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The Kalanithi Maran-owned SpiceJet Ltd has appointed consulting firm Bain and Co. to restructure the airline’s network and return it to profitability after losses at the budget airline have mounted over the past few quarters.
SpiceJet posted a record loss of Rs.559 crore in quarter ended 30 September because of the rupee’s depreciation, high fuel prices and lean travel months.
The company posted a loss of Rs.163.52 crore in the year-ago quarter. The number, though, was still lower than larger rival Jet Airways (India) Ltd’s record loss of nearly Rs.1,000 crore.
SpiceJet’s revenue stayed almost flat at Rs.1,257 crore (Rs.1,207 crore in the year-ago quarter), although it fell sharply from Rs.1,701 crore in the preceding three months partly because it sent aircraft on a short-term lease to a Prague-based travel firm.
“The airline is flying to 55 destinations with 57 aircraft, stretching it thin. Then there are several routes which are losing money. There is a need to drop those routes,” said a person familiar with the matter who asked not to be identified. “The COO (chief operating officer) is trying to systematically stop the bleeding before healing can start.”
SpiceJet, which has seen a flight of executives, including chief executive Neil Mills, announced on 31 October the appointment of Sanjiv Kapoor, a former chief executive of Bangladesh’s erstwhile GMG Airlines Ltd, as its new COO.
The airline uses Boeing 737 and Bombardier Q400 aircraft and operates around 350 flights a day, including to 44 Indian and 9 destinations outside India.
Chennai based S.L. Narayanan, group chief financial officer, Sun Group that owns SpiceJet, confirmed that the airline has hired Bain but said there is no plan to shrink the current route network.
“What we are doing is network optimization and not a rationalization. Every aspect of performance improvement will be considered. The sole objective of this exercise is profit maximization,” Narayanan said. “Unprofitable routes will be dropped, and good routes will be added. Just as we speak we are adding a fourth flight on Chennai-Madurai sector, where we hold a 75% market share.”
Bain would take a few months to complete its work, Narayanan added.
Effective 1 February, he said, “you will see the new long-term network in place. Routes, flights, and frequency additions and deletions will involve both domestic and international sectors.”
SpiceJet will also hire a new chief commercial officer soon, Narayanan said, adding that an offer has been made to someone.
“Other senior professional appointments also in progress. We are committed to rejuvenating our leadership team and bringing in proven professionals into the fold.” He declined to provide more details on the appointment.
SpiceJet, which competes with Jet Airways, IndiGo, Air India and GoAir, will soon also face competition from the two joint ventures Tata Sons Ltd has floated to run airlines — one with Singapore Airlines Ltd for a full-service airline and another with Malaysia’s AirAsia Bhd for a low-fare carrier — after the government relaxed foreign direct investment rules for the sector. Both ventures are waiting for regulatory clearances but are expected to be up and running by next calendar year.
The privately held IndiGo, which runs 434 flights a day, is profitable and ended 2012-13 with Rs.787 crore in profit. GoAir, part of the Wadia Group, and also privately held, is a much smaller airline and also claims to be profitable. It made a profit of Rs.104.34 crore in the same period.
Jet Airways recently sold a 24% stake to Etihad Airways in a $900 million deal and Air India has the backing of the government.
SpiceJet hasn’t been able to secure any investment from a foreign airline although it is considered to be well placed by analysts for funding given its huge domestic network, which can feed a foreign airline and relatively lower level of debt compared with other airlines.
On 19 November, brokerage ICICI Direct downgraded the airline’s rating from a hold to sell while maintaining Jet Airways stock at hold. Jet hired consulting firm Seabury to streamline its network after Etihad bought a 24% stake in it. “Given the negative net worth of Rs 603 crore and loan liability of over Rs 1700 crore, funding the operations, going forward, would remain a very challenging task for,” analysts Rashesh Shah and Darpan Thakka said in the report. “Any strategic tie-ups with foreign carriers remain a key positive trigger while currency weakness and rise in competition from other carriers also pose a threat to our recommendations.”
SpiceJet requires — minus aircraft-related funding — a minimum of $250-300 million to be able to turn profitable, according to aviation consulting firm CAPA.
Narayanan said the airline will continue to be funded by its promoters.
“The promoters have infused equity as and when required and will (continue to) do so in full compliance with all regulatory requirements, including SEBI guidelines,” he said.
An analyst said the ongoing quarter –the best by virtue of profits for domestic airlines typically — will decide whethere this fiscal year ends in major losses for airlines.
“I think we have to await the results of this quarter, historically the best, to see how bad the situation really is,” said New York-based former Jet Airways chief executive Steve Forte, “They (SpcieJet) may have a cash problem at the beginning of the new financial year 2014-15. And they may not be the only ones.”
Shares of SpiceJet tanked 6.74% on Tuesday to end at Rs 15.90 apiece, the lowest since January 2012, at the Bombay Stock Exchange, even as the benchmark Sensex shed 0.99% to end at 20,402.07 points.