This Spice Almost Lost Its Flavour

Richard Branson gave a classic example of how to become a millionaire – start as a billionaire and invest in an airline! Astonishingly accurate – Who, in India, would have believed him 3 years ago? But as more skeletons tumble out of the skies (or hangers?), a picture akin to a dreary, cold, foggy and damp winter morning, instantly comes to our mind. The reality is not far from the picture – as the winter intensified its grip over Delhi, it almost claimed another victim - the ‘spices’ airline. Spicejet had become afflicted with a dangerous respiratory ailment and the doctors tending to it (read Government, regulators etc.) had all but spelled the death knell.

Image source: www.alchemymarketingsite.com

Spicejet, till recently India’s second largest airline by passenger share, was hogging the headlines, albeit for the wrong reasons. The nightmare of Spicejet’s top bosses, who begged for mercy with the authorities, continued unabated. Along with it was hanging the fate of its crew, staff and associated entities. Spare a thought for their families. We cannot imagine their condition until we are in their shoes – a thought which sent shivers down my spine. The smiles on the faces of Spicejet’s cabin crew, which was so welcoming when I took my first flight with them in 2007, being a first timer on a low cost carrier (LCC), had perhaps been lost forever.

Spicejet, in its current avatar, started operations in May 2005. GoAir was launched later that year in November and Indigo in August the next year. The growth of Spicejet was phenomenal and together with Indigo, gave the full service airlines a run for their money. Their expansion in fleet and routes were also quite similar, with Spicejet marginally ahead for most of their first five years of existence. Fares were similar, with Spicejet giving more flexibility in booking options. While Indigo offered a hold booking for 24 hours, Spicejet offered a hold booking till 2300 hours next day irrespective of the booking time. With the triumphant twosome, low cost airlines had arrived big time in India, giving enormous edge to the gleeful general public.

However financially, Spicejet was slowly losing the plot. After making profits in the financial year 2009-10 and 2010-11, it was in losses in 2011-12 before returning to profit in 2012-13. This change in trend was due to further investment by its then owner, Sun Group. On a straight comparison, Indigo was posting profits without a break since 2008-09. History, unfortunately, was being repeated for Spicejet. The issues relating to frequent change of hands of owners had grounded the airline in 1996, then known as Modiluft. In its second stint, Ajay Singh, who re-started operations, exited and so did Wilbur Ross and Bhulo Kansagra, Spicejet’s other investors. Spicejet is the only airline, which did not have a focused owner all throughout its life.

Was Spicejet a victim of its own actions or did it suffer from the hapless fallout of the restrictive Indian airline industry or was it a doomed cause? Let us take a look at some instances of the other failed low cost airlines globally.

In the United States, a generation after deregulation of airlines in 1978, low-cost carriers have seized control of the domestic market. It was not always thus. Of the 34 newcomers created after deregulation, 32 soon went bust. Those were the days when the strong, incumbent firms such as American Airlines could simply unleash even lower fares whenever a low-cost upstart invaded its market. Before the antitrust authorities could do anything about it, the competitor was crushed.

 
Similarly in Europe, as many as 60 low cost carriers were forced to exit the market between 2003 and 2010. The low-cost airlines that were now defunct were diverse and ranged from a number that hardly began operations to others that were relatively successful, but merged or were taken over. Most of these airlines operated for a period and then went into bankruptcy. Some, such as Go Fly and BuzzAway, merged with successful low-cost airlines. In a few cases, the airline was registered, but never offered actual services. (Source: Low Cost Airlines: A Failed Business Model by Kenneth Button, page 208) 

In Australia after de-regulation of the domestic airline industry in 1990, there have been a number of attempts at entry by low cost airlines. However, they lived for limited periods and the major reason for shutting shop was liquidity crunch and cash flow problems. Typically, they have been independent operations, with no strong links to either financial institutions or other airlines. (Source: Low Cost Carriers in Australia: Experiences and Impacts by Peter Forsyth , page 2) 

It is clear from the above that globally low cost carriers have struggled to stay afloat. Out of the numerous entrants, only a handful survived. The story in India has been no different. Post the liberalization in 1991, the Maharaja had its first taste of competition, when a string of airlines entered the domestic fray. Damania, East West, Jet, Modiluft, NEPC, Sahara all made flamboyant entries. I still remember collecting the flashy monthly magazines whenever my father would fly these airlines. However, apart from Jet and Sahara, none of them survived.
 

Coming back to Spicejet, a comparison with its peers, Indigo and GoAir, is imperative. Indigo had a focused policy and approach from the beginning. Some notable steps include investing in new aircraft (replacing old ones), maintaining an unbeatable ‘on time’ record and launching an innovative PR exercise (remember their TV commercial?). Indigo did its best to connect with flyers, retaining existing ones and equally wooing newer customers. Slowly its market share grew and currently it is ranked at the top. Once it sensed increase in volumes, it introduced pricing mechanism such as cost for pre-booked seats (Spicejet had introduced this earlier, but somehow, it weaned away passengers since Indigo did not charge for this), a few seats for a premium cost and on-board sales of retail products. GoAir, on the other hand, has had a slow but steady growth, focus being on profitability and gradual increase of the network.

 

Spicejet did not heed the various indicators of trouble that was brewing. When it was incurring quarterly losses in the last financial year, its management should have taken cues and commenced steps to bring it back to black. Instead they continued to only announce spot sales on its existing network. Initially it did help with its website crashing and counter overflowing. However, competition being stiff, other airlines including the full service carriers provided matching discounts. This somewhat made the entire effort look like a desperate attempt to remain afloat. Another possible indicator was Spicejet COO’s communication, be it repeatedly taking potshots at AirAsia India’s fare pricing strategies terming it unviable or internal emails comparing how his airline had better filled up seats. Spicejet’s auditors, SR Batliboi and Associates LLP, had pointed out in their quarterly review report the airline's total liabilities exceeded its total assets by Rs 1,145.58 crore (Rs 1.15 trillion) as on June 30, 2014 and warned "These conditions, along with other matters...indicate the existence of a material uncertainty that may cast doubt about the company's ability to continue as a going concern," in August A week later Spicejet announced its offer of a new range of enhanced food and beverage menu titled, ‘Hot Meals, Warm Smiles’, together with preference to passenger who pre-book meals. Although the press release mentioned that it was done to reduce costs, it is anybody’s guess that catering to a new menu is hardly a cost reducing factor, compared to other steps like reducing routes and operational costs, a step which it was forced to take just 4 months down the line.

The Government seemed to be a silent spectator to this catastrophe, till it was too late. The Ministry of Civil Aviation which has taken airlines to task for being unfair to passengers chose to take action only in December 2014. It may be argued that it would amount to interference in a non-Government entity. But Spicejet is a listed entity and deals with the public and it has responsibility towards its shareholders. Its financial figures are disclosed. With global instances of such bankruptcy not uncommon or unknown, some action by the Government and Directorate General of Civil Aviation (DGCA) earlier in the year could have prevented the misery and possibly revived the beleaguered airline and more importantly its passengers before its fall.

 

The downfall of Spicejet has been a dampener in the December year-end holiday season. Fares suddenly peaked at the expense of confused passengers, who were the ultimate losers. Spicejet passengers with confirmed tickets were panic-stricken when reports of the Government’s sanction begun to surface. There is some hope in 2015, though, with Vistara commencing operations. AirAsia India has already commenced flights and is expected to scale up its operations this year. While Spicejet’s ownership has changed hands again and Ajay Singh is back in the helm, we can only pray that its revival plans turn successful in the coming months. The vacuum created by Spicejet leaves sufficient room for the new kids on the block to get a head start and the old hands to make further inroads (or rather ‘inskies’!).

 

Warren Buffet who was once bitten twice shy by the airline industry famously said “Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down”.