SpiceJet review – Q3 results, preparations for international operations, new aircraft

India’s second largest value carrier, SpiceJet, has been in the news over the last ten days with a variety of announcements.

Maintenance contract with MAS-GMR Aerospace Engineering Company Ltd. and MAS Aerospace Engineering (MAE)

SpiceJet has signed a three year maintenance support agreement with MAE for the carrier’s fleet of all Boeing 737-800 and 737-900ER aircraft. SpiceJet is the launch airline customer of MAS-GMR Aerospace Engineering Company Ltd (MGAEC); a 50:50 joint venture company between MAE and GMR Hyderabad International Airport Ltd. to provide airframe MRO services at Rajiv Gandhi airport at Shamshabad. The agreement will commence this year and conclude in 2013.

SpiceJet’s current fleet of 19 aircraft and future aircraft will be initially sent to MAE in Subang, Malaysia, and later to the MGAEC facility at Shamshabad, once built in the first quarter of 2011, for “C” and “D” checks.

Fleet expansion
SpiceJet will be adding nine more B737-800 aircraft to its fleet over the next two years to build a fleet of 28 aircraft. Four will be added this year in March, April, June and December. Four more will be added during 2011 and one in January 2012.

International operations
Rumours abound about the carrier’s international plans since it will complete the mandatory five year of operations and 20 aircraft fleet requirement of the Government of India by May 2010. There are unconfirmed reports that SpiceJet wants to fly to SAARC countries like Sri Lanka, Bangladesh, Nepal and the Maldives initially.

The airline is taking first steps required towards operating international flights like appointing general sales agents (GSA) in overseas markets, registering with the SABRE global distribution system (GDS) of ticketing for overseas sales, and having India’s aviation safety regulator the Directorate General of Civil Aviation (DGCA) checking the airline’s preparedness including aircraft capability, maintenance procedures, and training levels of crews and engineers.

However, the airline is still proceeding “extremely cautiously”. As the first Indian value carrier it will run in to regional value carrier powerhouses like Air Asia, Air Arabia, Jazeera Airways, flyDubai and Tiger Airways.

The airline is seeking the membership of IATA, the International Air Transport Association, the global association for airlines and will commence the IOSA — IATA Operational Safety Audit, mandatory for all all IATA members. Even if SpiceJet does not commence international operations immediately, IATA membership will allow the airline to enter in to inter-line agreements with global carriers for domestic travel. SpiceJet is also one of the few value carriers which has hot food and beverage service, something market leader and fellow Delhi based carrier IndiGo does not.

Performance and Results – Quarter 3 Fiscal year ending March 2010.
Quarter 3 is always the best quarter for the airline industry in India. Domestic passengers increase for the Dassera-Diwali-Christmas holidays, and overseas Indians return home for their annual holidays as well. Coupled with a resurgent Indian economy, in line with the rest of the industry, SpiceJet recorded a good performance and a profit of Rs. 1,089 million ($23.17 million) compared to a loss of Rs. 180 million in Q3 of the previous fiscal.

Operationally, in Q3, SpiceJet increased passengers 61.6% to almost 1.8 million compared to 1.11 million during the same quarter a year earlier. Aircraft utilisation increased 15.6% to 12.49 hours per day, and despite an increase of one Boeing 737-800 (VT-SGE) to the 18 all Boeing 737-800/900 fleet, capacity measured in Available Seat Kilometres (ASKs) grew 28% to 2,291 million. Average ASK per flight reduced 2.2% to 196,107. Load factors grew 14% to 80%, well above the growth in break-even load factors to 71%, which increased 2% thanks to price pressures resulting in lower fares.

While fellow Delhi based carrier IndiGo led the value carrier segment with a 14.4% market share compared to SpiceJet’s 12.5%, the market share growth per aircraft shows SpiceJet leading the market. SpiceJet’s Chief Commercial Officer Samyukth Sridharan attributes this to the strong efficiency exercises undertaken by the carrier which has improved aircraft utilisation, while IndiGo has been adding aircraft to its fleet without a corresponding increase in market share.

SpiceJet has also undertaken a drastic cost reduction program which has reduced Cost per ASK (CASK). CASK without fuel was reduced 11.5% to Rs. 1.45, and CASK including fuel reduced 18.7% to Rs. 2.36. Revenue per Revenue Passenger Kilometre (RPK) increased 6% to Rs. 2.80.

Over 2009, full service carriers Jet Airways and Kingfisher Airlines have been steadily moving their capacity in to the low-fare market segment via their subsidiaries JetLite and Jet Airways Konnect, and Kingfisher Red. Today the low-fare/value carrier segment controls 68% of the Indian domestic air travel market — the largest market share in the world, well ahead of the 55% in Malaysia, the home of low fare giant AirAsia.

Despite the increased focus, SpiceJet feels fairly comfortable to tackle the increasing competition, thanks to its overall system efficiency and lower cost structures. As a comparison, for the same period Q3 FY2010, JetLite, the value carrier subsidiary of market leader Jet Airways, which also has the same all Boeing 737 fleet as SpiceJet, has a CASK of Rs. 2.90, revenue per RPK of Rs. 3.80, which requires JetLite have a break-even load factor of 78% compared to 71% at SpiceJet.

However, market leader IndiGo still holds a strong influence on the market, and till SpiceJet inducts its new aircraft and grows market share, it will be forced, if to a certain degree, to follow IndiGo.

SpiceJet officials still feel the quarterly results are too early to signify a long term turn-around for the Indian airline industry, and while demand is strong till June 2010, it is also “too price sensitive”. The X factor for the next six months will be the price of aviation fuel. Aviation fuel prices have been rising sympathetically as economies in India and China recover. An oil price of over $120 per barrel coupled with the irrational over-taxed aviation fuel regime of the both the central and state governments in India, will definitely derail any recovery prospects for the airline industry.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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