“We Are More Than Sufficiently Funded,” Chairman, SpiceJet

In his fifties Ajay Singh, the chairman of low-cost airline SpiceJet has worn too many hats successfully. The man who has been trying sincerely to bring back the faith of investors who had pumped in money to let SpiceJet fly 39,000 feet above the ground, coined the popular phrase ‘ab ki baar, Modi sarkaar,’ which was used extensively by the incumbent Prime Minister’s political outfit BJP during an aggressive election campaign in 2014. Singh who has been running the airline from its Gurgaon headquarters also formulated the IT Act and National Telecom Policy. Singh takes out time to respond to a set of questions volleyed by DSIJ’s Abhishek Kumar and Lohit Bharambe recently.  Excerpts:

Q. Crude oil is hovering at around USD 30 levels. Goldman Sachs in a research note anticipates crude oil to touch USD 20 per barrel. How do you perceive the situation with crude oil? Do you see it going to sub- USD20 levels in the coming months?

We do not want to speculate on oil, that is not our business. However, it looks like the oil prices are going to remain benign for the next two or three quarters at least but in those two or three quarters, we will try and see that we reduce other costs, so that we are prepared for a time even when the oil prices will not be as benign as they are today.

Q. Global crude oil meltdown has certainly helped aviation sector as a whole, which has been reflective into the performance of SpiceJet too. What are your thoughts on the recent Q3 results, which saw SpiceJet recording highest ever quarterly profit?

Oil prices have come down and as a consequence, airfares have come down. Overall it has been a very positive year and if fuel prices remain benign, the market will be stimulated with lower fares and we will surely witness further growth.

I am quite satisfied with the Q3 results and our revival plans have started showing that we are coming out of our legacy issues. The airline has cut down its debt burden by Rs 1,200 crore to Rs 800 crore in the last one year. The amount stood at around Rs 2,000 crore a year ago. Total income from operations jumped to Rs 1,459.95 crore in the latest December quarter compared with Rs 1,311.18 crore in the year-ago period. Despite a reduction in fares during the 2015 December quarter, the unit revenue rose in the same period. It was not just decline in fuel prices, the revenues also increased in the last quarter. The occupancy levels are on the rise and our planes are now much fuller, with an average load factor of 91.6 per cent for the quarter which has been the highest in the industry.

Q. What are your aircraft acquisition plans for the future? We expect SpiceJet to add to their existing fleet size. By when can we expect an official announcement made on the same?

We are looking at a considerable size, however it is important that we put our best foot forward and ensure aircrafts are purchased in an optimal manner. We have issued a RFP document to both Boeing and Airbus. They have both responded to it, and we are now in the process of evaluating. From our perspective, we want only a single fleet — either from Airbus or Boeing.

We are talking to both to ensure that we have a pricing advantage for the next 10-15 years. We are also looking at the maintenance aspect of the contract to ensure cost-cutting. We will take a call on it in the next few months.

Q. Aviation Turbine Fuel (ATF) is trending at a five-year low as OMCs recently slashed ATF prices by 10 per cent. Can you provide us the impact this will have on SpiceJet ?

As I mentioned earlier, oil has certainly been of great assistance. It gave us considerable breathing space and helped us achieve results a year earlier than our estimate.

Though I would not choose to speculate on the ATF trends, it looks like the oil prices are going to remain benign for the next two or three quarters and if that is the case, the markets will be stimulated with lower fares and we will surely witness further growth.

Q. Since the time you took over the reins of the carrier, we have seen a substantial equity infusion from your end. After success of Indigo IPO, in the coming future do we see SpiceJet too testing the waters by coming up with an FPO (follow on public offer) to raise fund in order to fund its expansion plans?

We are more than sufficiently funded. We have strong positive cash flows at this point. There has been a great deal of investor interest – both from financial and strategic investors – but this is not an appropriate time to dilute equity. We are in a strong growth path. We will find an appropriate time, if at all, to get fresh investment. At this time, it doesn't seem it is really required.
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Q. We have seen SpiceJet improve its market share over the past 10 months or so, how do we expect SpiceJet to fare in the coming fiscal given your passenger load factor that has been on an upswing in the quarters gone by?

What we have achieved so far is very significant for an airline that shut operation on December 16 last year. We have regained consumer confidence; our load factor has been in excess of 90% for the last seven months, which clearly shows that passengers are back.

The fact is that we have increased revenues. We have massively increased our on-time-performance (OTP). We have not just filled our planes, but have many more in the air. We have better utilisation of fleet and a much stronger morale within the organisation. We have infused confidence in our creditors, suppliers and (aircraft) manufacturers.

In financial terms, we have had four straight quarters of profit and continue to be on the path of profitable growth. We are in a place where we are looking at ordering new aircraft. So, in many ways, we have achieved significantly in the last twelve months but clearly there is a lot more to be done. We need to set the company on a growth path for the next several years to order planes. We need to bring down structural costs, lease cost, maintenance cost and prepare for a time when oil prices will not be as benign as they are today. At such a time, we need to make sure that the company still makes profit. So, those pieces need to be done over the next several months. So, clearly it's a job well begun but half done.

Q. As passenger traffic is growing at 18-21 per cent annually, new destinations being added at a brisk pact etc. thus making India one of the fastest growing aviation market in the world. What changes can be made into the existing policies to make India as one of the global hub’s?

India has a historic opportunity of being a leading aviation superpower in the world and we must not let go of that opportunity. The policies that we make today need to be designed to make that a reality. The focus of the current draft policy is on regional connectivity and encouraging maintenance, repair and overhaul (MRO) operations in the country, which will help us save cost and create jobs.

The current thrust on regional air connectivity will help in transforming key airports at existing metros into global hubs. Thus creating more airports, establishing a strong domestic MRO sector and improving passenger facilitation will provide further momentum to the sector.

However, having said that the situation is a little different today. We have allowed 49% foreign equity holding in airlines in India. This has been done so that the effective management and control of the companies is with Indian shareholders. Unfortunately, what has happened is that while on paper foreign firms are 49% equity, in reality they have the management and control of those companies. The situation is that there is nothing to stop these foreign carriers from getting bilateral rights from their country and from India as well and creating monopolies on foreign routes. That's going to happen with the way things are going. What will protect us (from monopolies being created on certain routes) is the 5/20 rule. So as long as there is a level playing field, one can consider removing it.

Q. The government came up with a draft aviation policy in October. There were suggestion to cap air fares at Rs 2500 for one hour flight. The proposal also states that the government will charge 2 per cent cess as a viability gap funding (VGF) to support connectivity between small towns across the country. What is your take on the draft policy?

The focus of the current draft (new aviation) policy is on regional connectivity, which is one of the high points of the industry and we have been great supporters of the same.

Encouraging maintenance, repair and overhaul (MRO) operations in the country is also extremely encouraging as it will help us save cost and create jobs. So, the policy correctly addresses a lot of these issues. It also correctly tries to address the issue of cargo hub within the country. So, there are lots of very good pieces of the new policy.
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However the government should stay away from capping fares. This dynamic fare model has worked pretty well so far. This capping on fares will affect the capability of the people to travel through air, and will also obstruct the market expansion. The market is growing at 20 percent, it can grow faster as well but capping of fares would act as an impediment to the growth.

Besides these, government must also consider reducing the aviation turbine fuel (ATF) taxation and steps need to be taken to ensure India doesn’t have the most expensive aviation fuel policy. Whereas the open sky policy, if required needs to be mandatorily reciprocal.

Q. What are your expectations from the upcoming Union Budget for the sector as well as general economy of the country?

Airlines in India have been operating in a hostile cost environment and being a long term gestation industry; there has been a huge amount of accumulated book losses (including unabsorbed depreciation) in the whole sector. It is requested that airlines should be exempted from application of MAT till all the accumulated book losses (including unabsorbed depreciation) are set off against future book profits.

Lease rentals for aircraft and aircraft engines were exempt from Income Tax under section 10 (15A) of the Income Tax Act, 1961 which was withdrawn w.e.f. April 1, 2007 and withholding tax was imposed. We recommend this section should be reinstated with the additional benefits to Indian Leasing Companies and Leasing Transactions done in India. It will help in smooth leasing of aircraft and aircraft engines in India.

For ECBs which help airlines / the aviation sector to source working capital funds from foreign lenders at competitive rates for longer terms, the industry wish list from this budget include enhancing the individual airline limit to be based on the capability / capacity of the airline to service ECB, based on its revenue projections; Don’t restrict this to end-use obligations. Allow the servicing of this borrowing through domestic earnings. And finally don’t put a limit on Sectoral utilization and extend this scheme of availing ECB by five (5) years.

Despite India being ATF surplus; the cost of Aviation Turbine Fuel (ATF) in India is amongst the highest (55% more) in the world. We recommend for an immediate action to bring ATF cost at par with other competitive markets/ ATF pricing should be based on actual costs not import parity. ATF should be notified as ‘Declared Goods’ with concessional rate of 4% as VAT.

Indian MRO’s are expensive when compared to neighboring countries like Sri Lanka, Dubai, China etc. We recommend MROs need to be cost effective in India by doing away with high taxes.