SpiceJet may go in for $4.5-bn plane order

Boeing,Bombardier in shopping cart: Low-cost carrier aims to stave off competition from AirAsia India.

Written by Fe Bureau | New Delhi | Published:May 14, 2013 12:39 pm

Boeing,Bombardier in shopping cart: Low-cost carrier aims to stave off competition from AirAsia India

Chennai-based low-cost carrier SpiceJet is likely to soon place an order for 30 to 40 Boeing 737 MAX aircraft as well as firm up the options for 15 Bombardier Q400 planes,according to aviation consultancy firm Centre for Asia Pacific Aviation.

At list price,the order size could be to the tune of $4 billion to $4.5 billion. The CAPA report states that SpiceJet is also likely to get a strategic investor in the next three to six months and the aircraft orders are likely to be made only after the investor arrives. The Boeing 737 MAX costs $100.5 million at list price whereas Bombardier Q400 costs $27 million.

The move would stave off competition from AirAsia India which is likely to begin services by the end of the fiscal using Chennai as a hub to connect Tier II and Tier III cities.

The low-cost carrier’s fleet expansion plan also coincides with Jet Airways which is also set to place order for 50 A320neos and 50 Boeing 737 MAX to beef up its low-cost arm Jet Konnect.

“The Bombardier Q400s are likely to be deployed on Tier II and Tier III routes which have already become profitable for SpiceJet,” said a consultant with a global audit and consultancy firm. “If SpiceJet manages to expand on their Tier II and Tier III routes,it will have a good breathing space to tackle the competition from AirAsia when it comes.”

SpiceJet has more than 100 flights a day on its Q400 turbo-propeller planes. Sales tax on aviation turbine fuel for such planes is 4% for operations between metro and Tier II and Tier III cities.

SpiceJet chief executive Neil Mills recently said at an industry event that the airline is witnessing more growth from such routes.

Industry experts,however,said that due to the order size,likely to be lower than Jet Airways’ order and substantially lower than IndiGo’s order with Airbus,discount on the planes is likely to be lower.

“Typically,customers get a 20-25% discount on large orders but in Jet Airways and SpiceJet’s case this may be slightly lower than what IndiGo got with its Airbus order in 2011,” said an official at an aircraft leasing firm.

The discounts for the size of orders that Jet Airways and SpiceJet are likely to make may be of the order of 10-15%,the official added. IndiGo on the other hand gets close to a 25% discount for the planes it bought from Airbus and makes additional money by opting for a sale and leaseback model.

The fleet expansion plans also threatens IndiGo’s numero uno position in domestic skies as additional capacity will be deployed. As per their websites,IndiGo has a fleet of 65 Airbus A320s,while Jet Airways has 100 planes,a mix of Boeing 737s,777s,ATR-72s and Airbus A330s. SpiceJet has 51 planes,15 Bombardier Q400s and 46 Boeing 737s.

The additional aircraft orders will take SpiceJet ahead of IndiGo while Jet Airways will have nearly double the number of planes than IndiGo.

“Going forward it is likely to face a more challenging competitive landscape in FY14 with Jet placing much greater attention on its low cost subsidiary JetKonnect,SpiceJet and GoAir set to be strengthened by new investors,Air India introducing its low cost subsidiary on domestic routes; and the launch of AirAsia and possibly other greenfield carriers,all of which will create a new market dynamic,” CAPA said in its report.

However,consultants argued that IndiGo’s large number of planes on order (the airline will be taking deliveries of over 200 planes in the next five to 10 years),has it on a stable ground operationally.

“IndiGo is focusing on providing the best possible operations whereever they apply,” said the consultant quoted above. “They haven’t been overawed and coaxed into expanding rapidly which has kept them in a healthy state. I don’t think they will ever enter the rat race for market share.”

Though IndiGo is the largest airline in the country,they only fly to 33 destinations while competitors by comparison,fly to as many as 75 within India.

“They fly double the number of planes than we have,but we focus on business,” said IndiGo chief executive Aditya Ghosh in a recent interview to CNN. “Staying away from ego,and being consistent,I think that’s what is different about us.”

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