Shishir Asthana Moneycontrol Research
Competition in the airline sector is expected to move from the domestic airspace into international skies. SpiceJet has already sounded the bugle by announcing that it plans a direct Delhi-London flight at a total fare of Rs 30,000 (including return fare) which can go down to Rs 20,000. Current fares start from Rs 44,000 and move up to Rs 90,000.
In an interview Ajay Singh, Chairman and Managing Director of SpiceJet, said: “As people become rich, it is easier for them to take a flight abroad, provided the fares are low. Imagine the demand a fare of Rs 10,000-15,000 would have for a Delhi-London flight.”
With this kind of pricing SpiceJet is all set to start a price war in the international travel sector, one that has been the most profitable for Indian airline companies. SpiceJet, as was the case when it started its domestic operations, seems to have its game plan in place.
The airline intends to continue with the same low-cost, no-frill model that it does in domestic operations. In order to increase its yield the airline plans to increase the number of seats by refurbishing the Boeing 787-8 Dreamliner aircraft. Against the conventional 256 seats that other airline uses, SpiceJet plans to make the aircraft an all-economy one by increasing the number of seats to 350.
Further, the airline is cutting costs by separately pricing each additional service like meals, on-board Wi-Fi, seat selection, priority boarding and privileged check-in. Rather than flying to Heathrow, where airport charges are high the company intends to use the Gatwick airport.
SpiceJet will also be taking the aircraft on a wet lease, which allows them to pay by the number of hours it has actually operated the aircraft. In a wet lease the lessor provides the aircraft along with the cockpit and cabin crew and pays for its maintenance and insurance. In short, SpiceJet is putting in place a low cost model to operate on international skies.
Whether this model will be cheaper than the conventional one will depend on the negotiation skills of SpiceJet, especially when it comes to the most critical cost of wet leasing the aircraft. By doing so SpiceJet will save the cost of maintaining an international crew.
International routes are preferred by Indian airline companies as they are able to refuel their aircraft abroad where cost of fuel is lower. Cost of Aviation Turbine Fuel (ATF) in India is the highest in the world as a number of taxes are bundled into it. This situation is expected to continue in future since ATF has been kept outside the purview of GST.
But will the cost-cutting measures taken by SpiceJet be enough is a question that will be answered only after the launch of its airline service.
The company has been trying hard to make a dent in the international market. Though it operates in only six destinations, its market share based on passengers carried has moved from 6.1 percent in April 2015 to 8.1 percent presently, among Indian companies operating international services. SpiceJet has the second highest growth rate in the international market after Jet Airways.
Though Available Seat Kilometer (ASK) for SpiceJet has grown at a slower pace than Jet Airways, its revenue passenger kilometer (RPK) has posted a higher growth highlighting the higher revenue and margins the company generates. Further, passenger load factor for SpiceJet is the best-in-class in both the domestic and international segment.
SpiceJet with its predatory pricing can shake up the industry and grab market share the way it did in domestic industry. Low-cost carriers have been growing at a 60 percent CAGR (compounded annual growth rate) in the international market as compared to a 4 percent growth for Full Service carrier as per data available in SpiceJet’s annual report. SpiceJet intends to tap this high growth market by introducing services at prices which will be hard for a full service airline to match.
SpiceJet’s growth will be at the cost of Air India and Jet Airways who between them control three-fourths of the market. Jet Airways, because of its association with Etihad, will be in a position to withstand the shock, but Air India will be pushed deeper into red. And if Air India resorts to price war to protect its turf the way it did in domestic market, the entire sector will be impacted.
SpiceJet stock reacted negatively to the news falling by nearly 6.56 percent as analyst feel that this move by the company will impact its medium-term financials. Jet Airways, however, took it on the chin with its share price falling by 8.14 as it is the biggest loser in the listed space, post SpiceJet’s plan of starting a price war in the international travel market.
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