In the two years that Neil Mills has been at the helm of SpiceJet as its CEO, he has seen it all. Cost pressures, cut-throat competition, declining revenue yields per seat, an unhelpful government, even potential collapse of a strong competitor. Through all the turmoil, Mr Mills also has quietly expanded SpiceJet’s operations and shored up its finances.
The airline reported its first profit in six consecutive quarters in June this year. The Bombardier Q400 short-haul turbo-prop aircraft which SpiceJet pressed into service a year ago has helped the airline cover even the most interior towns thus expanding its market. In this interview to The Hindu in New Delhi recently, Mr Mills says that the first signs of a turnaround in the industry are visible now and that there is a lot of interest from foreign investors, airlines and financial, to pick up equity stake in SpiceJet. Excerpts:
You reported your first profit in the last few quarters in June. So are things beginning to turnaround?
I think the industry is genuinely becoming more positive with yields improving to where they are. But the underlying cost environment we are operating in is still very challenging, particularly fuel and airport costs that are continuing to go up significantly above inflation. The rupee-dollar value may have improved marginally but it is not good enough. So, it is a dynamic, challenging environment. But generally speaking, the industry has started to turn the corner. The underlying demand is still continuing to grow though the rest of the infrastructure is not keeping pace. Flying would become an option for more and more people as we go forward. Roads and railways take time to build; you can provide an air connection faster than a road. That is what we are focussing on particularly with the Q400 operations flying to more and more places where infrastructure was a challenge.
But traffic growth numbers in the last few months are down. How do you match that with a turnaround?
You have to look at a slightly longer time horizon. You can’t look at it from month to month. From a longer time horizon, the general growth trend is upwards. And we also have to look at the economic realities around the world. With oil being where it is now there is a huge impact on the business.
Is the current fare structure remunerative or do you think fares need to trend higher for airlines to make money?
We have to be realistic and ensure that fares are at a level that is affordable to the consumer. As a low-cost carrier we would love to charge less but unfortunately with the cost structure that now prevails, that is not possible. Am I happy with the fares that are on now? No. Would I like them to be lower and still be able to recover my costs? Yes. So what we have to address is the cost issues that we have in India. This is not something that is purely down to what we decide we want to charge. The cost base that we have is enormous. If you look at fuel cost being 50-60 per cent of revenue for most airlines in India you have crossed the comfort zone which is about 35 per cent in most parts of the world. Add to this airport charges and exchange rate as all aircraft are leased in dollars and you get the picture.
Has the permission for you to import fuel helped in any way?
It’s a great step forward. We have run into some bureaucratic issues on getting some of the manuals approved. It’s been a very long winded process but we have only one more stage to cross now. We should be able to place the order for the first batch of fuel imports in the next six weeks.
But in practical terms how feasible is this option to import fuel?
We actually have nine separate commercial agreements to manage the transportation of the fuel from its origin to its destination in the aircraft’s fuel tank. This is not easy but it’s not impossible either. It’s pretty complex but doable. I have done this once before in a previous job where I imported fuel from Russia into Italy. It wasn’t simple then either but it worked. But because of the money involved you need to at least try and I believe it will be successful.
How much of a relief will all this give you in terms of costs?
It will be a small relief. Last year we spent Rs 2,200 crore on fuel. If I can save 1 per cent of that I’m obliged to do it as the CEO. It’s my job. Yes, it’s complicated, not easy and business as usual. But that’s my job. Even 1 per cent is Rs 22 crore. From a shareholder point of view, I’m obliged to at least try. If it doesn’t work fine but it will not be for want of trying.
It’s been a year since you inducted the Q400 into your fleet. What’s been your experience with the aircraft and with the routes that they are flying?
Anybody in India can now connect on a SpiceJet aircraft thanks to the routes of the Q400. The revenues have been fairly good because the customers have limited alternatives.
It’s a pretty cheap aircraft to operate because it burns lesser fuel. So we have managed to keep fares at an affordable level. We are running pretty much to business plan now. We have gone from zero to 101 flights a day using the 12 Q400s within one year. We committed to buy 15 aircraft but we might slightly delay taking the next couple because the current cost base does not help us to support their operation.
So you have been able to tie up seats from these small towns on to major metros through regional hubs…
Yes, we have managed to do that but what we find is that more and more people are not connecting like that. They travel from say Rajahmundry to Hyderabad and return, that is go to the metro for their business and get back. We also find a lot of traffic in the reverse, that is, from the metros to these small towns where the GDP growth is faster than the metros. We have a load factor of 70-75 per cent and expect to break even by the end of the second year of operations.
Let’s move on to the FDI issue now. Are you ready for a foreign partner?
There is very real interest, particularly in SpiceJet as a carrier, and some interest in India as a destination. People see opportunities in India over time. But the issue is the current cost structure which keeps coming up regularly in discussions, formal and informal.
The guys that I spoke to say that given these handicaps, what SpiceJet has is a unique access into India, particularly because of our network and our reputation. And that’s what these guys want. So, I have spoken to a couple of carriers and there is definite interest. But more airlines in the world have their own issues now. So are they going to be able to do something tomorrow? I don’t think so.
These sort of deals don’t happen overnight; they will take some time. But as I said before, we are not desperate for cash. We don’t need to do any deal. I’m only going to support a deal which is right for the company and the shareholders. We are in no hurry and don’t have to take any deal that comes by. So we are not chasing airlines; its actually the other way around. There is also interest from non-airline investors such as private equity players who now have another route to exit by selling to an airline.
So will you be able to wipe off your accumulated losses this fiscal year?
We had a pretty good first quarter; the second was more challenging and we will declare our results soon. The third quarter is panning out reasonably ok and we’ll have to see how the fourth pans out. Oil prices are the key. If there is a slight improvement in the currency and the oil came down a bit, the fourth quarter will be good. But it will take a brave man to give a clear guidance in this volatile environment.