SPICEJET

SVKMS
NMIMS SCHOOL OF LAW

ROUGH DRAFT SUBMITTED ON;

CAPITAL BUDGETING AND RISK ANALYSIS OF SPICEJET
IN COMPLIANCE TO THE PARTIAL FULFILLMENT OF THE
MARKING SCHEME, FOR TRIMESTER VII OF 2016-2017, IN THE
SUBJECT OF:
MANAGERIAL ECONOMICS

Submitted To:

Submitted By:

Assistant Professor

Riddhi Tulshian

Ms.Mitali Gupta

B.B.A. LL.B. (Hons.)

Svkms Nmims

Roll No. A056

RECEIVED BY: _____________________

ON DATE: __________ TIME: _________

ACKNOWLEDGEMENT
I take this opportunity to express my profound gratitude and deep regards to my guide
Assistant Professor- Ms.Mitali Gupta, for her exemplary guidance, monitoring and
constant encouragement throughout the course of this thesis. The blessing, help and
guidance given by her time to time shall carry me a long way in the journey of life on
which I am about to embark.
I also take this opportunity to express a deep sense of gratitude to my friends and family
for their cordial support, valuable information and guidance, which helped me in
completing this task through various stages.

TABLE OF CONTENTS
SR.NO
1.
2.
3.
4.
5.
6.
7.

PARTICULARS
LIST OF ABBREVIATIONS
INTRODUCTION
REVIEW OF LITERATURE
METHODOLOGY
ANALYSIS
CONCLUSION
REFERENCES

PG.NO.
5
6-10
11-12
13-14
15-23
24-25
26

LIST OF ABBREVIATIONS
1.

e.g.- Example

2.

etc- etcetera

3.

J- Justice

4.

Pvt.- Private

5.

Ind- India

6.

www.- World Wide Web

7.

LCC- Low Cost Carrier

8.

FDI- Foreign Direct Investment

9.

IT- Information Technology

10.

CEO- Chief Executive Officer

11.

IATA- International Air Transport Association

12.

FY- Fiscal Year

13.

CAPA- Centre for Asia Pacific Aviation

14.

Ltd.- Limited

15.

DIPP- Department of Industrial Policy and Promotion

16.

NEO- New Engine Option

17.

BFL- Bharat Forge Ltd

18.

MoU- Memorandum of Understanding

19.

TASL- Tata Advanced Systems Limited

20.

BSE- Bombay Stock Exchange

5

21.

ASKM- Available Seat Kilometer

22.

WAP- Web Access Protocol

23.

AAI- Airport Authority of India

24.

DGCA- Directorate General of Civil Aviation

1. INTRODUCTION
Indias airline industry is on a high-growth trajectory. India aims to become the thirdlargest aviation market by 2020 and the largest by 2030.
The Airline industry has ushered in a new era of expansion, driven by factors such as
low-cost carriers (LCCs), modern airports, Foreign Direct Investment (FDI) in domestic
airlines, advanced information technology (IT) interventions and growing emphasis on
regional connectivity. India is the ninth-largest civil aviation market in the world, with a
market size of around US$ 16 billion. India is expected to become the third largest
aviation market by 2020.
The world is focused on Indian airlines from manufacturers, tourism boards, airlines
and global businesses to individual travellers, shippers and businessmen. If we can find
common purpose among all stakeholders in Indian aviation, a bright future is at hand
said Mr. Tony Tyler, Director General and CEO, International Air Transport Association
(IATA).
1.1. MARKET SIZE
In May 2016, domestic air passenger traffic rose 21.63 per cent to 8.67 million from
7.13 million during the same month of last year. Passenger traffic during FY 2015-16
increased at a rate of 21.3 per cent to 85.57 million from 70.54 million in the FY
2014-15.
In March 2016, total aircraft movements at all Indian airports stood at 160,830,
which was 14.9 per cent higher than March 2015. International and domestic aircraft
movements increased 10.5 per cent and 16.0 per cent, respectively, in March 2016.
Indian domestic air traffic is expected to cross 100 million passengers by FY2017,
compared to 81 million passengers in 2015, as per Centre for Asia Pacific Aviation
(CAPA).
7

 India is among the five fastest-growing aviation markets globally with 275 million
new passengers. The airlines operating in India are projected to record a collective
operating profit of Rs 8,100 crore (US$ 1.29 billion) in fiscal year 2016, according to
Crisil Ltd.

1.2. BUDGET PRICING OF THE AIRLINE SECTOR

According to data released by the Department of Industrial Policy and Promotion (DIPP),
FDI inflows in air transport (including air freight) between April 2000 and December
2015 stood at US$ 612.53 million.
Key investments and developments in Indias aviation industry include:
Airbus SAS has signed an agreement with Karnataka-based Aequs Aerospace, an
aircraft component maker, for the supply of over 100,000 titanium machined parts
for its A320 new engine option (NEO) aircraft.
Lockheed Martin Corporation plans to make India a manufacturing base for its F16V fighter jets, C-130J Super Hercules military transport planes and helicopters.
Auto components maker Bharat Forge Ltd (BFL), the flagship company of the US$ 3
billion Kalyani Group, has formalized agreement with Rolls-Royce Plc, under which
BFL will supply critical and high integrity forged and machined components for a
range of aero engines.
Boeing has outlined the companys long term commitment to investing in India in
terms of funds as well as skills, capabilities, infrastructure and partnerships so as to
help the aerospace sector build capacity and become one of the drivers of the Indian
economy.
The Ministry of Civil Aviation has signed Memorandum of Understanding (MoU)
with Finland, Kazakhstan, Kenya, Sweden, Norway, Denmark, Oman and Ethiopia
for increased co-operation between the countries in terms of additional seats, sharing
8

of airlines codes, increased frequencies and additional points of call, during the
International Civil Aviation Negotiations (ICAN),2015 held in Antalya, Turkey.
Tata Advanced Systems (TASL) has signed a joint venture with American aircraft
manufacturing major, Boeing, to establish a centre of excellence for manufacturing
aerostructures for Apache helicopter initially and collaborate on integrated systems
development opportunities in India in the long term.
US-based aircraft manufacturer Boeing plans to assemble one of its two helicopters
namely, Chinook (heavy-lift) or Apache (attack type) in India, thus becoming yet
another global company to invest in India encouraged by the Make in India
campaign.
Airbus, leading European aircraft manufacturer, plans to invest US$ 40 million to set
up a pilot and maintenance training center in New Delhi, which will be operational
by the end of 2017.
Airbus also expects Indias aviation industry to grow at over 10 per cent annually in
the next decade, almost double the average growth rate of the global aviation
industry.

1.3. SPICE JET AIRLINES, AN OVERVIEW:

The origins of SpiceJet can be traced back to March 1984 when Indian industrialist
S. K. Modi to provide private air taxi services established the company. On 17
February 1993, the company was named as MG Express and entered into technical
partnership with the German flag carrier Lufthansa. The airline provided passenger
and cargo services under the name of Modiluft before ceasing operations in 1996.
In 2012, SpiceJet suffered a loss of over Rs. 390 million (US$5.8 million) owing to
increase in global crude prices. On 9 January 2012, the Directorate General of Civil
Aviation, reported that several airlines in India, including SpiceJet, have not
maintained crucial data for the flight operations quality assurance. The Bombay
9

Stock Exchange announced that ever since June 2011, SpiceJet had been suffering
losses. In 2012, Kalanidhi Maran increased his stake in the airline by investing RS. 1
billion (US$15 million) in the airline. The airline returned to profits at the end of the
same year. In 2013, SpiceJet entered into an inter airline pact with Tigerair on 16
December

2013

which

was

later

scrapped

in

January

2015.

In July 2014, SpiceJet announced up to 50 percent discount in air fares due to

competition. In August 2014, SpiceJet became the second largest carrier in terms of
passenger market share after IndiGo, beating full service carrier Jet Airways for the
first time in its operational history. In December 2014, financial losses and unpaid
dues led to cancellation of many domestic flights. Directorate General of Civil
Aviation issued a warning to the airline over non-payment of salaries and dues and
the carrier was put on cash-and-carry mode by airport operators, meaning the airline
can use the airport facilities only upon prior payment of money. On 17 December
2014, all flights were grounded after oil companies refused to refuel its planes due to
non-payment of dues with flights resuming the next day. Flights resumed the next
day. In January 2015, the Sun group sold its entire shareholding and transferred
control to Ajay Singh.
In 2015, SpiceJet's operations experienced a significant turn around with 93 percent
of available seats on flights being filled and only 0.13 percent of scheduled flights
canceled each month. The airline became profitable in the first three consecutive
quarters of the year 2015, in contrast to the previous five quarters when it suffered
losses. As of January 2016, it is the fourth largest airline in India in terms of
passengers carried with a 13.1 percent market share.

10

1.4. STATEMENT OF PROBLEM:

The difficulty is with regards to aviation petrol. India, having very small supply of
indigenous petroleum, has to depend on foreign sources for fuel, especially for
aviation purposes. Whenever there is any bottleneck in the regular supply of
aviation spirit, even the regular scheduled services, have to be cut off temporarily.

While the airline industry has to face a lot of competition, the industries that
airlines have to deal with are highly monopolistic. Two firms-Airbus and Boeingprovide the majority of the planes, and airports and air-traffic control are
monopolies. Given this, airlines are not always in the best position to control their
costs.

Besides these hurdles, the general poverty of the masses is a factor to be taken
into account in estimating the possibilities of the expansion of aviation in India. In
India, however, the number of people who can afford air travel is very small, and
they cannot by themselves keep the air-line companies going.

These problems are very prominent and need serious attention so that they can be
resolved as soon as possible. To compete with the other major players like Indigo
and Jet Airways, SpiceJet should come up with innovative schemes for its target
customers. Also SpiceJet should be focused on being a low-cost airline. Since
India is a still a developing nation where most of the population cannot afford air
travel, SpiceJet is revolutionizing air travel by providing cheap air travel and it
should continue this work in order to keep up with the competition.

11

2.

LITERATURE REVIEW

The commercial aviation business is a huge cash guzzler and has led many a capitalist to
his ruin-Vijay Mallya being the latest such example. And as things currently seem
SINGHS SpiceJet seems headed that way. SpiceJet was always a low cost airline. There
was no confusion on that front.
Kaul (2015)
The author in his article has discussed how the airline industry is a very difficult industry
to trade in because of a lot reasons like huge capital requirements and tough competition
in the industry. He goes on to say that SpiceJet was always focused upon being a lost cost
airline and never confused about its position unlike Kingfisher which was confused about
being a full service carrier or a low cost airline. But the author states that the company
made huge losses in 2013-2014 despite the fact that global oil prices fell during that
period. Mr. Kaul also adds that the airline had to use what aviation industry insiders term
as the "Christmas tree" option. This essentially means that the airline was taking out spare
parts from its airplanes and using them for other planes in its fleet. Long story short: it
didnt even have the money to pay for spare parts. To conclude the author said that Singh
had to take careful decisions and calculated risks in order to be back in business.

Aviation is not Maran's primary business. His primary business is spread across
television channels, a cable TV distribution network and newspapers in the state of Tamil
Nadu and the other Southern states. Further, these businesses have always had the
political protection of the DMK party (Maran is the grand-nephew of DMK boss M
Karunanidhi).
-Report in Business World (2014)

12

This article points out the reasons as to why SpiceJet finds it tough to make money. The
author of the article says that aviation is not Maran's primary business. His primary
business is spread across different fields and this also distributes his attention which is
required for the growth and success of the airline. The airline also saw a steady exit of
employees who knew how the aviation business operated. Another major blunder
committed by the airline was allowing IndiGo to capture the slots in the Delhi-Mumbai
route, left vacant by Kingfisher, after it stopped flying. To conclude, the author says that
the failure of airlines like Kingfisher and SpiceJet clearly tells us is that you cannot "also"
be in the commercial aviation business. Mallya found this out the hard way. He also ran
an airlines business, along with his primary liquor business, real estate business and some
sports business. Maran seems to be headed Mallya's way with his huge losses.

After being queried repeatedly over his seemingly doubtful investment in SpiceJet, aceinvestor Rakesh Jhunjhunwala may finally have an answer: see where the share price is
now. SpiceJet shares on 20 February hit the upper circuit limit of 20 percent to trade at
Rs 23.90 apiece on BSE at 1:30 pm.
On 28 November, Rakesh Jhunjhunwala's Rare Enterprises picked up 75 lakh shares, or
1.4 percent, in SpiceJet at an average cost of Rs 17.88 for a total of Rs 13 crore,
according to BSE bulk deal data.
Today, trading at Rs 23.90 a share, SpiceJet has given the ace-investor a return of 33.67
percent on his investment in less than four months.
- Saiya (2016)
After Rakesh Jhunjhulwala had invested 13 crores in SpiceJet, he was questioned and
made fun of, for doing so. But then the share prices of SpiceJet hit the upper circuit limit
thereby, giving the investor a huge return of 33.67% on his investment. Rakesh
Jhunjhunwala had the last laugh as SpiceJet up his investment by 33%.

13

14

3. METHODOLOGY
OBJECTIVE
The objective of this paper is to conduct an in-depth study of the airline sector in India
with context to its pricing policy and its impact on the economy. Also to analyse the
above mentioned in the contemporary position and compare with the competitive airlines.
In the end, to conclude the position of the same in the market and to study the way in
which it affects the market.

HYPOTHESIS
1. Properly planned and conducted promotional campaign will certainly help the industry
to get to the new markets and increase public appreciation and good will.
2. Change in the budget pricing is a must in order to increase sales.
3. Airline prices are such that they are available to only the upper class of the society. The
prices need to be altered.

RESEARCH METHOD
1. Deduction method: The researcher proposes to test the hypothesis after examining
various reports by legal experts, committee recommendations, court judgements and
scholar reports.
2. Comparative analytical method: The researcher is going to compare the brand with
other high end brands all over the world with respect to its impact on the economy,
pricing and production.

15

 RESEARCH QUESTIONS
1. What steps does SpiceJet need to take to be superior and ahead of its competitors?
2. What is its impact on the economy?
3. What are the marketing strategies of SpiceJet?

STATISTICAL TOOLS USED

Data collection: This study uses secondary data to analyse contemporary position
and details of SpiceJet in India. The researcher has used sources such as articles,
case studies, graphs, and statistical data.

TECHNIQUES USED
The research made for this project is qualitative one. Qualitative methods are
usually more flexible, allowing more naturalness and acclimatization for the
interaction and collaboration between the researcher and the participant. Also
this type of research provides insights into the setting of a problem,
generating ideas and/or hypotheses for later quantitative research. It is
concrete material at hand and the basic emphasis is on understanding.

16

4. ANALYSIS
SpiceJet has introduced online travel insurance in partnership with TATA AIG with which
they have maintained a consistent rate of 28 per cent of sales since the introduction of the
product.
It provides value-adds to clients by having internet banking for customers, wherein they
can select any bank with which they have an account and can use their own login
credentials, which is essentially for customers not owning a credit card or not inclined to
using one, are among the other major initiatives.
Apart from these, it provides efficient information flow to clients, wherein the system
gives the clients a recorded call giving information about the flight; creating a portal for
crew (pilots and cabin crew), which enables them to communicate with each other.
SpiceJet plans to introduce an on-board wireless telephone system for all SpiceJet
passengers.

4.1. Cost Control

SpiceJet is focused on twin pillars of cost control and growing its ancillary revenue.
It follows the classical low-cost airline model of very competitive fares, a single
type of aircraft and a single class of service, point-to-point operations, quick
turnarounds, no frills, and internet-based ticketing. But unlike other low-cost airlines,
water and snacks served on-board SpiceJet aircrafts is free.
SpiceJet has also focused on the curved winglet design which reduces noise and
improves fuel economy by 2-3 per cent. The company has also expanded inner
aircraft room by reducing unnecessary storage areas and allotting them to passenger
seats.

17

4.2. Pricing strategies

The airline marked its entry in service with Rs. 99 fares for the first 99 days, with
9000 seats available at this rate. This deal was followed by a Rs. 999 promotional
scheme on select routes. Their marketing theme is "offering low 'everyday spicy
fares' and great guest services to price conscious travelers. Their aim is to compete
with the Indian Railways passengers travelling in AC coaches. The airline in May
2007 offered two-lakh seats at a special price of 99 paise for two or more persons
travelling together on all non- stop flights covering 14 destinations. Recently in
January 2009, it came up with another attraction Book two air tickets, Pay for
one.
4.3. Value-addition to customers
SpiceJet has introduced online travel insurance in partnership with TATA AIG with
which they have maintained a consistent rate of 28 per cent of sales since the
introduction of the product.
It provides value-adds to clients by having internet banking for customers, wherein
they can select any bank with which they have an account and can use their own
login credentials, which is essentially for customers not owning a credit card or not
inclined to using one, are among the other major initiatives.
Apart from these, it provides efficient information flow to clients, wherein the system
gives the clients a recorded call giving information about the flight; creating a portal
for crew (pilots and cabin crew), which enables them to communicate with each
other. SpiceJet plans to introduce an on-board wireless telephone system for all
SpiceJet passengers.

18

4.4.

Operational efficiency

As Michael Porter says, a company can outperform its rivals only if it can establish a
difference it can preserve. It has partnerships with global leaders in their respective
fields to enhance safety and reliability. The company is well supported in the
maintenance department by KLM and state-of-the-art technology from world leaders
like the Star Navigation, Russell Adams and Tech Log.
SpiceJet Airlines has started partnership with Navitaire, the worlds renowned lowcost support system for reservations and revenue management. E-booking and Eticketing are available in SpiceJet. It made significant investments in information
technology to provide a backbone for operational effectiveness.

These approaches resulted in SpiceJet achieving the lowest costs in the industry (Rs.
2.65/ Available Seat Kilometer (ASKM) in 2008) and a flight dispatch reliability
exceeding 99.5%. SpiceJets efficiency is comparable to that of the legendary lowcost airlines.

4.5.

Marketing Strategies

SpiceJet has a unique marketing strategy that focuses on word-of-mouth marketing,

supported by print and Internet media initiatives. To build further on its branding
value, SpiceJet has introduced on-board merchandise sales such as goggles, airplane
models, perfumes, caps and watches. Sales of branded merchandise will also be
available through the company's website.
While there is stiff competition in the low-cost carrier market in India, the
competitive edge for SpiceJet lies in the quality of service offered during the flight.
This has resulted in 42% repeat flyers, 45% of business travel and over 90% of
passengers

recommending

the

airline

through

word

of

mouth.

19

4.6. Strategies for Future sustenance

4.6.1. Expansion Plans
SpiceJet started its operations with 5 Boeing aircrafts in its fleet and ramped it up to 18
aircrafts covering 17 destinations and 117 flights daily by May 2008. It reported a net loss
of Rs. 133.51 crores in the year 2007-08 and a loss of Rs. 17.91 crores in 3rd quarter of
2008-09. SpiceJet still has major expansion plans. It has another 30 aircrafts on order for
delivery between 2008 and 2011.
4.6.2. Open to Foreign investments as well as buyouts
On July 15, 2008 Billionaire Wilbur Ross invested $80 million (about Rs 345 crore) in
the low cost airline.
"If any foreign airline comes on board as a strategic partner, we will certainly welcome
them. If the right opportunity is presented SpiceJet could be a buyer too." Chief
Executive Officer, Sanjay Aggarwal on Feb 18, 2009. He expects consolidation in the
Indian airline industry over the next 12 to 24 months as the landscape is too small for so
many players.
4.6.3. Convenience to passengers
It plans to initiate roaming agents wherein passengers without baggage are assisted by the
roaming agents at the airport to skip check-in are some of the other initiatives. In future,
Spicejet plans to start Web Access Protocol (WAP) on the mobile phones of the
passengers and SMS check-in through which passengers can skip check-in by just
showing the barcode or the notification on their mobile phones.
4.6.4. Ancillary Revenues
SpiceJet have entered into a Joint venture with The UK based online retailer
UnderFivePound.com. The company through its website, sells a range of mens, womens

20

and childrens clothing along with other items such as jewellery and houseware gadgets,
all for less than 5 and is known for its discounts and freebies.
Keeping the pricing of the merchandise in sync with the image of a LCC, SpiceJet
expects to sell value-for-money items on board, to its customers.
4.6.5. Automation to sustain expansion
SpiceJet has automated its cargo business processes to support its aggressive expansion
plans for its domestic cargo operations. This will ensure an integrated management of
cargo reservations and ground operations including flight planning inbound cargo
operations, billing and shipment tracking. SpiceJet becomes the first Indian LCC to use
this high end business solution.
It is evident that the airlines following the point to point model tend to employ 1 or
maximum two types of aircrafts in its fleet in order to save costs, but those following a
hub and spoke utilize more in order to use smaller aircrafts for the short haul distances
and the large ones for long haul distances.
The airlines connecting only between metros and tier-2 cities follow the point-to-point
model in order to increase frequency and concentrate on specific hubs in order to
optimize costs, and the ones connecting metros to non-metros follow the hub-n-spoke
model in order to connect all non-metros through one major hub. But there are still others
following a mixture of the two, i.e. they follow the point-to-point model for metros and
the hub-n-spoke in regional areas. This helps the airlines operate between multiple
locations and follow different strategies for different types of places in order to save
costs.

21

4.6.

PRESENT SCENARIO

LOW COST V. LOW FARE

An Illustration of the Cost structure of Full Service Airlines as a % of Operating Expense

(Source: ICRA report, Civil Aviation, April 2012)

In India, the airlines that offer low fares are in reality not low cost operations. They
are Low cost carriers (LCCs) in name only. Among the LCCs in India, Spice Jet has
the lowest unit cost at 6.2 cents per ASK, which is comparable with Southwest, Easy
Jet, and Jet Blue. But this is more than twice that of the best performer, Air Asia with
unit cost of slightly over 3 cents per ASK. There were operating losses for Air
Deccan in 2007-08.

22

 Typically, LCCs provide point-to-point service avoiding connecting flights and

baggage transfers while FSCs base their operation on a hub-and-spoke system. Air
Deccan has deviated from the LCC business model in the sense that it has a hub-andspoke type operation to connect metros with smaller towns. It also provides point-topoint service between metros and large cities. Industry analysts have pointed out that
this has increased the costs for Air Deccan
Low-fare airlines outside India have many features in common a single type of
aircraft to facilitate pilot training, maintenance and aircraft utilization; no free food
service to save costs and reduce turnaround times; no inter-line transfer of baggage;
direct selling to avoid commissions to travel agents, etc.

These features are easy to replicate and are an integral part of the low cost airlines in
India. As a result of their replicability, they do not, by themselves, offer a sustainable
competitive advantage.

The dynamics of a low-cost airline are equally important. Typically, a successful

low-fare airline chooses routes that are not already operated by other low-fare
airlines. It increases demand for air traffic by cutting fares, and provides frequent
services to saturate the route. In contrast, head-on competition between two low-fare
carriers on the same route often results in a price war that benefits consumers but is
not profitable to the airlines themselves.

The low cost airlines in India are not targeting distinctive routes. Instead, they seem
to be moving towards creating huge capacities on the trunk routes. Since shorthaul
services impose other cost disadvantages on an airline, quick turnarounds to achieve
high utilization become critical. Clearly, on-time passage is an important value
proposition for this type of service and delays are extremely annoying to passengers.

23

 Running a low-fare airline is a major managerial challenge. In addition, the

government will need to improve airport infrastructure quickly if this model is to
succeed. The increase in air traffic is not matched with the increase in the
infrastructure at the airports. The airlines prefer to halt and ply between only metros
and airports which have sufficient landing and parking place, this leads to long halts
and waiting of these planes at metros and also traffic congestion and delays besides
loss of precious air fuel.

In India, air fuel and not salaries & wages constitute the largest share in expenses of
airlines as the airlines have to procure their Air fuel from oil companies. The underdeveloped commodity hedging market also puts a stumbling block on these
companies to hedge against fluctuating prices of air fuel.

The cost of procuring new fleet also needs consideration because; they should be
able to have at least 80% occupancy of seats to be viable in long run. Now if most of
the flights operate on the popular routes chosen due to above reasons, there would
surely be a saturation of market sooner or later. Therefore, these airlines must think
of exploring low-cost routes, less time taking routes, rather than hauling on the same
popular routes, if they wish to remain viable in long run. For example the north-east
region of our country completely remains outside the gamut of competition from
these LCC's.

The requirement for trained commanders to operate these flights also is another issue
that needs urgent attention. A severe demand supply gap is emerging resulting in
price hike by these commanders; this may also lead to increasing cost and defeating
the entire spirit of operating a LCC.

24

4.8. Impact of Rising Fuel Prices on the Industry

The high price of fuel is killing the profitability. In two years the industry fuel bill more
than doubled to nearly US$100 billion23% of operating costs. And there is no relief in
sight. So what are airlines to do? Improve efficiency is the answer. Progress to date has
been dramatic. The break-even price of fuel rose from US$22 per barrel in 2003 to nearly
US$50 in 2005. Unfortunately, fuel prices are above that. Airlines will not return to
profitability until 2007 when we expect a break-even fuel price of US$55. Even then the
projected profit is only US$6 billion. Asia will remain profitable in 2006 posting US$2
billion in profit. But do not start opening the Champagne. That is still less than a 2% net
margin.

COMPARITIVE STUDY
SpiceJet and IndiGo are both low cost airlines who started their business around the same
time (Spicejet in 2005 and Indigo in 2006). But there are a lot of factors that make IndiGo
more profitable than SpiceJet.
Factors that make Indigo the most profitable airline in India:

Chalking out Locations (Market-reach)

Indigo has a fleet of 70 aircrafts, yet it flies to only 29 domestic and 4
international locations. However, SpiceJet has 56 but it flies to 45 domestic and
25

10 international locations. Thus, IndiGo's strategy is to provide more capacity

on select routes, rather than spread itself thinly over several. As each
destination requires funds (rentals, staff, ground-handling, equipment etc.), this
helps reduce the costs. This strategy rather ensures that a traveler from Ranchi
will not have to look at a non-IndiGo flight. Eventually, Indigo gets a loyal
customer and hence, a larger share of the Ranchi market.

Operational Cost strategy

One more integral factor is maintenance and spares which constitute a good share
of the operational costs. As we say the airline is profitable the longer it stays in
the air. The focal point here is that Indigo doesnt have to maintain a large
inventory of spares or engines. How the grounded aircraft is bad can be pointed
out by what happened in 2010 when Kingfisher Airlines had to ground its aircraft
because of snags in the engine, but IndiGo, which used the same machine didn't
had to because of the vendor support contracts. Also, IndiGo gets its C-checks
done in Sri Lanka, unlike its competitors who send their aircraft to as far as
Dubai, Hong Kong, Singapore etc. Obviously, this along with maintenance costs
is the defining number that drives the business.

Cost cutting by controlling the employee-aircraft ratio (Efficiency)

In the cost-control exercise, IndiGo's employee-aircraft ratio is approximately
100-102 now. However, Jet Airways has a ratio of 130, while Air India's number
is 262. IndiGo closely monitors turnaround time and fixes tough targets: currently
it gets an aircraft ready for its next flight in 31 minutes (Industry record). This
helps the airline achieve its target of keeping the plane airborne. Also, its fleet
consists of only one aircraft: the Airbus A-320. Thats why, it is required to deal
with one set of pilots, spares and engines. This simplifies the process of running
the airline and also keeps costs on a tight leash. This is in contrast to a rival like
SpiceJet, which has two sets of aircraft. IndiGo has shied away from any loyalty

26

scheme for passengers or the temptation to join a global alliance which, Ghosh
(Indigos reticent CEO) says, only adds costs.

Fuel burden strategy

The biggest cost for any airline is jet fuel; it can add up to 50 per cent of the
operational cost and any savings here could make a large difference to operations.
IndiGo goes through it with a toothcomb. For example, when the aircraft lands
and comes to a halt, the airline goes into a detailed analysis of whether it should
be on auxiliary power or should it invest in a ground power unit to save fuel costs.
"The question is whether you want to burn jet fuel for the auxiliary unit or burn
diesel in the ground unit which is cheaper," says an aviation insider. Pilots are put
through training on how to save fuel, which includes details of the time they
should take to climb to 32,000 feet. Insiders also say that the airline preferred not
to go for a full-fledged inflight magazine, which would have added additional
weight and burnt more fuel.
The Thrifty mentality & detailed cost-analysis at every stage of the supply-chain
is the reason behind Indigos sustained success. Media baron Kalanithi Marans
SpiceJet, is facing funding issues with the Spicejets recent debt crisis. When
Kalanithi Maran's Sun Group took control of Spice-Jet in 2010, it never looked
like a bet that could go wrong. Even Obama in his visit to India praised Maran for
creating job opportunities in America through SpiceJets overseas operations. The
airline was profit making and had INR 800 crore of cash. What was more, it was
eligible to operate overseas flights that offer fatter margins.

What led SpiceJet down?

(1) SpiceJets move to become the prime mover by being the first airline flying to smaller
cities hurt them badly. In this process, they added the 78- seat Bombardiers, something
most budget airlines avoid to keep costs low. Neil Mills (SpiceJets CEO 2 years ago)
wanted to go to uncharted markets like Hubli, Tirupati and Amritsar, and leverage the
benefits of being the first airline to cover unchartered territories.
(2) Second factor again was its eagerness to follow aggressive discount fares in hopes of
increasing passenger load. But, it wasnt to be as they failed to lure the number of
27

passengers to sustain its revamped business model. The price-fare war hurt them badly. It
still works if an airline makes the revenue on a flight to match costs. Airline tycoon
Naresh Goyals Jet Airways, co-owned by Etihad Airways, is being coveted the rich
mans carrier owing to its brash prices. Jet did try to fight in the economy sector by
diversifying itself into Jet Lite & Jet Connect but, its not so frugal business model let
Naresh Goyal down. People say airlines is a tricky business as you run for the debt
debacle being an airline owner (ask Kingfisher). Indigo has certainly quelled all this
nonsense.
Five years of generating consistent profits Indigos consistent record of profitability has
also helped the airline in getting more attractive financing deals to pay for its lease rentals
which, according to estimates, are around 20 per cent of the total operating cost.
The whole effort to prune costs and improve profitability doesn't end here. IndiGo is
taking more steps. With the governments liberal policy of allowing airlines to fix
baggage and pay more for some seats, it hopes to get a larger portion of its revenue from
auxiliary sources in the days to come. With the Tata- Singapore-Airlines alliance Vistara
and AirAsia joining the battle, IndiGo requires pulling out all the tricks in the bag.

28

Source: Trak.in

29

5.

CONCLUSION

India is one of the fastest growing aviation markets in the world. The Airport Authority of
India (AAI) manages a total of 127 airports in the country, which include 13 international
airports, 7 custom airports, 80 domestic airports and 28 civil enclaves. There are over 450
airports and 1091 registered aircrafts in the country. The genesis of civil aviation in India
goes back to December 1912 when the first domestic air route between Karachi and Delhi
became operational. In the early fifties, all airlines operating in the country were merged
into either Indian Airlines or Air India. and, by virtue of the Air Corporations Act 1953,
this monopoly continued for the next forty years. The Directorate General of Civil
Aviation(DGCA) controlled every aspect of aviation, including granting flying licenses,
pilots, certifying aircrafts for flight and issuing all rules and procedures governing Indian
airports and airspace. Finally, the Airports Authority of India (AAI) was assigned the
responsibility of managing all national and international airports and administering every
aspect of air transport operation through the Air traffic Control.
In 1990s, aviation industry in India saw some important changes. The Air Corporations
Act was abolished to end the monopoly of the public sector and private airlines were
reintroduced. With the liberalization of the Indian aviation sector, the industry has
witnessed a transformation with the entry of the privately owned full service airlines and
low cost carriers. In 2006, the private carriers accounted for around 75% share of the
domestic aviation market. The sector has also seen a significant increase in the number of
domestic air travel passengers. Some of the factors that have resulted in higher demand
for air transport in India include the growing middle class and their purchasing Power,
low airfares offered by low cost carriers like Air Deccan, the growth of the tourism
industry in India, increasing outbound travel from India, etc. Increasing liberalization and
deregulation has led to an increase in the number of private player. However, Airlines
today face issues from multiple quarters. While on one hand the economy faces the brunt
of recession, on the other hand most airlines In India find themselves in the red. What
was once hailed as one of the fastest Growing sector in the economy, now is struggling to
30

keep itself afloat. While it is still premature to declare that the industry is seeing a
downtrend, many domestic players are seeing a bleak future. In our analysis we look at
factors that influence the industry and key indicator.

31

REFERENCES
WEBSITES REFERRED:
1. http://www.firstpost.com/business/rakesh-jhunjhunwala-spicejet-33-sinceinvestment-2111461.html, Last Accessed on 25th August, 2016.
2. http://timesofindia.indiatimes.com/business/india-business/I-am-at-SpiceJet-forlong-run-Ajay-Singh/articleshow/46951504.cms, Last Accessed on 24 th August,
2016.
3. http://www.infinancials.com/fe-EN/30493FI/SpiceJet-Limited/gprv-risk, Last
Accessed on 25th August, 2016.
4. https://www.scribd.com/doc/26815835/Spice-Jet-Consultancy-Report,
Last
Accessed on 25th August, 2016.
5. https://www.equitymaster.com/dailyreckoning/detail.asp?
date=12/09/2014&story=2&title=Lessons-from-the-collapse-of-SpiceJet,

Last

Accessed on 25th August, 2016.

ARTICLES REFERRED:
1. Srivastav Pawan, Aviation Industry in India: History, Growth, Challenges, FDI and Future,
importantindia.com, 24th June 2015, Sunday August 2016
2. Phukan Rumani, In Indias Burgeoning Aviation Sector, Safety Is the Key Word,
mapsofindia.com, 21st January 2015, Monday August 2016

32

33