue and increased that pretty dramatically over the last few months and as a consequence of this even as costs are lower the revenues have sustained and therefore we have been profitable.Q2 is the weakest quarter of the year and while we are in silent period and can't talk of our results, the fact is that it is clear from our occupancy numbers which are published that we will do significantly better than we did in the same quarter last year. As you have said we are coming into a strong quarter which is the festive quarter and we expect to do very well.Q: Let me ask you now in terms of bringing an investor onboard because that continues to be something that you are grappling with, is this the right time to bring a financial investor onboard? Where do current conversations with potential investors stand or are you in fact waiting for the Indigo IPO to be out of the way because the question is whether that will in fact rerate the sector and perhaps be better news for players like yourself?A: I don't think investments are a challenge at all at this point in SpiceJet. SpiceJet is a profitable airline. It has shown two quarters of profitability. The prospects going forward look very good. There are no cash flow issues at all in the company at this time.Q: So, working capital is not an issue despite what the rumours seem to suggest at this point in time?A: Not at all and that is clear from our numbers. So, from our perspective the company doesn't need too much cash at this time. Cash will really be needed when we place large orders for aircrafts which we fully intend to do in the future. So, at that time you are absolutely right we expect the Indigo IPO will be out later this month, that will rerate the sector. There is very little reason why Indigo would be valued at Rs 25,000 crore and SpiceJet would continue to be valued at under Rs 2,000 crore. We expect that there will be a rerating.Q: So, the hope and the wait is in order for you to get a better valuation because you believe that desperate times are behind you?A: There is no desperation. SpiceJet is on a very strong wicket right now. Obviously with growth expected to pickup in the Indian aviation sector and with SpiceJet settling down pretty nicely into the space with high occupancy factors, with continually lowering cost regime, we think that we have a great future ahead. Therefore we will take money when we need it. There is no reason to take money when we don't need it.Q: So, at this point in time, you are saying that you are not necessarily in need of money and hence potential conversations with potential investors perhaps are on the back burner or do the conversations continue? And would the preferred route really be talking to a foreign airline or would you be looking at a clutch of investors?A: As SpiceJet has started to do better, we have been approached by both airlines and financial investors and we continue to speak with them and keep up a dialogue with them. But clearly, investments into SpiceJet will happen when it works in the interest of SpiceJet the company itself and its shareholders.Q: Let me ask you about expansion plans, because on Friday, you put out your network expansion plans with six new aircraft that you are bringing in, 291 daily flights, 10 new sectors, 30 increased frequencies. You were talking about the need of the money when you actually placed those large orders. The speculation is that a 100 new aircraft is what SpiceJet will look for as far as the future is concerned, but what about the 42 that have already been ordered? When do we start seeing deliveries coming in?A: The deliveries for those are expected in the start and end of 2017, those are actually 55 planes. They are all, the SpiceMax orders. We expect to supplement those orders so that we have orders going for the next 10 years. So, the orders that we have placed now could be in excess of the number you have just suggested.Q: It could be in excess of 100?A: Yes.Q: How soon do you intend to make that?A: We expect to place that order hopefully in this financial year. We are in conversation with the aircraft manufacturers. We are also looking to see what we can do on the regional side where we have Bombardier aircraft currently and we are trying to see if there can be an expansion of the regional network as well.Q: When do you intend to take that decision as far as the regional route is concerned because that could perhaps work out to be a profitable operation for you?A: At this time, both operations are profitable. The big aircraft, the larger aircraft operation is profitable as is the regional aircraft operation. We expect that a lot of the growth in India will come from tier II, tier III markets and there is clearly space for regional play. We are the largest regional player in the country and this time and therefore we are continuously evaluating if we need to expand that network as well.Q: But in terms of efficiencies as you said that has been a clear area of focus as well ever since you took over. So, in terms of debt reduction we have actually seen your debt reduce to about Rs 1,120 crore in FY15, your borrowing cost have gone down as well. What more can we expect on both those parameters?A: We continue to work on debt reduction and we expect that over the next 12 months you will see a significant reduction.Q: Can you quantify significant?A: It is tough to say right now. But we started with Rs 2,200 crore, we are at Rs 1,100 crore already in the space of the last eight months. We will continue to work on this and we expect that there will be significant reduction.Q: In this financial year given where you currently stand today in terms of your debt reduction, how much more if you can give us a little more of a sort of quantifiable aspiration about debt reduction in this particular financial year?A: I don't want to give guidance because that will basically be giving guidance on profits in the next two quarters, I prefer not to do that but we expect the performance to be very strong and we expect there will be significant debt reduction.Q: What do you think went wrong with SpiceJet. Why did it get to the position that it did get to before you could actually chart out this revival path for it?A: One issue was probably inexperience. The previous ownership had no previous experience of aviation. For a period of time there seemed to have been severe dilution of fares and it seemed that the airline was chasing market share and market share in aviation tends not to be as sticky and you can lower fares and get market share but the moment you raise them the market share goes away.Q: So, that kind of aggressive discounting strategy is not longer part of the SpiceJet DNA?A: Absolutely not.Q: So, no Rs 1 fares, so on and so forth?A: Those are mostly marketing tactics. They have a role to play. Market stimulation always has a role to play. It brings about a modal shift from rail to air and therefore it is useful. SpiceJet will not on a continuing basis dilute their yields to get market share. Ultimately it is about the airline needs to be profitable and the revenues needs to be sustained.Q: So, very conscious focus on the bottom-line?A: Absolutely. Q: Let me ask you about where things currently stand with the government and this back and forth on whether we will see regulation of fares or not, there have been several rounds of  meetings that have been held by the industry with the civil aviation ministry. It is almost a carrot and stick sort of approach where if you don't comply then we are going to wield the stick and get you to regulate fares. Where do things currently stand do you believe that we will continue to see a more hands off approach or do you believe that this is political rhetoric and it is going to pass?A: We have heard similar objections for years. What happens is that every time you get into peak season the fares go up and then people will protest high fares but when it comes to the weaker season the fares are really low and then you don't find people really protesting. So, I think that government needs to take a hands off approach. The moment you start to cap fares, you also need to cap the bottom, so you need to raise the floor. When you raise the floor you stop people coming into this whole space. So, this whole shift that we are bringing about from trains to planes will stop. New customers and growth in segment all this is going to come to a halt the moment you start to put a cap on the floor.Q: So, are they buying your argument?A: We made the argument to them and it is for them to decide what they want to do. Having said that there are certain circumstances in which being political people they will get complaints  to say that last minute fares were obnoxiously high or there was a medical emergency and even then the fares were obnoxiously high and so on and so forth. It is not completely unjustified to say that these fares can be extremely high sometimes and perhaps inordinately so. So, airlines will need to take a responsible position on that as well. However largely experiments to try and regulate fares have not worked very well and we don't expect that they will work in this market as well.Q: Since we are talking about regulations and there continues to be debate on 5/20, whether 5/20 will stay, whether it will come back in some frankensteinian form of linking international flying rights to domestic credits and so on and so forth. Let me put the argument to you that is being made by the new carriers, likes of Air Asia  and Vistara, the argument is that you allow the Indian aviation market to open up, do away with 5/20 because anyway at this point of time 70 percent of your inbound and outbound traffic is being carried by foreign airlines. So, if anything you are only going to benefit foreign aviation and foreign international hubs as opposed to Indian aviation sector. So, 5/20 their argument is actually constraining  Indian industry and Indian aviation, how do you respond to that?A: There are some problems in terms of, firstly if you create a level playing field for all players, it probably works. The question really is that the airlines that you mentioned they have used a formula by which they become Indian carriers and our thought really is that are they really?Q: So, you are saying it is Indian ownership, they may not necessarily be Indian carriers.A: They may not be and will their countries and will those countries where they come from will they give us exactly the same formulation if we decide to go and form airlines. Today if I was to go and make an airline in Dubai or Abu Dhabi, will they let me do it? Indian carriers today, India is a strong country, India has fantastic potential, they need to give me the same level playing field that they expect in our country. So, it is tough to confine it to just that one 5/20 rule. The overall policy must encourage Indian aviation, Indian players in Indian aviation as well as infrastructure in terms of MROs, in terms of training facilities, in terms of being the service centre of the world.Q: How would you classify an Indian airline? Vistara and Air Asia also have majority Indian ownership at this point in time.A: I think the thought at that time was that Indian airlines would be controlled and managed by Indians. So, that would be an Indian airline.Q: So, they are all Indian, right?A: True but if you look at them, are you saying that Air Asia is today an Indian carrier? It is for the regulator to say but from our perspective some of those carriers continue to be controlled by their parent. Their parent is sitting outside of India. In those circumstances we feel that there needs to be a level playing field for all players for the Indian market as well as for the markets overseas. So, we need to find that balance.Q: So, you are saying that 5/20 unless and until other changes are made, a wholistic approach is taken to promote Indian aviation at this point in time it should stay?            A: Yes. There needs to be a wholistic approach to an aviation policy which encourages India to become an aviation super power.Q: Let us talk about the growth forward and you are clearly betting on that as well with the kind of aircraft orders. We have seen what Indigo is looking at as well in terms of  placing aircraft orders and so on and so forth. CAPA has put out a report very recently talking about the economic value add to India if the aviation market was to be unshackled. IATA has got all kinds of numbers in terms of the potential growth from here to 2030. Unless and until there is a significant shift as far as the way the government approaches this sector, are all of these forecasts going to remain on paper?A: It is true that there needs to be a change of mindset. We have to stop treating aviation as good for the rich. The mindset still is, much as they used to tax colour televisions in the past and computers in the past because they were supposed to be goods for the rich, they continue to tax aviation. Aviation  is about connectivity, it is about growth in tourism and growth in the economy and so on and so forth. It is very much a middle class mode of travel today. So, I think that mindsets have to change, taxation has to be moderated.   Q: Besides tax and of course that continues to be the number one bugbear as far as the aviation sector is concerned to be able to bring down tax significantly. We have had this conversation going on for months now, years in fact on ATF and whether states will actually move as far as ATF is concerned. We haven't seen much progress on any of those funds. Do you really feel confident that we are going to see some sort of rationalisation as far as taxes is concerned given the fact that the government has its own fiscal priorities to balance as well?A: You know how much money are we talking about. All of ATF today all that the states collect is about Rs 3,000 crore and there is going to be competition between the states, the states which have reduced taxes have seen that their - for example Andhra Pradesh. They have seen that Hyderabad has become a major aviation hub. So, states will see the advantages but there is also politics. So, the states themselves are a little concerned that if they give concessions for aviation will they be then thought to be pro-rich, so, that is an issue that they have to grapple with.In addition to just ATF and taxation on ATF today we are in a situation where we are forced to take our planes overseas for service and that is as absurd for us to sit in Delhi and say, I can't service my car here and I need to take it to Lahore to take it serviced because the tax here is so high. And these are things which can potentially create a lot of jobs.Q: What is the aspiration in terms of post market share as well as profitability?A: We have no aspirations for market share really. For this year it is much more about being financially sustainable bringing down the costs that you referred to and ensuring that our revenues remain consistent and that we are able to keep increasing both our passenger and ancillary revenue.Q: That is the second or third time that you spoke about the ancillary revenue. If we can get some colour about the kind of growth that you envisage as far as the ancillary business is concerned?A: We have nearly tripled the revenues that we get from ancillary sources which includes our cargo revenue, our seat selections, our meals, all sorts of other add-ons that we sell along with the ticket itself. Those revenues since I took over have nearly tripled. We still think that there is room to grow in that space and we will continue to work on them.Q: What kind of number would we be talking about, on the ancillary revenues at?A: At this time we are in excess of 15 percent of our ancillary revenues. We expect to take that up to 20 percent.Q: This is something that keeps going back and forth also on phasing out of the Q400 for instance. Is that on the card, is that something that you will look at, consider?A: At this time the regional operations are profitable and going forward the government has made it clear that they will support much greater regional connectivity in the new policy. So, there is space there. We are the largest regional player at this time by a long margin and therefore we feel that we should explore, whether we can expand that operation rather than curtail it.Q: Our last conversation that we had when you spoke to us about the payment schedule once you took over the airline and you had spoken about Rs 1,500 crore being pumped in. Where do things currently stand on that front and are we likely to see the last tranche if my memory serves me right being advanced further or is that the entire amount likely to come in this financial year?A: At the time we started this process we thought that there will be significantly larger amounts of money which we will required. Our estimate then was that we would require about Rs 1,500 crore. As it turned out the company did a lot better than we expected it. The airline did a lot better, because profitable far sooner than we expected it to and as I said to you before at this time there is no requirement for cash flow. So, given that and given the fact that we think that there is going to be a significant re-rating of SpiceJet with the incoming IPO and the way the sector is doing at this time we feel we should time the investments right.Q: So, how much have you brought in altogether so far?A: So far about Rs 850 crore has come into the company. We find that that is more than enough at this point and as we place more orders there will be more funding into the company.Q: I interrupted you when you were articulating your growth target. Let me not keep you from that?A: In terms of the aircraft as I said we will be placing significant orders both on the large and the small aircraft and the targets really remain much more profit oriented and much more cost oriented, much more revenue oriented than specific market share targets.