Not cash alone: Ajay Singh needs a lot more to do to revive SpiceJet

Merely pumping in money into cash strapped SpiceJet will not turn it around. The tough task of turning it around actually begins from here. Former promoter Ajay Singh has come as a white knight since he has lined up an investment of up to Rs 1500 crore, in phases, into SpiceJet. This would mean complete exit of current promoters, the Marans, even though they may retain a minority stake through conversion of some warrants eventually.

Singh has come as a manna from heaven for cash strapped SpiceJet which was forced to briefly ground flights last month when oil companies refused to fuel its aircraft on non-payment of bills. The money will surely help SpiceJet tackle its liabilities which stand anywhere close to Rs 1200 crore. But money is only one part of SpiceJet’s revival. The airline needs a complete overhaul and industry analysts say this may take up to one year to achieve. Singh needs monumental patience, a team of turnaround specialists and aviation industry veterans to help him in this task.

Lady luck is already on his side. Oil prices are down to historic lows which means operational costs should be at their lowest for SpiceJet in years. Rupee has been appreciating and an expected economic boom will fuel air travel. Then, a benign Government means SpiceJet has been forgiven many sins like mounting dues to Airports Authority of India and some other vendors as the Government has been providing it cushion. Now, when it is time to repay dues to vendors, again SpiceJet may be given some breather.

In fact, the Ministry of Civil Aviation has been outdoing itself in getting SpiceJet back on track, with the Secretary and at least one joint secretary holding almost daily meetings with Singh and the SpiceJet management to iron out a revival plan.

Singh’s plan envisages acquisition of Marans’ entire stake, which triggers an open offer for public shareholders. There have been reports that the ministry may waive this requirement too. Like I said, the ministry has been outdoing itself on SpiceJet - leading some to question its lack of initiative in saving Kingfisher which died a slow death in 2012 amid similar cash woes.

Anyhow, Singh himself is clear that there are many more aspects to the revival of an airline which holds close to a fifth of the domestic market share, some international slots and is the only competitor to aggressive market leaders like IndiGo. IndiGo holds over a third of the market. In simple terms, this means every third domestic passenger checks into an IndiGo flight whereas less than one in five have been flying SpiceJet. GoAir, the only other low cost carrier (LCC), holds close to 10% share of the market.

Singh told Firstbiz late last night that the airline needs to be restructured so that its operations are curtailed. “We need to curtail operations so that SpiceJet flies to less stations but offers more frequencies at these stations. It needs to be a full LCC”.

This may mean the airline shuts operations to some unprofitable stations quickly. Singh is well versed with the LCC model, having himself steered SpiceJet to profits before exiting in 2010.

Sources close to developments at SpiceJet have been saying that there will also be a full review of the twin fleet strategy - SpiceJet operates Boeing 737 aircraft as well as Bombardier Q400 fleet. These sources say it is not a given that the Q400 will be phased out. Indeed, if the Government’s new route dispersal guidelines are anything to go by, SpiceJet may need to hold on to this fleet of smaller aircraft to connect tier II towns and the hinterland. It is another matter that a twin fleet strategy is rarely adopted by legacy LCC carriers anywhere in the world.

Then, Singh also said that the new promoters are convinced SpiceJet’s Boeing fleet needs to be expanded.

The fleet has been reduced to less than half from its peak strength last year due to cash crunch, when lessors began repossessing aircraft whose lease rentals were unpaid.

The third thing that the new promoters will almost certainly do is restructure the entire operations from a staffing angle. A senior airline official had explained earlier that the manpower:aircraft ratio which SpiceJet wants to maintain is 120. “If the fleet is reduced by 20 Boeings, say, then the staff strength should straightaway go down by 20 multiplied by 120 or about 2400 people”.

This official said that pilots and cabin crew “will not find it hard to get other jobs as there is already a scarcity of these people in the market”.

On restructuring, Singh said that the “airline has to make economic sense and that right sizing will have to be done” but declined to share specifics.

The most important aspect of a turnaround at SpiceJet will have to be significant cost rationalisation. And Singh is well aware of this. IndiGo is the industry leader in cost benchmarking and some months earlier, SpiceJet management had begun studying cost structures at competing airlines to align its own.

In the last press meet held for second quarter results, COO Sanjiv Kapoor had said that the airline had some legacy costs which would not be easy to shed quickly but other costs were already being reworked.

Speaking after the announcement of the deal between the Marans and Ajay Singh yesterday, he again said cost rationsalition would be the airline’s top priority and contracts with vendors would be re-negotiated.

India is poised to the third largest aviation market by 2020. Though new entrants like Vistara and AirAsia India have increased competition for SpiceJet, right strategies and sensible route planning could help the airline retain its lost glory.