The Indian aviation sector floundered last fiscal due to high fuel cost and weak pricing power. But low-cost carriers IndiGo, GoAir and SpiceJet — buoyed by expansion in market share and expectations of market growth — went aggressive on their expansion plans.
While IndiGo and GoAir placed large orders for the Airbus A320 Neo aircraft, the Sun Group controlled SpiceJet placed its bets on the Bombardier Q400 turboprop aircraft. These, SpiceJet says in its annual report for 2011-12, helped the airline connect to Tier II and Tier III cities. It placed an order for 15 Q400 aircraft and took delivery of 12 last fiscal.
What made the airline decide to go for the Bombardier Q400? SpiceJet says the airports in many smaller cities do not have the infrastructure to accommodate jets. But such airports can be served by turbo-propeller aircraft. Thus, these aircraft open the market to another 50 airports. The airline chose Hyderabad as its initial hub and soon followed it up with Chennai. It also plans to make Delhi the next hub for Q400 operations to expand its reach in North India.
So, did SpiceJet manage to translate the potential? Yes, says the annual report. It connected nine domestic airports within 16 days using the Q400 aircraft. This, along with the addition to its Boeing fleet, helped SpiceJet increase its domestic network from 22 stations to 34 stations last fiscal.
Turbo boost
The new inductions in SpiceJet’s fleet resulted in an increase in the average number of aircraft in operation (34.74) by 51 per cent in FY-12. The number of flights operated grew 50 per cent and capacity (available seat kilometres) deployed increased by 31 per cent. SpiceJet also grew its market share from 13.5 per cent in FY-11 to 17.10 per cent in FY-12.
But all this growth did not help the airline’s bottom-line. In fact, it may have done just the opposite. Given the difficult operating conditions in the sector, the larger fleet and higher number of flights may have added to SpiceJet’s pain.
The airline ended FY-12 with a loss of Rs 606 crore, compared with profit of Rs 101 crore in FY-11.
But clearly, the airline is betting on high growth to come from the untapped smaller city markets in the country, and seems willing to undergo short-term pain for long-term gain.
Cheap financing
The company has financed the Q400 aircraft through external commercial borrowings from Canada’s export credit agency, Export Development Canada.
This resulted in SpiceJet’s long-term borrowings shooting up from nil in FY-11 to around Rs 650 crore in FY-12. But the interest rate on these loans, at 2.4-4.1 per cent, is much lower than that on the company’s domestic borrowings (around 12-13 per cent).