SpiceJet to keep tight vigil on costs

SpiceJet, the country’s second largest low-cost carrier (LCC) by market share, plans to keep a strict watch on costs as it flies into fiscal 2012. The airline reported Rs101.15 crore net profit for fiscal 2011, 65% higher than the Rs61.45 crore net profit it posted in the year ago period.

The full-year profit is significant as it was accrued despite a net loss of Rs59 crore in the March quarter (against ¤27crore net profit in the same quarter of the previous fiscal). SpiceJet CEO Neil Mills said that had “one particular competitor” not priced seats below cost in Q4, his airline’s financials would have been better for the full year. “I am not saying we wouldn’t have made a loss in Q4 but the magnitude of loss would have been much less had competition followed any pricing discipline”.

The March quarter has seen record low pricing power by domestic airlines, after carriers such as Air India introduced rock-bottom pricing just when fuel prices climbed 22% between January and March.

So for SpiceJet, the strategy going forward would be keeping a tight check on costs, taking yields (revenue per seat) higher without pricing seats below cost and expansion into tier II and tier III towns through turboprop operations, which are scheduled to begin from July this year.

SpiceJet is acquiring 11 new aircraft between now and March 2012 and will need to raise $250 million for this purpose. “This amount will be majority funded by the Export Credit Department of Canada. These aircraft will allow us to expand operations to smaller towns and cities, where the growth is happening at a faster clip than the metros,” Mills said.

He said the regional operations should help the airline’s finances further because of the sheer growth potential in these cities and the fact that his airline would employ brand new planes against old equipment deployed by competition.

To a question on SpiceJet’s seat factors being the lowest among LCCs in March, he said “we did not dump prices but competition did. Besides, our average size of aircraft is larger than IndiGo, so even on slightly lower seat factors we are carrying equivalent passengers”.

He said SpiceJet would strive to obtain marginally higher yields this fiscal. “It’s been extremely challenging environment for yields and it continues to be so,” Mills said, adding that he is not planning an immediate fare hike.

Explaining the rationale behind the strict watch on costs, Mills said this discipline helped SpiceJet lower cost per ASK (available seat kilometre) by 50 basis points (excluding fuel cost) last fiscal despite overall costs being significantly higher. The company’s audited financial results show that total expenditure was up to Rs324.49 crore (from Rs279.57 crore) but Mills said that cost on lease rentals, staff, airport charges, ground handling and maintenance of aircraft was lower per unit because of strict control.