SpiceJet, the low-cost airline is the only listed entity to bet on the regional connectivity scheme (RCS).
Ajay Singh, CMD, SpiceJet said as of now there is no reason to believe why the regional flights will not do well.
The Government in March started its Regional Air Connectivity Scheme (RCS) by awarding 128 regional routes to five airlines — Alliance Air, SpiceJet, Turbo Megha, Air Odisha and Air Deccan.
As proposed by the government, under this scheme at least half the seats on every flight will be available for a fare of Rs 2500 per seat per hour of flying.
In an exclusive interview to CNBC-TV18's Shereen Bhan, Singh said the airline has three-year exclusivity on some of the RCS routes, for example, Delhi-Kanpur, Delhi-Jalandar, and all these routes are expected to profitable from day one.
It is a new scheme and a small part of SpiceJet’s overall flights, said Singh, adding that there were limitations on the routes they could bid for in the first round. However, going forward they would bid for other routes too, he said.
Talking about the great potential of this scheme for aviation in India, he said today we have 75 airports operational and with this scheme, another 45 will be operational.
The airline for the past two years have aircrafts that have been significantly cheaper to lease and maintain than earlier, so the average cost of the lease has come down and will go down further in the next one-year, said Singh.
The airline is working on low-cost long-haul flights at sustainable profit margins, said Singh adding that the underlying demand is extremely strong at a certain price.
Speaking of the aviation turbine fuel (ATF) prices, he said there is need to bring them down because the prices are unsustainable in India. “To us it is unsustainable that ATF prices are going to be 50-60 percent higher than most countries around the world,” adding that the country cannot have the most expensive ATF price and expect civil aviation sector to prosper.
Below is the verbatim transcript of the interview.
Q: Let me start by asking you about the big bet, you are the only large listed entity to bet on the regional connectivity scheme (RCS). Interglobe Aviation has very recently after its result said that they will look at getting into the regional space as well, in fact they have put in an order with ATR. How soon can we see the RCS starting to have an impact as far as your earnings are concerned?
A: We will start to fly the RCS routes in June of this year. That will be one route but progressively we will roll them out. You will see that all the routes are functional by about September. So, numbers for that will only come in post that really.
Q: The question mark in the mind of investors, analysts, and the market is that with a price cap of Rs 2,500 are you likely to make any money because it will depend on volumes, it will depend on traffic. Are these likely to be profitable for you?
A: This is a very small part of Spicejet’s business. We will expand it in time, but at this time it is a small part of Spicejet’s business. I think one of the most important part of RCS is that the routes that we are flying to, there is a three-year exclusivity on these routes that Spicejet has. Half the seats are not under any fare cap and we believe that there is great potential in these routes.
For example, Spicejet will be flying from Delhi to Kanpur, that will be a route that Spicejet will have on an exclusive basis now for three years. Kanpur is the industrial hub of UP, there is not a single flight into Kanpur. Spicejet will be flying from Delhi to Jalandhar, the Adampur Airport. Again, very prosperous area without any flight at all. We think that there is no reason why flights like this are not going to do well. We expect that those flights will be profitable from day one.
Q: You believe that they will be profitable from day one?
Q: You have obviously worked in some calculations. If you are saying that all the regional routes will be operations by September, give me a sense of what you expect, for instance, in the next financial year from purely the regional connectivity scheme (RCS).
A: I do not want to give any guidance on that because it is a new scheme, we have got to test it out and as I said, it is still a small part of SpiceJet's business. We are looking at 10-12 flights where the total universe of flights that SpiceJet has today is about 370 every day. So it is a very small part, but it will grow.
As the next round of bidding happens, we will bid for some more. There was a limitation on the number of routes that we could have bid for in the first round and we bid for the number of routes we were allowed to and we will bid again. Now, of course, in some of the cases, government has to get the airports in order, there is a lot of groundwork which is still to be done, but I think there is great potential in the scheme.
Just think that with all the constraints on airport infrastructure, today we have 75 airports which are operational. In one shot, with the RCS scheme, you have suddenly made another 45 airports operational. Now with the next round there will be another few airports which will become operational. It is great for aviation in India.
Q: You were talking about the RCS scheme and IndiGo has now expressed its desire to also get into this. They hope to launch operations by the end of the year, orders being given to ATR. How do you see that? And the fact that they have decided to use this under a separate vertical, I would also imagine that is largely this is the first time that they are bringing on a different aircraft as well. But what do you make of that strategy?
A: It is very good for regional connectivity that the largest airline decides to get into this space. It was something that is worth doing. We feel, at SpiceJet it is worth doing. So, it should be good for IndiGo. It is of course, a different animal to operate a regional aircraft is very different from operating a narrow body plane and there are challenges. But I am sure that an airline with that size and with that experience will do that well.
Q: Given the fact that you are bullish about the growth in the aviation market, both for the main line services as well as for the RCS services, what are the kind of fleet guidance that you can give us because if I look at what IndiGo is saying, it has raised its fleet guidance to about 170 versus 154 for FY18. What can we expect from SpiceJet?
A: As you know, we have placed an order for 155 firm and 50 options. These are narrow body planes which will start to deliver in August, 2018. We are trying to prepone some deliveries, but at this time, this is August, 2018. Till that time, we will be taking some aircraft on lease. We have already taken three aircraft on lease for this season and we will keep adding planes as and when we feel that there is a need and that we get the aircraft at a cost which is sustainable for us. So it is tough to give a guidance because we need to see what is available in the market and at what cost because at SpiceJet, one of the core principles has been that we need to reduce our operating cost.
Q: How much room is there to further bring down operating costs? You have been able to do that quite successfully, but how much do you believe you can squeeze that further?
A: We think there will be a significant reduction in costs as new aircrafts start to come in.
Q: That is 2018?
A: That is 2018 onwards. Till then, we are looking at leasing aircraft which are far lower cost than the average cost of lease that we have today. This has been the principle fort SpiceJet for the last two years. What we have done is that we have progressively taken aircrafts which are significantly cheaper to lease, significantly cheaper to maintain than the aircraft that we had previous to this. Therefore the average cost of lease has come down for SpiceJet and in the next one year, we expect to bring it down further.
Q: You have decided to already bid for the RCS routes and that is something that you will start in June, but what about the low cost long-haul plans that you have been working on? When do we expect a decision to be taken on whether you are going to go down that route or not and what will it mean for you?
A: We feel that fundamentally India is a massive market, people want to travel to different corners of the world. Currently, we are dependent on foreign carriers pretty much to take people from India to other parts of the world. We think that there is conceptually at least, there seems to be a great opportunity. If you are able to bring down the cost of that seat, for example, when you fly from Delhi to London, if you can bring down the cost of the seat and you can sell that seat at a lower price…. (Interrupted)
Q: What is a lower price? You look at the papers today, British Airways is saying Rs 45,000-50,000 or so on and so forth.
A: We do not know what that lower price is, but it is tough to say what is that low. But, just imagine if somebody was able to do this in Rs 25,000-30,000 return to London, I would think that many Indians would like to go.
Q: How realistic is this?
A: I do not know. We are working on it, we are trying to see if we can bring down the cost to a level where we can sustain our profit margins because SpiceJet is not going to do anything unless we are able to sustain profit margins. If we feel that we can profitably, at a lower fare, run a service to two different parts of the world, we will certainly explore it.
Q: What does the business plan tell you today? Will you be able to do this and when will you finally take a call on whether you will be able to do this profitably?
A: We are studying it and we are contacting aircraft manufacturers. We are trying to see what cost we are going to get the plane for and what the engineering cost is going to be and so on. So, we are working on it, but you have to negotiate those numbers and if you can get them to a level, certainly, it is something that we feel will be worth looking at, but it will never ever be done at the cost of profitability.
Q: Since we are talking about profitability and we are talking about costs, one of the big concerns is what is happening to aviation turbine fuel (ATF) prices. On the IndiGo concall, you saw Rakesh Jhunjhunwala ask questions to the IndiGo management about why government was not bringing down ATF prices. I know that you have been of course, pushing this case very hard that the government needs to bring down prices of ATFs. But my last conversation with the minister of state for civil aviation, he seemed to suggest that that is unlikely to happen. So, where do you go from here then as far as ATF prices are concerned?
A: We need to bring down ATF prices. To us it is unsustainable that ATF prices in India are going to be 50-60 percent higher than most countries around the world. We cannot have the most expensive ATF and expect the civil aviation sector to prosper.
So, we have been working with government, we have some ideas that we have given to them so it is basically two-pronged. One, you go to state governments and you say to them that look, if you reduce the sales tax or you bring it to near zero, you will see an explosion of flights into your state. That helps improve connectivity to your state, that helps improve the business environment, that helps improve tourism and so it is a good thing. Many states have accepted that proposition and actually brought down the sales tax. The second is to go to the central government and to say to them that look, you must include ATF as part of GST.
Now, they have actually done this for all that is used for ships. So, for fuel which is being used for ships, that is actually included in the GST. So, if you can do the same thing with the ATF then what will happen is it will allow us to set-off our taxes and therefore, it will bring down the cost of ATF and that will give a huge fillip.
Q: But is there any reason for you to be hopeful? So far, we have not heard anything that gives us confidence that the government is agreeable or open to your suggestion.
A: To be honest with you, nobody realised that actually shipping fuel was actually included in GST and when we said this to members of the government, they said they were surprised to hear that and they feel that it is worth looking at and we all need to collectively push. It may not happen right at the outset as GST is introduced, but certainly this is something that is worth discussing with government because if you look at the total amount that they are collecting by way of taxes on ATF, the total amount is just Rs 3,000 crore.
Now if you were to do away with these taxes, the increment will be huge. We have done some calculations, we have shown to them what impact this will have and in fact, the government will end up making money, not losing money.
Q: Since we are talking about the operating environment, what is the sense that you get in terms of passenger traffic? I was just looking at a report from ICRA and they believe that passenger growth is likely to come down to between 13 and 15 percent versus about 22 percent last year. What is your own sense and also as far as yields are concerned, how much pressure do you anticipate to be there as far as yields?
A: Firstly, the underlying demand is extremely strong. We put a flight in there, within a few days, the flight was up. The underlying demand is certainly there. Obviously that underlying demand is there at a certain price. If you take out the price and it becomes too high then obviously there is an impact on the demand.
So, the problem really today is the capacity, in the sense that airport capacity at Delhi and Mumbai is extremely challenged, it has run out. And while we are talking of small towns and of course, a lot of the growth is going to happen in small towns, in the first instance the small towns need to be connected to the larger towns. So you need to connect small airports with the Delhis and the Mumbais. Because the capacity there is limited, airlines are not being able to put too many flights into these stations and therefore there is a bit of drop in the growth.
But as you start to create capacity, as more capacity comes on stream with RCS and other steps that the government is taking, the underlying demand will remain strong and if you are not able to put as many flights as you want to, you will see actually that the yields will go up.
Q: But do you believe that given that the situation where we are seeing significant amount of aggressive discounting, that is going to continue?
A: The aggressive discounting really was a consequence in part at least of demonetisation.