In May, SpiceJet ferried less than 2 lakh passengers, leading to a single-digit market share
When the Directorate General of Civil Aviation (DGCA) declared the market numbers for September, SpiceJet was relegated to the fourth spot, a significant drop for an airline that was the undisputed number two until last year and started 2021 at the same position. (The Tata group airlines—Vistara and AirAsia India—jointly had a higher market share than SpiceJet, but they had two different airline operating permits.)
Things changed for the industry in May 2021 as the second wave of the pandemic moved towards a peak, which saw the number of passengers carried plummeting. In May, SpiceJet ferried less than 2 lakh passengers, leading to a single-digit market share.
After three quarters in 2021, Air India has come out as an undisputed number two in Indian skies, having carried 66.66 lakh passengers compared with SpiceJet’s 57.83 lakh. The latter was forced to reduce its presence in the passenger segment, weighed down by financial stress.
SpiceJet faces a mountain of challenges from restoring salaries to paying lessors and other vendors. And it may not be surmountable unless a multipronged approach of renegotiating contracts and lease rentals and infusing funds is in place.
The proposed low-cost carrier Akasa and a possible comeback of Jet Airways could make the market even tougher as the cost of retaining talent will go up. In the past, SpiceJet had resorted to wet lease operations but as things return to normalcy, this cheaper option may not be available in the market.
The real challenges will be on the lessor and human resources fronts. While lessors have been working closely with airlines for the last one and half years, they are less likely to be lenient as travel demand picks up. The air crew and other staff, on the other hand, are expecting a rollback of pay cuts. When other airlines restoring salaries, the comparison would begin and so would attrition as allied industries and rival airlines start recruiting.
SpiceJet has also been factoring in estimated compensation from plane manufacturer Boeing for the grounding of its 737 MAX aircraft. With the MAX now allowed to fly in India, this comes to an end and sooner or later the airline will have to reveal the real number with regard to the compensation. So far, the airline has only said that it has entered into a commercial settlement with a few lessors, without giving details.
The load factor and revenue
The high passenger load factor at SpiceJet is often cited as being behind its success story. But the airline has many monopoly routes that it has enjoyed as a niche area. However, IndiGo is slowly catching up on such routes outside the regional connectivity scheme Udan where competition is possible. The Udan scheme gives monopoly for three years but the exclusivity period is coming to an end for routes started earlier under the scheme.
There also is the angle of cancelling flights and combining them. This leads to increased load factors on the face of it, but does not necessarily translate into higher revenue.
Window of opportunity
The airline plans to hive off its cargo business on a slump sale basis. The future of the airline and the group could well hinge on how this goes. The cargo business, though lower on revenue, is profit making. The airline could well be able to attract one of the global players to invest on the lines of DHL’s investment in Blue Dart, or look to list the business and raise cash.
This cash, if it comes about, could be the saviour for the group.
Alternatively, the strategy could be three-pronged. One, focus on sustained revenues from Udan routes, two, look for additional flights to Dubai when the Emirates codeshare materialises, and three, shrink to make the best of prime slots and not be in cut-throat competition with IndiGo.
This will help the airline balance revenue streams, profitability and continue with its current ways of making the most of good times or making the most of monopoly operations.
The transfer of the cargo business to its subsidiary SpiceXpress and Logisitics has helped clean up the airline’s balance sheet to some extent, with the negative net worth being reduced to less Rs750 crore. If it manages to raise the planned Rs 2,500 crore through a qualified institutional placement, the immediate threat to its survival will be negated.
Alleged proximity to the government has often been cited as a reason for the airline’s survival but similar talk of proximity swirled around the owners/promoters of the failed Jet Airways and Kingfisher Airlines. In the end, what matters is a balance sheet that can sustain the business and if the SpiceXpress sale is an indication, SpiceJet seems to be working towards it. But it should pick up the pace before the Tata group can consolidate and further corner the market.