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'Full-service airline costs are double of ours'

October 23, 2009 15:49 IST
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Sanjay AgarwalThe Indian aviation industry, which accounts for 2 per cent of the global aviation industry, suffered losses of Rs 10,000 crore (Rs 100 billion) in 2008-09. The industry is, however, now looking up, feels SpiceJet chief executive officer Sanjay Agarwal.

Speaking to Surajeet Das Gupta and Mihir Mishra, Agarwal claims his airlines has all the right ingredients of a successful airline -- low-cost airlines, he says, are performing much better than their full-service counterparts.

Nor is he worried about losing market share once existing full-service airlines like Jet and Kingfisher expand their low-cost operations. According to him, the costs of existing full-service airlines are around double those of low-cost airlines like SpiceJet. Excerpts:

Are the bad times over for the aviation sector?

I think when people are saying that the worst is over, what they're looking at is the growth in passenger demand on a year-on-year basis.

In the case of SpiceJet, passenger growth in July was up 5 per cent, it grew by 18 per cent August and you will see the September numbers have also gone up. But one also has to compare the average fares of the same time last year with those of this year. The fares this year are almost 30-40 per cent lower than what they were last year.

So, I am cautiously optimistic. In the last few weeks, fares have risen and the yields have not dropped, and if that continues it would be good for the industry.

By how much have fares gone up?

In the last four weeks, fares have gone up by 25 per cent but this has not affected the growth in passenger traffic, so that's a silver lining. This 25 per cent rise in fares is quite important.

Will this help make up for your losses so far in the year?

Yes, we have made up for some of our losses, but not all. I have taken a hit on the yields by 40 per cent and if fares go up by 25 per cent, it is still not good enough.

Do you see the fares going up again?

If the load factors remain at around 75 per cent and we continue to get a passenger yield that is in the mid-Rs 3,000 range, and fuel prices remain comparatively stable, it would be a good quarter. At the end, all that matters is the revenue per flight. So if this remains the case, I do not think we need to get back to Rs 4,000-level in terms of ticket pricing.

Do you think more and more airlines becoming low-cost would increase competition and push fares downwards?

Pricing is function of the gap between demand and supply. Even if full-service airlines are converting their existing two-class configuration (economy and business) planes to a single class (economy), it hardly makes any difference as it adds just 30 more seats per plane -- on an average plane, this adds just 20 per cent to the capacity. I do not think it will have any downward pressure on the fares because the market is huge.

But yes, it will ensure the market share of the low cost carriers stabilises instead of continuing to grow in the manner it has in the past. We are not really worried by this as we have a limited network and a small fleet compared with Jet and Kingfisher.

Are LCCs doing much better than the full-service carriers?

We are always better because of our lower cost structure. Our performance quarter after quarter is a testimony to our comparative advantage.

Also if you look at statistics, Jet and Kingfisher with their huge fleet have a market share of 22 or 23 per cent but LCCs with much smaller fleet size have a decent market share -- Indigo's share is 14.3 per cent, SpiceJet is 13.2 per cent, GoAir 5.8 per cent and Paramount 2 per cent.

We are able to do this since we have not just a better utilisation of our fleet, we even carry more passengers per departure.

They can launch LCCs, but there is no way they can match our cost structure. A full-service carriers' cost per airplane is double than that of SpiceJet. We continue to focus on our cost.

You said the Q2 fares dropped by 40 per cent compared with last year. Does this mean that all of you misread the market and raised fares to a level which the market could not sustain? And with fares rising again, is there a danger of this happening all over again?

I contest that. The prices should have been double what they were since this is the period when oil was at its peak. Besides, the economic slowdown   meant that people cut down on their travel budgets quite considerably -- people who were travelling were travelling only because they had to fly to do business.

How do you manage to keep your cost to half that of what full-service carriers cost?

Many of the charges like those levied by airports or the aviation turbine fuel are the same for both full-service carriers and us. In fact, since our planes are newer, our lease charges tend to be higher.

So our scope to cut costs is quite limited, especially in comparison to LCCs abroad which fly to different airports where charges are lower. In India, we are able to bring our cost down by utilising aircraft more -- on average, our utilisation of aircraft is around 15 per cent more than that of the full-service carriers.

Once we get to fly international flights, this will allow us to buy vastly cheaper fuel, apart from tapping into a growing demand segment -- so flying international is an important part of lowering our cost structures further.

What are your expansion plans?

We are not going to buy any new planes in the near future. We are one of the best capitalised airlines in the country and have the lowest cost in the industry and that is what you need in order to grow. We have nine more deliveries coming in the next two years.

When the timing is right and if consolidation still makes sense we can look at this, but India has a history of failed mergers.

Image: Sanjay Agarwal

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