Budget carrier SpiceJet started the trend of announcing hefty discounts on air fares in India. Despite being neck-deep in losses, India's third largest carrier by market share cut air fares on some tickets by 50 per cent in January 2014 and followed up with a series of even steeper discounts. (Read)
By the end of the year, the price of a promotional SpiceJet ticket came down to triple digits. Other airlines followed suit raising fears of a price war in India's troubled aviation sector, where only a couple of carriers are making profits.
There was apprehension that SpiceJet was resorting to "mindless discounting", but second quarter results show that "there is a method to the madness", SpiceJet's COO Sanjiv Kapoor told NDTV on Monday. SpiceJet lost Rs 310 crore in the three months to September 30, which is 45 per cent less than the Rs 560 crore it lost last year. (Watch the full interview here)
The narrowing of losses has been driven by operational performance, SpiceJet says. The carrier has increased the passenger load factor, which measures the capacity utilization in percentage and cut down costs.
"We refuse to fly empty seats around because an empty seat, once the aircraft takes off, is lost forever. So we will sell empty seat in advance," said Mr Kapoor, who joined SpiceJet late last year. (Read)
The strategy seems to be working as the carrier's revenue rose 15 per cent year-on-year to Rs 1,436 crore and its load factor jumped to 81 per cent in the September quarter, the highest for a domestic airline in the three month period.
In terms of increase, SpiceJet's load factor jumped 19 per cent year-on-year in the September quarter. SpiceJet's yield (revenue per mile per seat) declined by 8 per cent because of discounting, but the unit revenue (yield multiplied by load factor) improved by 12 per cent.
"We have completely rewritten the book in terms of filling the planes in lean season," Mr Kapoor adds. The July to September period is considered to be a lean period for airlines because of monsoon rains that discourage travel.
SpiceJet also managed to cut down its expenses by 2 per cent by reducing the fleet size. It has no expansion plans for the next nine months.
SpiceJet shares tumbled over 9 per cent on Monday despite the sharp reduction in losses. Over the last one year, SpiceJet shares are down 16 per cent, while its competitor Jet Airways' is down 12 per cent. The benchmark Sensex is up 35 per cent during the same period. (Track stock)
The underperformance in SpiceJet shares indicate that a turnaround may not be around the corner. The company has now lost money for five consecutive quarters and as of September 30, 2014, its total liabilities exceed its total assets by Rs 1,460 crore. The company urgently needs fresh funding, analysts say.
The need for fresh funds has also been highlighted by SpiceJet's auditor SR Batliboi & Associates, which has been consistently raising doubts about the company's ability to continue as a going concern. SpiceJet has delayed payments to various parties, including vendors and its dues to statuary authorities, the auditor said.
Mr Kapoor, however, said that the auditor's comment is a technical observation, which calls for efforts to raise funds and recapitalize the company. The new management believes that they have inherited large losses, which cannot be solved by operational cash flows alone. The company will continue to look for investors, Mr Kapoor said.
It will also stick to its strategy of aggressive discounting as of now, which means good days for passengers are likely to continue ahead.
SpiceJet shares closed 4.12 per cent higher at Rs 14.39 on Tuesday and outperformed the broader Nifty, which shed 5 points to end at 8,425.90.
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