January 10, 2015
Have you ever wondered what led to the downfall of SpiceJet and the reasons behind profitability of Indigo? Both of them are low cost airlines who started their business around the same time (Spicejet in 2005 and Indigo in 2006). So why is it that one of them is the most profitable airline in the country whereas the other is looking out for rescue plans?
Factors that make Indigo the most profitable airline in India:
Indigo has a fleet of 70 aircrafts, yet it flies to only 29 domestic and 4 international locations. However, SpiceJet has 56 but it flies to 45 domestic and 10 international locations. Thus, IndiGo’s strategy is to provide more capacity on select routes, rather than spread itself thinly over several. As each destination requires funds (rentals, staff, ground-handling, equipment etc.), this helps reduce the costs. This strategy rather ensures that a traveler from Ranchi will not have to look at a non-IndiGo flight. Eventually, Indigo gets a loyal customer and hence, a larger share of the Ranchi market.
One more integral factor is maintenance and spares which constitute a good share of the operational costs. As we say the airline is profitable the longer it stays in the air.
The focal point here is that Indigo doesn’t have to maintain a large inventory of spares or engines. How the grounded aircraft is bad can be pointed out by what happened in 2010 when Kingfisher Airlines had to ground its aircraft because of snags in the engine, but IndiGo, which used the same machine didn’t had to because of the vendor support contracts. Also, IndiGo gets its C-checks done in Sri Lanka, unlike its competitors who send their aircraft to as far as Dubai, Hong Kong, Singapore etc. Obviously, this along with maintenance costs is the defining number that drives the business.
In the cost-control exercise, IndiGo’s employee-aircraft ratio is approximately 100-102 now. However, Jet Airways has a ratio of 130, while Air India’s number is 262. IndiGo closely monitors turnaround time and fixes tough targets: currently it gets an aircraft ready for its next flight in 31 minutes (Industry record). This helps the airline achieve its target of keeping the plane airborne. Also, its fleet consists of only one aircraft: the Airbus A-320. That’s why, it is required to deal with one set of pilots, spares and engines. This simplifies the process of running the airline and also keeps costs on a tight leash. This is in contrast to a rival like SpiceJet which has two sets of aircraft. IndiGo has shied away from any loyalty scheme for passengers or the temptation to join a global alliance which, Ghosh (Indigo’s reticent CEO) says, only adds costs.
The biggest cost for any airline is jet fuel; it can add up to 50 per cent of the operational cost and any savings here could make a large difference to operations. IndiGo goes through it with a toothcomb. For example, when the aircraft lands and comes to a halt, the airline goes into a detailed analysis of whether it should be on auxiliary power or should it invest in a ground power unit to save fuel costs. “The question is whether you want to burn jet fuel for the auxiliary unit or burn diesel in the ground unit which is cheaper,” says an aviation insider. Pilots are put through training on how to save fuel, which includes details of the time they should take to climb to 32,000 feet. Insiders also say that the airline preferred not to go for a full-fledged inflight magazine, which would have added additional weight and burnt more fuel.
The Thrifty mentality & detailed cost-analysis at every stage of the supply-chain is the reason behind Indigo’s sustained success. Media baron Kalanithi Maran’s SpiceJet, is facing funding issues with the Spicejet’s recent debt crisis. When Kalanithi Maran’s Sun Group took control of Spice-Jet in 2010, it never looked like a bet that could go wrong. Even Obama in his visit to India praised Maran for creating job opportunities in America through SpiceJet’s overseas operations. The airline was profit-making and had INR 800 crore of cash. What was more, it was eligible to operate overseas flights that offer fatter margins.
(1) SpiceJet’s move to become the prime mover by being the first airline flying to smaller cities hurt them badly. In this process, they added the 78- seat Bombardiers, something most budget airlines avoid to keep costs low. Neil Mills (SpiceJet’s CEO 2 years ago) wanted to go to uncharted markets like Hubli, Tirupati and Amritsar, and leverage the benefits of being the first airline to cover unchartered territories.
(2) Second factor again was its eagerness to follow aggressive discount fares in hopes of increasing passenger load. But, it wasn’t to be as they failed to lure the number of passengers to sustain its revamped business model. The price-fare war hurt them badly. It still works if an airline makes the revenue on a flight to match costs.
Airline tycoon Naresh Goyal’s Jet Airways, co-owned by Etihad Airways, is being coveted the rich man’s carrier owing to its brash prices. Jet did try to fight in the economy sector by diversifying itself into Jet Lite & Jet Connect but, its not so frugal business model let Naresh Goyal down. People say airlines is a tricky business as you run for the debt debacle being an airline owner (ask Kingfisher). Indigo has certainly quelled all this nonsense.
Five years of generating consistent profits Indigo’s consistent record of profitability has also helped the airline in getting more attractive financing deals to pay for its lease rentals which, according to estimates, are around 20 per cent of the total operating cost.
The whole effort to prune costs and improve profitability doesn’t end here. IndiGo is taking more steps. With the government’s liberal policy of allowing airlines to fix baggage and pay more for some seats, it hopes to get a larger portion of its revenue from auxiliary sources in the days to come. With the Tata- Singapore-Airlines alliance Vistara and AirAsia joining the battle, IndiGo requires pulling out all the tricks in the bag.
Only time will tell what will happen with SpiceJet. What do you think? Write in our comments section below.