SpiceJet fights for survival and US baggage

Dino D'Amore
By Dino D'Amore May 19, 2014 13:47

SpiceJet fights for survival and US baggage

US airlines made 4% less on baggage fees in 2013 than they did the year before. Given that this is a core revenue driver for the ultra-low-cost model, can we argue that there is a problem developing? No is the very short answer! Sifting through the data it is clear that American Airlines was responsible for a very large chunk of the drop – its baggage revenue was down $51m or 9% to be exact to $506m in 2013. The reality is that airlines in America have developed a secondary use for baggage fees by using them as a hook to get customers to sign-up for reward credit cards – “Sign-up today and you do not have to pay baggage fees” is the sell. It seems that this process is gathering good momentum and given that airlines can earn far more from rewards credit cards than they do from baggage we can take this as another sign that US airlines are further developing significant revenue growth.

These ancillary revenue development schemes are by no means lost on the Indian airlines, a slight slackening of the layers of bureaucracy in this market is all that it will take to kick-start revenue generation at some airlines. That is why if the likes of SpiceJet can hold-out just a little while longer then it might just get the fillip it needs from the new government when it comes into office fully.

But can SpiceJet hold out? For two years now we have been stating that Jet and SpiceJet are going to fail; indeed Jet would have were it not for Etihad. But SpiceJet on the other hand has managed to cling-on. Today though the airline posted a record loss over Rs 1,003.2 crore  ($171m) for the full year 2013/14 – some five times the previous year’s losses, and that is going to be too much to take for this airline I fear.

The warning signs were there for all to see as Spice went on an Air India style market share war against airlines with far deeper pockets. Why? They wanted to ensure market share was consolidated to try and get some FDI, then this turned into a need to increase forward bookings before AirAsia India and Tata moved in. Now Batliboi and Associates, the auditor for SpiceJet has stated that SpiceJet might not be able to survive as an airline since the losses taken along with existing liabilities exceed total airline asset valuation by around $171m as at March 31, 2014. I am afraid that from what we can see, the assets on the books are valued far in excess of current market value and as such the liabilities at SpiceJet exceed asset valuation by more like $380m. The last airline to be found to have those sorts of ratios was Kingfisher, as stated by us back in 2008-9.

Against this backdrop SpiceJet put in an order for 42 737s this year!

SpiceJet said in a statement that its fiscal year was “the most challenging period in Indian aviation history. The sharp depreciation of the Rupee was crippling.”

But given that the BJP has won the election on a mandate of opening up the economy, the Rupee should start to recover from its 64 to the US Dollar lows.

Year-to-date, SpiceJet shares are down 20.48%, and yet the airline’s revenue is up 12% to Rs 6,350.6 crore from the last fiscal year. Expenses rose 24% to Rs 7,303.7 crore in this fiscal. As a result, the loss widened even though there was a 5% increase in average air fare to Rs 4,253 from Rs 4,052 in the same period. Market share was up, due to discounting, despite a 2% capacity reduction.

So do you run a mile from SpiceJet or do you stick with them?

Kingfisher was brought down by bad management and a terrible business model in a strong (stronger) market – so to draw a comparison between the two airlines is somewhat rude. SpiceJet is being brought down by terrible FX rates, weakening market conditions and strong competition, partly due to the distortion of the market brought upon it by the Indian government funding Air India. Of these core problem areas only the former, FX rates, show any sign of easing slightly in the short term. SpiceJet has good management in place and a good plan of action to reduce costs going forward, add to this the fact that the macroeconomic environment should significantly improve in this fiscal year and there is some hope. Competition though is going to get a whole lot worse during 2014/15 but SpiceJet is doing its best to dodge the AirAsia hammer blow.

A re-structuring and transformation plan to position the airline is underway and the model of operating special flights from Delhi to the top three tourist hotspots – Srinagar, Goa and Bagdogra – during the peak holiday season is a wise move. SpiceJet has now increased the frequency on the Delhi-Srinagar route to five flights a day from four at present, from June 3.

Services on the Delhi-Goa and Delhi-Bagdogra, which apart from being a gateway to the Northeast is a tourist destination as well, have also been increased to three flights per day from June 3. The airline is also offering an introductory fare of Rs 4,999 on the Delhi-Goa and Delhi-Bagdogra routes and Rs 5,999 on Delhi-Srinagar route.
Now this strategy is one of concentrating on competing with the rail system and that might work so long as fares do not fall on these now key routes.

SpiceJet is not dead yet. It has a model that has a great deal of merit to it but it needs to raise funds for working capital and also needs to cut costs urgently. If the airline was operating assets owned by you, should you be worried? Yes, but in India the main worry is with regard to certain debtors and that is the key lesson from the Kingfisher mess. Find out if the airline operating your assets is in debt to certain airport operators and if it is then try to make sure your assets are not being operated to that airfield. Also watch to ensure that staff are being paid on time, the moment that they are not, you need to pull your assets fast.

Good luck to SpiceJet; it could do with some.

Dino D'Amore
By Dino D'Amore May 19, 2014 13:47
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