The new service is based on strong financial rationale, but there are challenges galore
With revenues from cargo increasing faster than that from tickets for almost all airlines last fiscal, SpiceJet has a good reason to start freight services.
The airline, earlier this week, launched its cargo unit named SpiceXpress and inducted its first freighter aircraft, a Boeing 737-700. The service will take off from September 18.
Curiously though, the cargo segment – just like passenger services - faces challenges in the form of inefficient infrastructure and intense competition cutting into margins. With additional capacity on its way, the Ajay Singh-led airline will have to play it right to make operations profitable.
This year, most airlines have shown a healthy increase in cargo volumes. SpiceJet’s cargo volumes were up nearly 35 percent till July this year - at 43,184 tonne – compared to the same period last year.
Similarly, Jet Airways also carried 10 percent more cargo over the same period. On the other hand, IndiGo’s cargo volume fell marginally to 98,625 tonne, from a little over a lakh tonne a year earlier.
But this could be an exception as past numbers show that volumes pick-up at a faster rate in the second half of the year.
Overall, cargo volumes increased to 4.26 lakh tonne in the first seven months this year from 3.87 lakh tonne a year earlier.Revenue up
Each of these companies saw a handsome increase in revenues from cargo and other ancillary services.
For Jet Airways, the 19.2 percent increase in cargo revenue was the only silver lining in the first quarter of the current fiscal.
IndiGo and SpiceJet club their revenues from cargo business under ancillary revenue. While IndiGo’s ancillary revenue – driven by cargo say experts – grew 14 percent in the 2018 fiscal. SpiceJet’s ancillary revenue was up 28 percent.
The numbers could get even better with research agency ICRA saying that air cargo volumes may grow 60 percent over the next five years. In its report earlier this year, ICRA called for an increase in cargo handling capacity to meet demand.Some turbulenceBut before Singh’s new venture starts making money, it has to deal with a few critical challenges.
Like the rest of the aviation business, air cargo business – despite the numerical promise cited above – is a tough terrain. Air India was forced to shut down its cargo unit in 2012, following years of losses, despite an inherent demand for the service. The airline was forced to put its six Boeing 737-200 aircraft up for sale.
SpiceJet is better placed, as its Boeing 737-700 aircraft can fly longer and can serve some of the international destinations. But then, it will have to contend with serious infrastructure issues.
The cargo infrastructure, the ICRA report pointed out, is unable to handle growth in volumes. While the Hong Kong airport alone handled 4.9 million tonne of air cargo in 2017, all of India’s airports put together could manage only 3.3 million tonne.
This inefficient infrastructure results in delays and additional costs, a serious challenge already seen in the passenger segment. Similarly, SpiceJet is up against some serious competition.
It may be the first among private airlines to start a standalone freighter service, but will continue to face serious competition from its peers. Airlines usually have free space in their aircraft, even after loading checked-in luggage, and use it to carry cargo. With all of them increasing capacity – IndiGo alone is adding 40 planes this year – SpiceExpress may find it difficult to corner orders.
Competition also comes from specialised players like Blue Dart, which according to a Business Standard report, has a market share of 49 percent.
This competition will also eat into margins. The combination of increasing capacity and intense competition is already driving down fares and eating up margins in the passenger segment.
Singh is not new to these adversaries, having steered the airline to profits after returning at the helm in 2015. He will have to make a repeat at SpiceXpress.