| Background
SpiceJet was launched in 1993 as ModiLuft in technical collaboration with
Lufthansa but came to a grinding halt in 1996, much like many of its contemporaries.
The Air Deccan success story encouraged Ajay Singh to raise funds in 2004 to replicate
Gopinath’s model through a rejuvenation of ModiLuft (initially dubbed Royal Airways).
Commencing with three leased Boeing 737-800 aircraft, SpiceJet placed its first
firm order for 20 Next- Generation Boeing 737-800s in March 2005, with deliveries
scheduled up to 2010. The first commercial flight took off in May 2005 and, by
Indian standards, the airline fared well. Media mogul Kalanithi Maran acquired
37.7 per cent stake in the airline in June 2010 and restructured the business
model significantly. The airline needed frequent fund infusion from the Marans
who invested more than `1,500 crore over a period of time and became the largest
shareholders with a 58.46 per cent stake. In November 2010, SpiceJet placed an
order for another 30 Boeing 737-800s, following up with an order for 15 Bombardier
Q400 NextGen turboprop airliners and an option to buy another 15. In March 2014,
SpiceJet signed a deal with Boeing for procurement of Boeing 737-MAX 8 aircraft.
The fleet strength built up to 30 Boeings and 15 Q 400s but sustained profits
remained an unattainable fantasy. At the beginning of 2014, ominous portents of
brewing fund flow troubles appeared. By July 2014, in desperation, SpiceJet resorted
to selling heavily discounted tickets into the future with the objective of actualising
some sorely needed working capital. However, its dues mushroomed and leasing companies
(Australian Babcock & Brown, American GE Capital, and Singapore’s BOC Aviation
and ILFC) started reclaiming aircraft due to non-payment of dues. This precipitate
action was an anticipatory one as the Kingfisher saga had left leasing companies
with their fingers burnt. SpiceJet paid the price for Kingfisher’s mismanaged
deactivation and its fleet strength dwindled down to 22 Boeings and 15 Q 400s.
Consequently, its network shrivelled to half of its past expanse, with DGCA snatching
away the slots and sectors that SpiceJet was forced to abandon due to declining
fleet strength. On December 5, Ministry of Civil Aviation (MoCA) asked SpiceJet—
which was raising some of its working capital through advance ticket sales—to
stop sales of tickets more than a month in advance. That restriction came after
the airline cancelled around 1,800 flights in December. Contributory
Factors From the operations point of view, the single major factor that
hastened SpiceJet downhill was the decision to induct the Q 400. While the decision
to exploit the first-mover advantage in connecting Tier II/III cities was a sound
one, it was the choice of aircraft for the purpose that was inappropriate. Air
Deccan’s introduction of the ATR turboprop had been a resounding success and possibly
provided the inspiration for SpiceJet’s decision to go in for a turboprop aircraft.
However, in doing that, SpiceJet forgot the basic principle of low cost airline
operations, i.e. maintaining a single aircraft type fleet model. Having more than
one type militates against low cost philosophy based on the common sense logic
that two types of aircraft fleets inevitably involve duplicated costs of manpower
resources, training, ground handling and maintenance overheads, not to mention
two disparate sets of flight and cabin crew. SpiceJet’s decision to move
into the regional space was based on sound logic but it failed to get the desired
results. Scheduled operations in India have gravitated around the metros and,
despite the constant clamour for increase in regional aviation, SpiceJet’s foray
into Tier II/III cities was not rewarded with the success it deserved. Complimented
by the high cost of operation of the Q 400, the lack of custom from a capricious
customer base added to SpiceJet’s woes. On the management front, candid
exchanges with insiders indicate that weak management may have been the long term
cause for the downfall of SpiceJet. The initial promoters quit (and invested in
Indigo) while Sanjay Agarwal, installed as CEO by Wilbur Ross who invested $80
million into SpiceJet (increasing his stake to $100 million later), was preoccupied
by ensuring that the Ross investment yielded handsome returns. Sanjay Agarwal
did indeed make good money for Ross (one estimate puts the return as 200 per cent)
before the Marans took over (Sanjay was then hired by Kingfisher in a bid to replicate
his SpiceJet success story there). Neil Mills, the next CEO, was a finance man
who had to work with Maran loyalists who were not aviation professionals. He found
that difficult but plodded on to gain the experience which helped him get his
next CEO post. Sanjeev Kapoor, the current COO has gained respect within the airline
through his application towards brand enhancement but by the time his policies
could take effect, the lack of strategic vision and foresight in his predecessors
had produced undesirable effects. Some insiders blame all the current woes
of the airline on Kalanithi Maran who, at one time, was perhaps the highest paid
functionary in India; it is rumoured that he and his wife drew salaries of `59
crore each annually. There were some whispers, occasionally audible outside the
confines of SpiceJet’s domain about management practices of the Marans being autocratic
and whimsical. Several top management exits were said to be predicated to this
factor. As an aside, the problems faced by the Maran brothers as a fallout of
the 2G scam, by association, projected a shadow over the airline’s profile thus
detracting from customer and stakeholder confidence in the airline’s future. The
deluge of low cost tickets that SpiceJet spilt forth from July 2014 onwards is
pointed out by some as a contributory factor for the perilous state it reached.
A contrarian view would be that the low cost ticket sales were a result (and not
the cause) of the fund flow crisis that was apparent by that time. The need to
raise cash by undercutting other airlines in a cut throat, competitive market
was dictated by the working capital deficit that had built up to such a level
that Airports Authority of India (AAI) and oil companies were putting SpiceJet
on cash and carry basis. Indeed, operations were held up for half a day in December
when oil companies stopped supplying fuel altogether. The
Turn Around At the beginning of January 2015, Jet Airways placed vacancies
under the Careers link in its official website for captains and first officers
with flying experience on the Q 400 leading to the inevitable surmise that it
was considering taking over SpiceJet’s Q 400 fleet. While such a takeover would
have been a Godsend for SpiceJet, it never came. Meanwhile, with AAI and oil companies
building up the pressure on SpiceJet, MoCA made some encouraging noises and exhorted
banks to loan some more money to SpiceJet with the proviso that the Marans provided
personal guarantee (which was not forthcoming). When all seemed lost and India
aviation watchers had resigned themselves to another domestic airline bereavement,
Ajay Singh, a co-founder of SpiceJet, showed an inclination to pump in badly needed
funds. After protracted negotiations, a deal was stuck and Ajay Singh regained
control of the airline by acquiring 58.46 per cent of the stake and with a commitment
to invest `1,500 crore into it. `550 crore was invested initially and another
`400 Crore is expected to be put in during May (around the time this issue goes
to print). It was expected that the senior management would see some major changes
as a result of change of ownership. Sanjay Kapoor is still around as the COO while
the Chief Commercial Officer Kaneswaran Avili and the Senior VP Information Technology,
Sudhakar Kondishetty have stepped down in recent weeks. There has been some talk
about JP Morgan Chase making a bid for an equity-led bailout, but SpiceJet seems
to have kept that offer at bay for the time being while looking around for local
investors to sort out the cash crunch that brought the airline close to an inglorious
end. So, is the turnaround complete and is the airline on its way to prosperity
(or at least subsistence)? It is hard to give a definite answer to that. The near-demise
in December led a lot of pilots to put in their regulatory sixmonth notice for
quitting their jobs. While a small number have withdrawn their notices, an informal
projection indicates that by July, when those of the pilots who have not withdrawn
notices become non-effective, the airline will be faced with a situation wherein
there would not be adequate pilots to fly even the reduced number of flights currently
being operated (around 250 per day). It remains to be seen if some more pilots
can be tempted by the management to stay back. Meanwhile the airline plods on
with an employee strength of less than 4,000 (down from 5,500 at its peak in 2014)
and the number of serviced stations down to 31 (from 39). In an interview
to a leading English daily in April, Ajay Singh summed up the situation aptly,
‘I am back in the airline for the long run. We are not yet out of the woods but
we have made a lot of improvements since February..............” Conclusion
The imperfections and maladies that afflict our civil aviation have taken
a heavy toll on the airlines and continue to do so. Whether they are mismanaged
and sport internal inefficiencies (like Air India), or have private managements,
airlines are being smothered by an oppressive environment that threatens every
airline, every day, with financial hypoxia. The annual and cumulative losses of
airlines run to vulgar figures and there does not seem to be any good portent
visible in the near future. SpiceJet’s return from its death bed has set off a
despondent debate about why Air India should be bailed out despite its internal
inefficiencies while other airlines (like SpiceJet) are denied bail outs despite
the fact that their penury is attributable to Government policies. | 
