‘lower fares don’t mean high demand’

In a take-off mode for three years,SpiceJet CEO Sanjay Aggarwal landed in India as the company’s head when Indian airlines were facing turbulent times.....

Written by Smita Aggarwal | Published: March 11, 2009 1:33 am

In a take-off mode for three years,SpiceJet CEO Sanjay Aggarwal landed in India as the company’s head when Indian airlines were facing turbulent times. In just three months,he has wrestled a 12 per cent market share for his low-cost carrier,up from 8 per cent last year; in a market where demand is at an all-time low. For 2009-10,the year when he hopes to make a small profit,the company is aggressively looking at expanding its footprint,the CEO tells Smita Aggarwal in an interview. Excerpts:

In the last two months,fuel prices have dipped sharply. How are the lower fuel prices likely to play out in your pricing strategy?

Fuel still accounts for about 40 per cent of our operating costs. Even if we lower fares,the demand just isn’t there. In January,we sold at the rate of Rs 2,300-2,500 per ticket,but we still had only 68 per cent load factor. At Rs 2,300 a ticket,we need 110 per cent load factor to break even. Fares in January were totally unsustainable. So we increased them in February.

What about the accusations of airlines resorting to cartel-like behaviour?

Globally,one airline increases fare and waits to see if everyone else follows. If everyone follows,the fares go up. If no one follows,the airline that took it up,brings it down. In SpiceJet’s case,we took the fares up on January 29,we sat there with our high fares for 24 hours,looked back,no one followed. We pulled it down. Then a week later,on February 3 or 4,we tried again. This time,four hours later,IndiGo followed,six-seven hours later Jet Airways and Kingfisher Airlines followed. So this time it stuck. When fares went down to Rs 2,300 in January,no one accused us of cartelisation.

The fares have now come back to the November-December levels. How is it affecting demand?

The demand has slowed down in comparison to January. However,we are bringing in more revenue per flight by anywhere between 15-20 per cent despite lower bookings. At the end of the day,revenue generated per flight matters. Because once that flight takes off,there are certain costs that we have incurred. The people who have to fly will continue to fly. We are not seeing a lot of discretionary travel. I don’t think dropping fares at this point will make any difference to the demand; load factors are unlikely to jump from 68 per cent to 72-73 per cent. Air tickets will never reach levels which people got used to in the Deccan days. Those are not sustainable fares and are not the true cost of flying.

What will be focus areas for SpiceJet in the fiscal 2009-10?

We are evaluating the option of launching a regional airline or commencing international operations. For inorganic growth,we are looking at mergers and acquisitions as and when the opportunity presents; maybe even consolidation. We are conducting the analysis right now. And if the results say it makes sense to explore a few routes,for us it will be a question of how soon we can get those airplanes and how soon we can deploy them. If it makes economic sense,we may experiment on certain routes for a hub and spoke model. We achieved breakeven profitability in Q3. If the current economic conditions prevail,next year will be a breakeven or even a small profit one for us. We will be very aggressively looking at growth opportunities. A crucial element in surviving this downturn would be to keep a check on costs.

How does the decision to levy development fees on passengers affect airlines?

As the Federation of Indian Airlines,we have written letters to the ministry expressing our concern about the increasing fees. The Airport Authority of India has announced a 10 per cent increase in airport fees which are actually not passed on to the customer. So on the one hand we get forced to lower the prices as fuel prices are going down,but on the other hand,the surcharges and different costs keep going up.

How will the government’s proposal to allow foreign airlines a stake in domestic carriers help Indian airlines?

We welcome the government’s proposal to make it easier for foreign airlines to invest in India. However,we are not looking at equity dilution. We might talk to an airline about a strategic alliance,if an opportunity presents itself in future. We have cash in the bank and we are running almost a cash neutral business right now.

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