How SpiceJet Survived Its Worst Crisis

Photo by Boeing

SpiceJet Limited is one of the best Low-cost carriers (LCC)’s in India. It is the second largest airline in India by the number of domestic passengers carried and has a market share of 13.6% as of March 2019.

Established as air taxi provider ModiLuft, in 1994, the company was acquired by Indian entrepreneur Mr. Ajay Singh in 2004 and re-named to SpiceJet. The airline operated its first flight in May 2005. Indian media baron Mr. Kalanidhi Maran, acquired a controlling stake in SpiceJet in June 2010 through Sun Group which was sold back to Mr. Ajay Singh in January 2015.

The airline operates a fleet of Boeing 737 and Bombardier Dash aircraft. But while it is primarily a success story, the airline was forced to halt all operations for a short time in its history. Let's find out why, and how it recovered to be one of the most successful and profitable airlines in the Indian aviation industry.

In 2005, the airline leased two Boeing 737-800 aircraft and started its commercial operations. Everything was running smoothly until Mr. Kalanidhi Maran acquired a controlling stake in the company. Mr. Maran's lack of experience in the aviation sector started to come out as soon as he took over the airline. After taking over the airline he went around recruiting his own people to run the company. His replacements on the board were largely Mr. Maran's own family members and trusted aides but not people with experience of running a business - let alone an airline business.

And at that time SpiceJet Airlines management allowed Indigo to take over slots in Delhi-Mumbai sector (which is one of the most profitable sectors in India) which was left vacant following the demise of Kingfisher Airlines. In 2010, SpiceJet decided to place orders for the Bombardier Q400 aircraft, at a time when most airlines in the country had Airbus and/or Boeing planes. The price of the 15 Bombardier Q400s was $450 million, the first of which joined the fleet in 2011. SpiceJet’s rationale to opt for the 70-seater Bombardier Q400s was so that it could expand its network to include smaller towns and cities, notably in India and to make flying more affordable for people.

But this did more harm to the company as, SpiceJet’s total debt soared from Rs 55 crore in fiscal 2011 to Rs 855 crore in fiscal 2012, when the Bombardiers were inducted. This doubled to Rs 1,678 crore in fiscal 2013. The company’s net worth which was Rs 321 crore in fiscal 2011 turned negative in fiscal 2012, to minus Rs 147 crore. Two years after these aircraft were inducted, SpiceJet’s maintenance costs shot up over 50 per cent. While the maintenance cost per flight hour for a 70-seater Q400 is about $1,300, a low-cost airline needed it to ideally be at about $800.

The lack of support centres in India meant that the aircraft had to be flown to the Netherlands for maintenance checks. All these decisions made by Mr. Maran showed his lack of experience within the airline Industry. Another major factor was the rising fuel prices complemented by the discounted fares which SpiceJet offered. This had a huge impact in its profit sheet. Between October 2013 and September 2014, the company faced losses of Rs 928.9 crore. During the period July to September 2014, the company made losses of Rs 310 crore. All this despite the fact that global oil prices even fell during the period. On December 18, 2014 the airline had been forced to stop its operations as fuel companies decided to cut Spicejet off of their fuel supplies as Spicejet was no longer paying. To make matters worse, Spicejet staff had also gone on strike as the company had not paid their salaries. At this time founder of SpiceJet Mr. Ajay Singh decided to take over the airline and make it profitable again.

His first priority was to get in talks with Civil Aviation minister and DGCA to try to convince them remove the restriction for selling tickets (as the DGCA had barred SpiceJet from selling tickets for travel date of more than 30 days). One of the main factors which supported SpiceJet in its revival time was the fuel rate; SpiceJet paid Rs2,410 crore to oil firms in 2014-15 but only Rs1,392 crore in 2015-16, a drop of 42%.

Mr. Ajay Singh allowed some senior staff from Mr. Maran’s era to leave but retained old-time loyalists who had helped him launch the airline in early 2005. His hands-on approach led to the gradual improvement in market share, passenger load factor (PLF, or the number of seats sold as a percentage of seats available) and financial performance of the airline. He also kept a very simple work culture and had kept his doors open for senior officials to discuss issues and to take decisions on the go. Mr Ajay Singh was a savior of SpiceJet and today this airlines profit is a testament to his knowledge and approach.

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