SpiceJet COO looking to cut costs, big and small, starting with crews' 'weekend uniform'

SpiceJet flew into its fourth straight quarterly loss in the June quarter this year which by itself is not surprising since analysts had widely predicted this. The surprising part was the Rs 133 crore incurred on restructuring and one-time costs which shaved off SpiceJet's puny Rs 9 crore operational profit for the quarter. In other words, though the airline improved its operational performance, these one-time expenses spoiled the party. It had declared a five fold higher net loss for FY14 at Rs 1003 crore earlier. In an exclusive e-mail interaction with Firstbiz, COO Sanjiv Kapoor says airline's promoters continue to be committed to provide capital, he continues looking to trim all costs, big or small. Excerpts:

FB: During the quarter, SpiceJet incurred restructuring and certain one-off costs of Rs 133 crore, which resulted in it declaring a net loss. What were these one-off costs due to? How much did early aircraft lease terminations cost and how many aircraft were returned before lease expired? What kind of additional interest and funding costs were carried forward from the previous fiscal?
SK: The restructuring costs were inevitable since they will ensure that SpiceJet emerges as a leaner and more efficient airline. These expenses relate to restructuring of the network with a focused elimination of unviable routes and strengthening of profitable segments. This resulted in capacity rationalization that required us to reduce our fleet leading to the early lease terminations four Boeing 737-800NG aircraft that entailed early termination penalties and associated early return and re-delivery costs. We also closed some unviable stations as part of the revamped network, adding to these onetime costs. Cost of funding has been higher than normal due to continuing impact of unprecedented losses in the previous fiscal.

FB: Could you please tell us about the airline's working capital requirements and how these will be impacted now since auditors have once again said your total liabilities exceed total assets by Rs 114,557.5 lakh? Does the inability to continue as 'going concern' impact your day-to-day operations?
SK:
Working capital requirements are being met through internal cash flow generation and periodic promoter funding support (information on which is fully disclosed in BSE filings). The auditor comment on 'going concern' is not a new development in this quarter, it has been noted since December 2011. Auditors invariably raise this when a firm's net worth turns negative. It is not a happy situation but the risks of insolvency are mitigated with fresh infusions of equity. The promoters continue to be committed in providing required operational and financial support to the company in the foreseeable future and have done so from time to time in the past, which is evident from their past investment and support aggregating around Rs 550 crore since FY 2011-12 till date.

FB: SpiceJet became the second largest airline by passengers last quarter and also had industry leading load factors. Why then has increase in revenues and yields not translated into profits despite one-time costs? By when would you say the airline will return to profitability? Any plans to further trim domestic capacity? What news routes are being added in the next few months?
SK:
SpiceJet has emerged as the #2 airline in India in terms of domestic passengers carried thanks to our all-new network and schedule that launched on March 30, along with a new approach to pricing and revenue management. Our new network and pricing and inventory management approach has significantly increased revenues per flight and therefore average revenue per seat, has resulted in higher RASK (unit revenue) by almost 10% year-over-year, and has allowed us to keep revenue essentially flat while shrinking capacity by almost 9%. We have increased market share while shrinking capacity, which is truly remarkable. This has resulted in SpiceJet becoming operationally profitable (excluding re-structuring and one-time costs) in the last quarter.

We had positive contribution from both domestic and international operations, and also from both fleets (Boeings and Q400s), inclusive of aircraft and maintenance costs. We are adding new routes such as Bagdogra-Kathmandu, Kolkata-Bangkok, and also adding additional flights to Dubai. We review our network constantly, and will make ongoing adjustments as and when required. We have launched new products to improve yields, such as SpiceFlex and an all-new SpiceMAX, and the response to these has been strong.

The reason we are not profitable as yet on a net profit basis is because of the reasons mentioned earlier relating to early lease terminations and higher cost of funding, and also importantly because fixed costs tend to be more "sticky" and take longer to take out due to nature of long term contracts, etc especially in situations where capacity is being reduced as part of the re-structuring.

The revenue engine reduces in size instantly hitting revenue right away, but costs take longer to take out. It will take some more time before the cost reduction efforts become visible in the bottom-line. We are looking at every aspect of costs, big or small. For example, even the new weekend uniform of kurtis / polo shirts with jeans is a cost-saving: it replaces one annual issuance of the standard uniforms with jackets etc, which are much more expensive. And it is a huge hit with our customers.

FB: Is SpiceJet in talks with an Indian investor for a strategic stake sale? Has any foreign airline shown an interest in picking up a stake in the airline? How much is the fund requirement for the current quarter?
SK:
No further comment at this time, we will comment at the appropriate time.

FB: What are the outstandings to lessors, banks, oil companies and airports till June 30? Have these reduced since June?
SK:
This information is privileged between the parties concerned and is being well handled between us and our partners.

FB: What is the status of DGCA's engineering audit? Is SpiceJet stripping some aircraft of spare parts as alleged in some media reports? How many aircraft are on the ground now and have maintenance costs seen any significant increase in the June quarter?
SK:
The DGCA engineering audit is a routine audit that it conducts regularly across all airlines as part of their role as regulator. The only thing surprising about this audit is that it somehow became big news as if it were unusual for the DGCA to conduct audits. The DGCA itself is surprised as to how this became such big news. SpiceJet has all of its aircraft flying in regular scheduled service, except for one Boeing in regularly schedule C-check, and one Q400 that is undergoing repairs after a bird strike.

There is absolutely no truth in the allegations that some aircraft are grounded and are being cannibalized stripped for parts at SpiceJet. Some parties keep repeating these motivated allegations regardless as they do not want the facts to get in the way of a sensational but false story designed to capture eyeballs.

FB: There was speculation about your quitting the company earlier this month, which you denied. Do you regret any decisions taken while you have been at the helm, anything that could have been done differently? Do you think the arrival of AirAsia and more specifically the withdrawal of Jet Airways from the LCC space will impact the fortunes of all LCCs including SpiceJet?
SK:
I am not going anywhere. The promoters and the Board have given me complete independence in executive management and any rumours about my quitting is total completely baseless. The rumours supposedly came from "reliable sources", to which I say, "How reliable can these so-called reliable sources be if they are flat wrong?"

The only regret is that we waited to start our market stimulation efforts so long. We should have started this a long time ago, it is an essential part of LCC revenue management and is just the right thing to do to maximize revenues and improve margins. It improves margins for the airline since the marginal cost of an additional passenger is a fraction of the incremental revenue. Those who refer to these as "fire sales" that will further weaken the bottom-line just do not understand LCC revenue management.

We are prepared for a changing competitive environment with our ongoing restructuring. Our loads and yields have gone up despite the entrance of a new player, in fact this past June was perhaps the best June in terms of loads and revenue performance in our history, despite the start of operations of the new entrant. Customers are noticing the difference and are responding positively to our new products, to our differentiation through many innovations, and to our market stimulation, and are choosing to fly us more frequently. At the end of the day flying fuller aircraft at higher unit revenues and average realizations while keeping operational costs to a minimum, is what makes LCCs succeed, and our Q1 operational results show what we are on the right path.

We are hopeful that the new government will help airlines get relief in terms on high taxes on ATF and high airport charges, and that will go a long way in helping the industry in India. One interesting factoid: If we had the same aviation fuel price in India as Singapore Airlines has in Singapore or Emirates has in Dubai, we would have been profitable in the last fiscal, instead of making unprecedented losses. That is how much we are impacted by high fuel prices in India.

Updated Date: Aug 17, 2014 16:04:18 IST