News Backgrounder
Perfect timing
SpiceJet co-founder, Ajay Singh, has bought the debt-ridden low-cost carrier for S$243.5 million in a deal that will give him full management control as well as 100% ownership of the carrier.
February 1st 2015
SpiceJet’s woes may not be over, but the widely expected deal that will see one of the carrier’s founders returned to full ownership and control of the airline could not have been better timed. Read More »
Last month, entrepreneur Ajay Singh paid $243.5 million for the low-cost carrier at a time when global oil prices had fallen by more than 50% in seven months and Indian domestic air traffic growth was improving.
SpiceJet was in trouble. It owed its creditors, including airport operators, oil companies, ground handlers and other suppliers, more than $200 million. It had reduced its daily flights by a third since last September and grounded half its fleet. It had returned 20 B737s to lessors in the past few months because it couldn’t meet its payments.
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Payment of staff salaries have been delayed on two occasions. It posted a record loss of $162.8 million last year and has not been profitable, on a full-year basis, since the 2012-2013 fiscal year ending March 31, 2013.
Singh, who founded Spicejet with two partners in 2005, sold the Delhi-based carrier to media baron, Kalanidhi Maran, and his Sun Group and supporting investors in 2010. The airline tried to raise funds to keep flying to no avail until he emerged in late 2014 as SpiceJet’s savior. Backed by an investor network, the deal was signed in January and is awaiting government approval.
A new five-year plan to rebuild the carrier includes an infusion of investment funds from associates of Singh. Indian media has reported the carrier will return to a single-type fleet of B737s, phase out its 15 Bombardier Q400s and shrink its network.
SpiceJet has 42 B737 MAX jets due for delivery from 2018. At press time, it was not known if the order would be reviewed.
Analysts said the SpiceJet resurrection is a good sign for the local airline industry. Amber Dubey, partner and India head of aerospace and defence at global consultancy, KPMG, said the failure of an airline with a 17% market share is the last thing India’s beleaguered aviation sector needed.
“SpiceJet’s revival is good for passengers, employees, lenders, suppliers and the industry as a whole. The airline has excellent slots, brand and staff. Given the right support, it can rebuild itself into a profitable airline in the next year,” Dubey said.
While Indian aviation struggles with high costs, fierce competition and excessive taxation, analysts consider the market underserved. In recent months, there are signs the government will ease the biggest burden airlines have, the lowering of the value-added tax imposed by the country’s various states on jet fuel.
Ranging from 4% to as high as 30% under different Indian state governments, the tax results in fuel making up as much as 50% of airline costs.
India’s Civil Aviation minister, Ashok Gajapati Raju Pusapati, is visiting all 29 states – the process will continue throughout the year - to convince the provincial governments to lower the tax.
“The minister has decided to reach out to states to discuss and resolve issues pertaining to air connectivity, infrastructure development and rationalization of taxes on aviation turbine fuel (ATF). We will go to their doorstep and make all efforts to catalyse growth of the civil aviation sector,” said a senior ministry official.
In the meantime, passenger demand continues to increase, with the latest figures from the Directorate General of Civil Aviation (DGCA) reporting air traffic expanded by 9.7% last year compared with 2013 although a significant amount of this growth was driven by discounting.
Indian airlines carried 10.9 million passengers in 2014 against 10 million a year earlier. Some 8.9 million passengers, or 81.6%, travelled on private airlines, with state-owned Air India reporting an 18.4% share, or two million passengers, of the market.
Low-cost carrier, IndiGo, was the market leader with 3.5 million passengers, or 31.8% of the market. The Jet Airways group, now part-owned by Abu Dhabi’s Etihad Airways, carried 2.4 million passengers, 21.7% passengers for the year. Another budget airline, GoAir, attracted one million passengers ( 9.2%) for 2014.
All seven domestic carriers, including the new AirAsia/Tata joint venture, no-frills AirAsia India, and regional airline, Air Costa, reported higher load factors during the December peak season.
Air India’s seat factor rose to 85.9% in December from 76.9% in November. IndiGo reported an 88.8% average load factor for the month compared with 78.6% in November. Jet Airways also reported an 89% seat factor against 83.8% in November. All of the carriers have benefitted from SpiceJet’s forcibly reduced network.
