There was a time when buying aircraft and flying overseas appeared just another plan for Indian aviators. The slowdown ensured everybody cut on fleet and rationalised routes. All except one – SpiceJet! Are they nuts (apart from being, er, India’s only profitable airline company right now)?! by Steven Philip Warner
A better understanding about the superiority of domestic operations over international operations can be got from Jet Airways’ Profit & Loss account, disclosed on January 25, 2010, for the quarter and nine months ended December 31, 2009. Despite global operations contributing to 54% of total revenues (Rs.6.0 billion) during FY2008-09, it is Jet’s domestic operations which contribute more to EBIDTA (Operating Profit) – a figure of Rs.2.56 billion, which represents 55.2% of EBIDTA. The other obvious point to note, as a London-based aviation analyst says to B&E, is that “a larger part of ‘Other unallocable expenditures’ (which totals $5.14 billion) can be attributed to its international operations, which naturally means greater outflow of funds.”
For SpiceJet, this is good news as there are still domains left unexplored within India, as John Siddharth, Aerospace Analyst, Frost & Sullivan tells B&E, “SpiceJet is well positioned in the Indian market. Now it should focus on increasing its market share (from the current 12%) by strengthening its position in South India. This would not be the right time for SpiceJet to go international as the domestic market isn’t tapped completely, and SpiceJet needs to improve its market share.” SpiceJet defends that it plans to begin with a “neighbour approach”. The airline plans to start its overseas operations with flights linking Indian cities to neighbouring overseas destinations like Kathmandu, Dhaka and Colombo. This is unlike what the likes of Jet and Kingfisher did. While Jet began focussing on far-off locations like London, Brussels, New York, Toronto & Newark within the first three years of its going global, Kingfisher dedicated all attention to connecting London in the first phase.
But there is some ground to the domestic only theory. A comparison of revenue-per-passenger kilometer (RPK) proves that it is higher in the case of domestic flights. The best fare RPK (for Jet Airways) for a Mumbai-London flight on June 1, 2010, is Rs.2.25 while that for a Delhi-Toronto flight is Rs.2.67. Comparatively, the best fare RPK for the same carrier for a Mumbai-Delhi flight comes to Rs.2.84, while that for a Delhi-Pune & Delhi-Chennai flight is Rs.4.05 & Rs.2.96 respectively.
If the dynamics of the cost structure are related – as is evident – to the distance of the overseas destination, then SpiceJet’s initial plan to cater to “closer” destinations might clearly be less risky. But some analysts still complain about SpiceJet’s stock’s high P/E value of 490.4 (as compared to the industry average of 0.9), and speculate that there will be a correction soon. That may well be true, as markets have no method to the madness most of the times. But as long as there is market recovery and increased air travel (“Traffic was up by 20% during October-March 2010 period,” says Prasoon Majumdar, Head, Global Strategy Investment Consulting), however ‘Nutty’ it might seem to the world, SpiceJet might just be fantastically successful in conjuring up a crazy recipe for business and personal success!
A better understanding about the superiority of domestic operations over international operations can be got from Jet Airways’ Profit & Loss account, disclosed on January 25, 2010, for the quarter and nine months ended December 31, 2009. Despite global operations contributing to 54% of total revenues (Rs.6.0 billion) during FY2008-09, it is Jet’s domestic operations which contribute more to EBIDTA (Operating Profit) – a figure of Rs.2.56 billion, which represents 55.2% of EBIDTA. The other obvious point to note, as a London-based aviation analyst says to B&E, is that “a larger part of ‘Other unallocable expenditures’ (which totals $5.14 billion) can be attributed to its international operations, which naturally means greater outflow of funds.”
For SpiceJet, this is good news as there are still domains left unexplored within India, as John Siddharth, Aerospace Analyst, Frost & Sullivan tells B&E, “SpiceJet is well positioned in the Indian market. Now it should focus on increasing its market share (from the current 12%) by strengthening its position in South India. This would not be the right time for SpiceJet to go international as the domestic market isn’t tapped completely, and SpiceJet needs to improve its market share.” SpiceJet defends that it plans to begin with a “neighbour approach”. The airline plans to start its overseas operations with flights linking Indian cities to neighbouring overseas destinations like Kathmandu, Dhaka and Colombo. This is unlike what the likes of Jet and Kingfisher did. While Jet began focussing on far-off locations like London, Brussels, New York, Toronto & Newark within the first three years of its going global, Kingfisher dedicated all attention to connecting London in the first phase.
But there is some ground to the domestic only theory. A comparison of revenue-per-passenger kilometer (RPK) proves that it is higher in the case of domestic flights. The best fare RPK (for Jet Airways) for a Mumbai-London flight on June 1, 2010, is Rs.2.25 while that for a Delhi-Toronto flight is Rs.2.67. Comparatively, the best fare RPK for the same carrier for a Mumbai-Delhi flight comes to Rs.2.84, while that for a Delhi-Pune & Delhi-Chennai flight is Rs.4.05 & Rs.2.96 respectively.
If the dynamics of the cost structure are related – as is evident – to the distance of the overseas destination, then SpiceJet’s initial plan to cater to “closer” destinations might clearly be less risky. But some analysts still complain about SpiceJet’s stock’s high P/E value of 490.4 (as compared to the industry average of 0.9), and speculate that there will be a correction soon. That may well be true, as markets have no method to the madness most of the times. But as long as there is market recovery and increased air travel (“Traffic was up by 20% during October-March 2010 period,” says Prasoon Majumdar, Head, Global Strategy Investment Consulting), however ‘Nutty’ it might seem to the world, SpiceJet might just be fantastically successful in conjuring up a crazy recipe for business and personal success!
Steven Philip Warner
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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