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Maran’s acquisition makes it evident that
the growth segment of the aviation industry is
going to be the budget airlines. In the case of
SpiceJet, after half a decade of existence, it
has finally recorded profits of Rs. 61 crore in
a full year of operations. This is in sharp contrast
to the full service carriers who may have a larger
market share but are saddled with huge debt burdens.
The largest airline in terms of market share is
Kingfisher but it has a debt of about Rs. 5600
crore while Jet Airways has a debt overhang as
high as Rs. 13,000 crores while Air India’s
accumulated debt is estimated at Rs. 22,000 crore.
These factors clearly weighed with Maran before
he went ahead with the take over of this no frills
carrier. He made it clear that SpiceJet was chosen
only after making a careful study of the Indian
aviation sector. As a result of this study, he
appreciated the tight ship being run by current
CEO Sanjay Aggarwal and claimed that so far there
are no plans to rock the boat by making any management
changes. He has also revealed that his decision
to buy a 38 per cent equity stake in the company
was based on the fact that SpiceJet is nearly
zero debt and has a healthy EBITDA (earnings before
interest tax depreciation and amortisation). In
addition,the budget carrier which has a 13 per
cent market share has raised revenues by nearly
30 per cent during the last fiscal and load factors
have remained consistently over 80 per cent.
Spicejet has been cleared to fly to four destinations
in South Asia, which may increase the debt burden
on the airline. But Maran clearly has ambitions
to make Chennai an international hub for the airline.
The airline’s strategy of leasing aircraft
has paid rich dividends as now the larger players
like Kingfisher and Jet Airways are pulling back
on fleet acquisition. This leaves room for the
smaller airlines like Spicejet to expand their
fleet by both acquiring aircraft and leasing to
meet the growing demand. Expectations are that
the budget airline will reach a market share of
15 per cent in the current fiscal itself (2010-2011).
SpiceJet though is set to acquire another Boeing
737 aircraft.
The airline’s earlier avatar was as Modiluft,
but was relaunched in 2005 as SpiceJet by the
new promoters, Ajay Singh and the Kansagra family.
In 2008, the billionaire Wilbur Ross who specialises
in taking over troubled companies and reselling
them for a profit, bought 30 per equity stake
in the airline at a cost of Rs. 345 crore ($ 80
million). Ross has now sold his stake to Maran
at 16 per cent less than market prices, but has
made a 100 per cent profit on the deal. In this
context, one must note that in the past one year,
the company’s stock price has gone up by
over 150 per cent, primarily due to the improved
performance of the budget carrier.
Maran, who is chairman of the Sun Network, has
acquired the airline through his aviation company
known as Kal Airways, jointly promoted by him
and his wife Kaveri. One of the major plus points
of this takeover is that the fragmented holding
pattern of the company will be consolidated with
Maran ultimately expected to hold as much as 57
per cent of its equity. This will make it easier
for its board to take decisions especially at
a stage when the carrier is poised to expand both
in the domestic and international arena. It has
been seeking to raise 75 million dollars for these
expansion plans. In fact, it is being felt that
with Maran involved in the venture, his deep pockets
and political clout will make SpiceJet a game
changer in the aviation sector. The company has
already been given permission to fly to Colombo
as well as other destinations in South Asia. It
may have earlier feared other budget carriers
in the region like Air Asia and Tiger Air, but
with Maran’s decisive brand of business,
it is felt that Spice Jet can become a worthy
competitor to these airlines.
What is interesting in this entire development
is the fact that Maran has made no secret of the
fact that he was approached by at least three
to four airline companies before he carried out
this takeover. Clearly the aviation industry is
facing tough times as it looks for cash rich companies
to bail them out from their heavy debts. Some
of the consolidation has already been carried
out in the industry. Jet Airways bought over Sahara
to create its budget airline called Jet Lite.
Similarly Kingfisher took over Air Deccan to form
its no-frills carrier known as Kingfisher Red.
This was not enough for Jet which has launched
yet another budget wing known as Jet Konnect.
Given the fact that other airlines have approached
Maran, it is possible that another round of consolidation
may take place in the aviation industry. There
have been persistent rumours that Go Air is being
sold though these have been strenuously denied
by the promoter, Jehangir Wadia. The fact that
the airline is looking for a strategic investor,
however, has been conceded by the company which
remains one of the smaller players with a seven
per cent market share . There has also been speculation
that some of the budget carriers might merge to
make operations more viable. For the time being,
however, it seems all plans have been put on hold
owing to recent surge in the aviation sector.
The latest government data for May this year
confirms this revival of the airlines business.
An official release says that India’s domestic
airlines carried a total of 47.85 lakh passengers
in May as against 41.88 lakh in April. Of this,
Kingfisher Airlines carried 10 lakh passengers,
Jet Airways carried 8.69 lakh, Air India carried
8.47 lakh, Indigo 7.53 lakh, SpiceJet 6.32 lakh,
Jet Lite 3.84 lakh, Go Air 2.81 lakh and Paramount
0.19 lakh. Kingfisher had a 20.9 per cent market
share, followed by Jet with 18.2 per cent. Market
share of Air India was 17.7 per cent, 15.7 per
cent for Indigo, 13.2 per cent for Spice Jet,
8 per cent for Jet Lite, 5.9 percent for Go Air
and 0.4 per cent for Paramount. The seat factors
of the airlines in May were 92.3 per cent for
Indigo, 90.4 per cent for Spice Jet, 86.6 percent
for Paramount, 86 per cent for Go Air, 85.4 per
cent for Jet Lite, 83.2 per cent for Kingfisher,
82.5 per cent for Jet Airways and 77.8 per cent
for Air India.
The first and most positive news from this data
is that more and more people are travelling by
air now that the clouds of recession have disappeared.
The second is that the seat load factor is much
higher for the budget airlines than for the behemoths
who may have a much larger market share. Profitability
is thus better for the smaller players than for
the big guys in the fray. Some of the larger players
like Jet, however, are already finding an improvement
in their bottomline by making an operating profit
in the last fiscal as recessionary conditions
have eased and air travel is once again booming.
But the airline had to make significant changes
in its operations over the last two years including
shifting a large chunk of full service operations
into the budget segment by calling it Jet Konnect.
Kingfisher Airlines also recorded a 50 per cent
dip in operating losses, but is still in the red
for the time being.
The good times, however, seem to be on the way
for the Indian aviation industry. SpiceJet’s
take over by media baron Kalanithi Maran will
strengthen the budget carrier segment which seems
to be going from strength to strength. At the
same time, the larger players will have to continue
their strategy of cutting costs on all fronts.
The silver lining is that air travel is once
again showing a resurgence and this should translate
into higher revenues and profits for the domestic
airlines.
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