Spicejet gets new fundings

Last week no less an investor than the Tata Group decided to back the Gurgaon-based low cost carrier (LCC) Spicejet. Others who were willing to bankroll the fledging airline, which took off in May 2005, included the Texas Pacific Group, Goldman Sachs and Istithmar. Together they have agreed to pump in $ 80 million, a handy sum at any time. The last two investors are already stakeholders having betted $92 million on the airline earlier this year. That helped the company pay for the planes that it has ordered. Says Chief Executive Officer, Siddhant Sharma, "We've paid for the aircraft. This money will be used to beef up infrastructure at the new airports where we plan to operate and for working capital.” Starting next week, Spicejet will fly two new routes; Jaipur-Mumbai-Chennai and Mumbai-Ahmedabad-Hyderabad, taking the total number of routes to 16. It's creditable that Spicejet has found takers for its equity at a time when the industry’s not exactly in the pink of health.

And that's because the airline has followed the no-frills model without any compromises: it uses just one kind of aircraft, the Boeing 737. Deccan Aviation, on the other hand, flies both Airbuses and turboprops (ATRs) which means more expenses on engineers and larger inventories. A single passenger class means Spicejet cancram a good 189 seats into the airplane. And the seats are made of leather making them more comfortable, easier to clean and durable. By keeping the logistics simple, Spicejet has managed to cut turnaround times on the ground and maximize revenue-generating airtime. Says Ajay Singh, director, who together with the London-based Kansagra family, forms part of the promoter group. "Our planes are in the air 12 hours a day — 20 per cent longer than other LCCs." The airline's performance, both on the ground and in the air, has been impressive: a near 100 per cent flight completion, the lowest number of cancellations, one of the best on-time records.

That's why the company has managed to keep costs under control. Observes Sharma, " As we add more aircraft and routes we are able to defray the expenses over a larger base.” Spicejet's CASK(Cost Per Available Seat Km) is just around Rs 2.60 compared with over Rs 3 for Deccan. And at around 40 per cent below those of full service carriers, Spicejet's fares are attractive. The result: loads are currently nudging 85 per cent. With all this, the company has notched up a market share of close to 9 per cent. It will be a while though, before the performance shows up in the numbers. In FY06, the company posted an operating profit loss of Rs 68.2 crore on revenues of Rs 419.6 crore. And in the August quarter, during which high aviation turbine fuel(ATF) prices peaked, it reported a loss of Rs 36.7 crore.

At a price of around Rs 51 per share, the issue of preferential shares to the new investors for $ 80 million will mean a huge dilution of around 38 per cent on the present equity capital of Rs 184 crore. But, that's a small price to pay: at this juncture it's the funds needed for expanding operations that's more important. The management had hoped that the airline would turn in a net profit in FY 2007( June-May) even though ATF prices have come off their highs to around Rs 39 per litre currently, it's unlikely that will happen. By the end of this year, Spicejet would have added three more aircraft to its fleet and by the end of 2008, it hopes to add another 18 planes, taking the tally to 28 aircraft or around 32,500 seats a day. That should help the airline acquire critical mass. The Tatas have for long harboured aspirations of setting up an airline. Those may not be fulfilled soon. In the meantime, by investing in Spicejet, they seem to have backed the right horse.

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