STRATEGY IMPLEMENTATION

PROJECT REPORT

STRATEGIC CHALLENGES FACED BY SPICE JET

FACULTY – DR. SATISH KAJJER

By

GROUP 9

Group Members:

Shubhangi Gupta: G003, Abhinav Narayan: G013, Bhuwan Garg: G030,

Sidharth Sharma: G036, Sonal Bajoriya: G043, Aayush Goel: G060

1. AVIATION INDUSTRY
The Indian aviation business, according to Mr. Tony Tyler, former Director General and CEO of the
International Air Transport Association (IATA), is "exciting for the world." Manufacturers, airlines,
multinational corporations, tourism boards, individual travellers, and businesspeople are all affected.
A united vision among stakeholders can help to propel the industry's bright future.

With a market value of roughly USD 16 billion, India's civil aviation industry is in the top ten in the
world. India's industry is on a fast track to success. According to a recent KPMG report, the aviation
business is worth 16 billion dollars and accounts for 0.5 percent of GDP. On any given day, 150 million
passengers are transported by air. In FY 14, total passenger traffic increased at a 5.5 percent
compound annual growth rate (CAGR). According to the Airport Authority of India, passenger and
aircraft movements will increase at a pace of 5.3 and 4.2 percent, respectively, across the entire
airport. By 2030, India wants to be the world's largest aviation market.

The Civil Aviation industry has entered a period of boom, fuelled by reasons such as the emergence of
low-cost carriers (LCCs), the development of modern airports, FDI investment in domestic airlines, and
a greater emphasis on regional connectivity. According to the FICCI-KPMG report "Indian Aviation
2014," the development of air transportation services and socioeconomic development are highly
associated.

❖ Increasing presence of Low-cost carrier (LCC) model: The most crucial aspect in the Indian
domestic market is the low-cost carrier model's growing dominance, which accounted for
almost 70% of local capacity in FY-2013. Low fares, the establishment of regional lines, and
periodic reductions have all contributed to the growth of aviation. More seats will be allocated
to low-cost carriers by full-service carriers.
❖ Increase in regional initiatives: Regional airports, according to the research, will be the catalyst
for India's next wave of aviation growth. Some governments, particularly in the country's east,
have begun to take aggressive measures to improve air connectivity. Reduced sales tax on
aviation turbine fuel (ATF), growth of no-frills airports, and promotion of aviation academies
are among the measures. West Bengal merits special note because it was the first significant
state to impose a 15% sales tax on ATF used by additional flights beginning at its metro airport
in Kolkata, as well as a zero percent sales tax on ATF at its other airports. However, there are
currently approximately 450 used/unused/abandoned ports and airstrips scattered over the
country.
❖ Government initiatives: Under the automatic route, foreign investment in scheduled air
transport, regional air transport, and domestic scheduled passenger airlines is authorised up
to 49 percent. The government reduced the customs charge on components or parts for
aircraft manufacturing by public sector units of the Ministry of Defence from 2.5 percent to 0
percent in UnionBudget2021-22.
❖ Robust Demand: Demand is expected to rise as the working class expands and the middle class
becomes more diverse. By FY40, India plans to increase the number of operational airports to
190-200. By 2024, the country will be the third-largest aviation market in terms of passengers.
By 2038, India will require 2,380 new commercial aircraft.
 Major Airports in India

❖ Capacity and Demand Utilisation:

In India's civil aviation sector, demand and capacity have increased significantly. Domestic flight
capacity (available seat kilometres) grew to 155,033.4 million kms in FY19. Domestic demand
(Revenue Passenger Kilometre) increased fast in FY19, reaching 136,631.4 million kms. In FY19,
the available capacity (Available Seat Kilometre) on foreign flights grew to 126,054.2 million kms.
As a result, demand for foreign services (Revenue Passenger Kilometre) increased fast in FY19,
reaching 111,620.4 million kms. Demand growth has regularly surpassed supply expansion,
resulting in high utilisation (Passenger Load Factor).
2. COMPANY ANALYSIS

a. Background
SpiceJet Ltd. (SpiceJet) is a low-cost airline that provides passenger and freight air transportation
services to a variety of destinations. The airline flies to both domestic and international locations on a
daily basis. Flight bookings, internet check-in, and travel advice are among the most popular services.
It offers domestic travellers travel insurance, discount vouchers, and cash back on online ticket
bookings and shopping. Its fleet includes new-generation Boeing 737-800s with winglets, Boeing 737-
900ER, Boeing 737-700ER, and Bombardier Q400 aircraft. Sri Lanka, Dubai, Dhaka, Kabul, Male,
Muscat, and Bangkok are among the company's overseas offices. SpiceJet is headquartered in the
Indian city of Gurgaon, Haryana.

For the fiscal year ending March 2017 (FY2017), the company recorded revenues of (Rupee) INR
61,913.6 million, up 21.7 percent from FY2016. The company's operating margin in FY2017 was 6.1
percent, down from 8.3 percent in FY2016. The company reported a net margin of 6.9% in FY2017,
compared to 8.8% in FY2016.

In the current fiscal year, the firm transported 13.59 million passengers. SpiceJet provides online flight
reservations, internet check-in, and travel advice. SpiceJet categorises all of its business segments into
a single reportable segment: Air Transportation. SpiceJet offers online flight bookings through its own
website, and travellers can check-in online from 24 hours to four hours before their flight's planned
departure time. Domestic Travinsure is a type of insurance that the company offers to domestic airline
passengers in collaboration with TATA AIG General Insurance Company Ltd.

Spice-Jet SBI Card, a credit card offered in collaboration with State Bank of India, allows customers to
book tickets, shop, pay utility bills, and receive instant cash back, extra points, discount vouchers, and
other incentives when using the card to pay for airline services. It also has a UPI payment partnership
with HSBC. SpiceMAX, a product created for customers who demand extra comfort and convenience,
is also available. It offers five rows on the Boeing with at least 6 inches greater legroom through the
service. SpiceMAX services are available on its website www.spicejet.com one hour prior to departure
for domestic flights and up to three hours prior for international flights.

SpiceJet's cargo service is capable of transporting 2 to 3.5 tonnes of cargo every flight. The cargo
service is a pan-India Airport-to-Airport offering with offices in Mumbai, Pune, Bengaluru, Delhi, Goa,
Guwahati, Hyderabad, Chennai, Coimbatore, Jaipur, Kochi, Ahmedabad, Agartala, Amritsar, Kolkata,
Madurai, and Vishakhapatnam, among other SpiceJet locations. SpiceJet Merchandise Private Limited,
the company's wholly owned subsidiary, sells consumer merchandise and goods such as readymade
apparels, electronic items, and accessories, among other things, through various channels such as its
online platform, in-flight sales, airport shops, and retail outlets. Spice Jet Technic Private Limited, the
company's subsidiary, provides engineering-related services such as aircraft and part repair,
maintenance, and overhaul.

b. Vision and Mission Statements

A mission and vision statement of SpiceJet Limited is given below. The following statement has been
taken from the company’s website.

SpiceJet’s mission is to become India’s preferred low-cost airline, delivering the lowest air fares with
the highest consumer value, to price sensitive consumers. We hope to fulfil everyone’s dream of
flying!

With India's economic and business growth, the percentage of traveling population is burgeoning.
More and more Indians are traveling for both business and pleasure and everyone needs to save both
time and money. SpiceJet's vision is to address that and ensure that flying is for everyone.

c. Competitor Analysis

Key Competitors

❖ IndiGo

➢ Market leadership based on low-cost model

➢ Offering good services through quality and detail

➢ Strong focus on customer preferences and needs

➢ Efficient usage of technology

➢ Highest market share

 ❖ Jet Airways

➢ Designed for full service

➢ Strong network portfolio

➢ Alliance with Etihad

➢ Focus on Innovation

➢ Vertically integrated operations

❖ GoAir:

➢ Strong backing by the Promoters

➢ Covers all the major Indian cities

➢ Has nearly 1000 flights per week

➢ Good branding and marketing in India

➢ LCC segment is ever growing in India

❖ Air India

➢ Has financial backing of the Government

➢ Air India offers a vast service portfolio

➢ Has the advanced aircraft of top companies

➢ Offers low price tickets

SWOT Analysis

Strengths: Weaknesses:
- Strong leadership at the - Low market share as
helm compared to rivals
- Aggressive expansion of - Steadily decreasing
networks profits
- Commanding higher - Restrictions of air travel
fares in regional networks are hitting the revenues

Opportunities:
- Increasing the routes for
better fares
- Cost cutting measures to
enhance revenue
- Focusing on liquidity will
help the company stay
afloat
Threats:
- Multiple legal battles
taken to courts
-Meagre cash and cash
equivalents
- Weak Balance Sheet
3. WHAT WENT WRONG

a. Fleet Strategy:
Generally, an LCC tries to keep a homogenous fleet to minimise the overall costs. Starting from
2012, Spicejet started targeting under-flown regions with smaller aircrafts. As a result, they added
a second type of plane to their fleet i.e., Bombardier Q400. This led to an additional employee
cost and it since the fleet size of Bombardier was limited to 13-15, it was uneconomical to
operate. Employee per aircraft for Spicejet increase to 130, while the standard for LCC in 90

b. Rising Crude Prices:

Fuel costs is one of the largest expenses for an airline and accounts for 40-50% of the revenues.
On an average, ATF is about 30-40% more expensive in India, when compared to other countries.
From 2011, the prices of crude oil started increasing and were around the $100+/barrel. At that
time, fuel costs accounted for more than 50% of SpiceJet’s cost structure. This complemented
the increase in employee costs and led to a drastic decline to the margins of the company.

c. Route Strategy
LCC’s adopt a strategy of point-to-point route structure by minimizing the number of destinations
and increasing frequency. SpiceJet aimed at exploiting the untapped regional market and began
to operate in new destinations. The strategy which was aimed at gaining market share led to an
increase in costs for the company and thinning of the margins.

d. Grounding of Fleet
Due to the declining profits and the wrong timing of their strategic moves, in 2014 SpiceJet
started having severe cash flow problems Oil companies refused to supply oil to the company
unless it paid its dues. DGCA had also put a bank on the company from taking advance bookings
beyond 30 days, this was a major source of working capital for the company. SpiceJet had to
return aircrafts to its lessors as it was unable to pay its lease rentals, leading to cancellation flights.

e. Deviation from LCC

Cost
Model Leadership LCC vs. SpiceJet Model
Fall of SpiceJet overall cab 5
be attributed to the 4
3
internal inconsistency, as
2
the management tried to Low 1
gain market share at a Homegeneous
Employee/Aircr 0
Fleet
time when oil prices were aft
rising. The company also
deviated very strongly
from the typical LCC
model in a lot of aspects. Point to Point
Routes LCC Model Spicejet
4. TURNAROUND STORY
a. Change in Management
In Mid-2010, Kalanithi Maran acquired 38.7% stake in SpiceJet and Ajay Singh quits the board.
Subsequently in 2014, there was real struggle going on for SpiceJet’s management in midst of
fleet reduction and flight cancellations leading to rumours of a shutdown. Under huge pressure
from all stakeholders in 2015, Maran quits and Ajay Singh is back as promoter and new
management comes into force. Finally, a Turnaround plan is devised.

b. Negotiations with Oil Players 120 60%

Ajay Singh met with oil companies
100 50%
to resume working with SpiceJet on
80 40%
part payment of their dues.
Naturally, a drastic drop in the 60 30%
crude oil prices aided the 40 20%
turnaround reducing fuel as % of 20 10%
revenue. SpiceJet made to the 0 0%
profit zone much quicker. FY14 FY15 FY16 FY17

Fuel as % of Revenue Crude Oil Prices

c. Cost Reduction Measures

In order to Optimise Route Strategy, 5 domestic and 3 international destinations were closed
down. Targeted turnaround time was set to 25 minutes and aircraft utilization enhanced to 11.5
hours (highest in industry). Increasing fuel burn-out ratio, employee lay-off, increase in capacity
utilization, renegotiating maintenance contracts. Key Dates like holidays, festivals etc- were kept
outside the purview of the sale.

d. Government Support
Aviation ministry directed AAI and oil companies to continue the credit facilities and allow the
airline to stagger payments in order to clear its dues. SEBI requirement states that an offer should
be made to shareholders during a takeover. However, in a special request to SEBI by the ministry
this rule was waived off citing the special circumstances. The Ministry of Aviation also provided
relaxation in Airport charges and ticket sales and asked Indian banks to lend Rs. 600 crores to the
airline.
5. CONCLUSION
The generic nature of Aviation industry is of a highly capital-intensive industry and the competition is
severely intense. It gets impacted by macroeconomic and regulatory situation significantly rendering
it powerless (the overall economic sentiment, taxes, outbreak of illnesses, price of oil and so on)

While the industry has to face a lot of competition, the suppliers that airlines have to deal with are
highly monopolistic. Given this, airlines are not always in the best position to control their costs. But
like Mallya, aviation is not Maran's primary business. His primary business is spread across television
channels, a cable TV distribution network and newspapers in Tamil Nadu and other surrounding states.
Maran's lack of experience in the aviation sector started to come out as soon as he took over the
airline.

SpiceJet flew back in from the brink and scripted what is being seen as a remarkable turnaround,
SpiceJet has embarked on a brand building exercise. And in the process build itself up as an airline that
is more than just an affordable ride. The key takeaways from this study are:

❖ Airlines should continue to stick to their operating models and not deviate from it in order to
perform consistently. Spicejet even though being an LCC, adopted a strategy which led to
increase in costs for itself which is not sustainable in the long term
❖ Since fuel costs constitute a majority of the costs for any airlines, decisions to deviate from
business model should take into consideration the current and future oil prices
❖ Spicejet moved to cost savings by improving operational efficiency i.e., steps like reducing
turnaround time to 25 minutes. Currently too SpiceJet is focusing on cost reduction and has
ordered CFM engines that can provide better fuel efficiency