The low-cost airline that will connect India and China even if they don’t want it

SpiceJet Ltd., the discount carrier controlled by billionaire Kalanithi Maran, will add flights to mainland China as trade expands between India and the world’s second-biggest economy amid intensifying competition at home.

The carrier, which flies four times a week to Guangzhou in China, plans to fly to three more destinations there this year as it taps business and leisure travelers from both countries, Chief Executive Officer Neil Mills said in an April 23 telephone interview. State-owned Air India is the only other local carrier that offers direct services connecting the combined 2.5 billion people in China’s mainland and India.

“You’ve got over a third of the world’s population in two countries that sit side by side, but they are almost not connected by air,” Mills said. “It’s not logical at all. It’s like not having a connection between the U.S. and Canada.”

SpiceJet is accelerating its overseas push while preparing to face competition from Asia’s biggest budget carrier AirAsia Bhd. and Jet Airways (India) Ltd., in which Etihad Airways PJSC agreed to buy a 24 percent stake this week. Mills targets to almost triple contribution of overseas flights to sales to 20 percent of total in the next 18 months as the Chennai-based carrier cuts costs to end losses.

The airline, which began operations in 2005, started flying overseas in 2010.

Trade ties

China is India’s second-largest trading partner, with bilateral volume doubling in four years to $75.6 billion in the 12 months ended March 31, 2012, according to data provided by India’s commerce ministry. The two neighbors want to reach $100 billion by 2015. Air India operates four flights a week between Delhi and Shanghai.

Jet Airways, India’s biggest publicly traded carrier, suspended flights to Shanghai less than a year after it introduced the route in June 2008.

“It’ll be a pretty smart move” by SpiceJet, said Mark D. Martin, chief executive officer of Dubai-based Martin Consulting LLC that advises airlines on cost optimization and fleet strategy. “China is one segment where traffic will consistently grow and it’s one of India’s biggest trading partners. This will pay off in times to come.”

Nuclear-armed

While trade ties are deepening between the two countries, tourism has yet to take off, limiting SpiceJet’s ability to fill seats on its planes, said Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. in Mumbai.

In 2011, about 142,000 Chinese people visited India, or 2.25 percent of the total arrivals behind Japanese, Canadians and Malaysians, according to data provided by India’s Ministry of Tourism.

“China is a relatively new market and there isn’t much tourism from India either, so it makes more sense to fly to a hub such as Hong Kong and then use codeshares from there,” Sabarad said. “Flights to China don’t have adequate seats getting filled so it remains to be seen whether these routes will be profitable.”

China and India, the nuclear-armed neighbors, have laid claims to territory held by the other and went to war in 1962 over a boundary dispute. Border disputes have prevented warm relations between the two. India accuses China of occupying 38,000 square kilometers of territory in Jammu and Kashmir to the west, while Beijing says 90,000 square kilometers of land in Arunachal Pradesh in India’s northeast belongs to China.

Shares surge

Shares of SpiceJet have gained 32 percent in the last 12 months, compared with 91 percent increase in Jet Airways. India’s benchmark S&P BSE Sensex has risen 13 percent in the same period.

SpiceJet plans to add seven Boeing Co. 737 aircraft to its fleet of 52 aircraft that include 15 Bombardier Inc. Q400 turboprop planes, Mills had said last month.

Maran, who bought majority control in SpiceJet in 2010, has more than $2 billion worth of shares through his direct 77 percent stake in Sun TV Network Ltd. and 16.3 percent of SpiceJet, according to data compiled by Bloomberg.

Adding international services will allow Indian carriers to earn revenue in dollars, the currency of invoice for aircraft and spares, Martin Consulting’s Martin said. As much as 70 percent of an airline’s costs, including jet fuel and aircraft prices, are denominated in dollars.

Central Asia

The Indian rupee has declined about 3 percent against the dollar in the past year, according to data compiled by Bloomberg.

Flying more overseas routes will also help carriers save on some local jet fuel taxes. Jet fuel, which accounts for about half of a carrier’s expenses, costs as much as 60 percent more in India, compared with Singapore because of sales tax levied by Indian states, according to government data.

SpiceJet is also considering flying to Commonwealth of Independent States, which comprises the former Soviet states, and start flights to Thailand, Mills said. It also plans to add more routes to the Middle East, he said. The carrier withdrew its application to fly to Abu Dhabi, Mills said.

The overseas push also comes as the airline strengthens its domestic network by connecting under-served towns. The carrier is using the 78-seat Q400s to access more airports with runways too short for jet planes such as Boeing Co.’s 737s. SpiceJet’s efforts come amid intensifying competition at home.

Air Asia

SpiceJet in January said it would cut costs by keeping fewer expatriate pilots on its payroll and new duty rosters for attendants that will ensure they return to their home base by the end of the day, eliminating hotel expenses. The airline also said that it would begin importing jet fuel to save on high local taxes.

This week Etihad Airways, based in Abu Dhabi, agreed to buy a 24 percent stake in Jet Airways for 20.6 billion rupees. Last month AirAsia formed a venture with Mumbai-based Tata Group to set up a local low-fare airline. The Malaysian company aims to start Indian operations in September, with the venture operating out of Chennai.

SpiceJet will probably post a loss of 473.5 million rupees ($8.7 million) in the year ended March 31, narrower than a year earlier, according to the median of 10 analysts’ estimates compiled by Bloomberg. And they estimate sales to rise 45 percent, the fastest pace in at least five years, to 57.3 billion rupees.

The carrier is enthused by the response it has got with its China connectivity.

“The first week of flights were actually full from China with tourists coming to India for the Chinese New Year,” said Mills.

Editors: Subramaniam Sharma, Sam Nagarajan. To contact the reporters on this story: Karthikeyan Sundaram in New Delhi at [email protected]; Siddharth Philip in Mumbai at [email protected]. To contact the editor responsible for this story: Anand Krishnamoorthy at [email protected].