Distress ticket sales keep SpiceJet in air

With its cash drying up, distressed budget airline SpiceJet has been meeting a large part of its working capital needs through a route termed as 'mortgaging the future' where it sells a huge portion of its seat inventory at steep discounts or abnormally high commissions to travel agents and online portals for advance cash paid to it.

The cash raised through this mode by the airline is being used to pay employee salaries and meet other cash commitments to keep the airline running, but this has raised an alarm in the industry as Vijay Mallya-owned Kingfisher Airline had resorted to a similar method to meet its cash needs just before it collapsed.

Sanjiv Kapoor, COO at SpiceJet, said what his airline was doing was a "market stimulation strategy".

"If what you say is true, then I guess every airline in the world with advance purchase sales (including Southwest, Ryanair, Air Asia, etc) are all doing it for sane reason. This is basic LCC (low-cost carrier) pricing and marketing stimulating strategy," he said.

The no-frills airline is able to mop up cash of up to Rs 30-40 crore, which equals to its revenues earned in three days, via this route. SpiceJet earned a revenue Rs 1435.85 crore from tickets sales in the quarter gone by.
"It's a desperate bid to feed a cash-starved airline when it is struck by crisis, but it is an easier and least hassle-free way to raise cash as it does not involve any mortgage, guarantee or lengthy and cumbersome due diligence process when you try to raise funds through banks, financial institutions or strategic investors," said an industry insider in the know.

In such deals, what is put at stake by an airline is its future – by selling at its inventory cheap in advance the airline, in a way, is giving up its prospects of earning better yields on tickets sold closer to flight departure date. Under a deal, where it agrees to pay a higher commission than the industry rate, also an airline is compromising on its yields. According to industry sources, the airline is offering commission rates that go up to as much as 20% when industry norm is 6-7%.

Samyukth Sridharan, president and chief executive officer (CEO) of travel portal Cleartrip.com, said he had heard about such practices and believed it "was possible and logical".

"I've heard about it (mortgaging the future) but we don't encourage it. It's quite possible and logical, however, whether a specific airline was doing it, I cannot say," he said.

Sridharan said it is usually done by large travel agents or consolidators who sell packages. "They pick up large (seat) inventory cheap and sell packages," he said.

Another industry insider, who did not want to be named, said Kingfisher Airlines was forced to do it because all other avenues were closed. SpiceJet has also been desperately scouting for investors for recapitalisation, which airline consultancy firm Centre for Asia Pacific Aviation's India head Kapil Kaul says was crucial for the airline's survival.

The flip side of this kind of fund-raising is that it could adversely impact the revenue of the airline. "When airlines do this, they believe they will recoup the lost revenue due to selling tickets at steep discount later. But that is debatable as competition may not allow them to do that," he said.