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Airline says strategy will pay off, but insiders cast doubts

Which way is low-fare airline SpiceJet headed? This is the question online portals, travel agents, various suppliers and vendors to the airline are plagued with as the airline continues to cancel flights across cities and its fleet continues to shrink.

According to DGCA sources, the airline is now flying with 22 Boeings and while it has 15 Q400s, DGCA sources were unable to say how many were in use as of now.

Portals and travel agents are worried since they have sold inventory and seats for the airline almost for a year in the future and there is now no guarantee that the airline will be flying till then. Moreover, since the airline is strapped for cash, obtaining refunds from them for tickets sold and cancelled is also proving to be a challenge. The Airport Authority of India (AAI) has also put the airline on cash and carry.

People are also sceptical on whether any investor would buy into the airline at this stage. “The only thing left to buy is debt. There is very little other value I see in the airline. Even the brand has taken a hit with its recent spate of cancellations”, said an industry analyst.

“Is it the beginning of the end,” is the question people are asking and is filling up all seats on the aircraft no matter at what price a dangerous game to play or the right way to rescue an airline?

No one has all the answers today but within six to eight months, industry experts, analysts, a growing number of former SpiceJet employees (several of whom have either quit or been asked to leave when they asked uncomfortable questions), rivals and even the airline’s various trade partners argue that the results will be there for all to see.

Spicejet’s chief operating officer (COO), Sanjeev Kapoor, argues that his strategy is the way to go. By offering never ending discounts and filling up more seats, the airline will in due course reverse its losses and attain new heights.

Pointing to the first quarter results, the airline in its response to a number of questions on its strategy says: “RASK (revenue per available seat kilometer) is up. RASK is the product of yields and load factor. So, clearly, this is helping, not hurting. This is basic revenue management. Some so-called “experts” evidently do not understand that relationship between loads, yield, RASK, and average fare, average revenue, and marginal revenue”.

There are doubts whether this strategy will work in the long term.

One, the airline has been offering high deposit incentives to mop up cash from online portals and travel agents. The industry normally offers between 1-2 per cent as deposit incentive. It’s not as if it hasn’t been done before (Go Air and others have offered higher rates when strapped for cash) but SpiceJet is offering 10-12 per cent which they argue is “suicidal” in an industry where margins are thin. “They have been collecting money today to fly tomorrow. This is very dangerous. It is like mortgaging your future to pay for your present”, says one of the large consolidators in the trade, who doesn’t want to be quoted as he works with SpiceJet among other airlines. SpiceJet in response to Business Standard’s query on this said that this was privileged information and that their incentives were in line with the market.

Two, the airline has been selling its inventory at very low rates. Sources argue that almost 40-50 per cent of the inventory has been sold at very low rates. How the low fare model works is that the airline may sell some seats well before the date of the flight at pretty low prices. And as the flight nears, the fares go up. But if the airline has sold a high percentage of seats at a low price, then it is unable to make up because the seats that are left have to be sold at very high rates to break even. “The October-December quarter which is typically high season has been sold at very low rates. And if an airline doesn’t make money in this quarter, it spells doom for the financial year”, says one source. He says that the airline has even sold 2015 inventory at very questionable rates.

That the airline has shrunk fleet is known. Not too long back, the airline was flying with 42 Boeings and 15 Q400s. Four aircraft were returned to Babcock (one of its main lessors). Five aircraft they say have been returned as “scheduled redeliveries plus opportunistic exits of older aircraft as we refresh and standardise our fleet.” Sources say the airline has been shrinking its fleet to remain profitable and cuts in fleet size cannot be ruled out. The airline recently lost a number of pilots including some commanders. It reported a loss of Rs 310 crore in the second quarter of the year.

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